Asia's Economic Recovery: A Turning Point in Investment and Inflation

Strategic Insights -

As the world watches the Asian region, observers are noting a glimmer of hope for a sustained economic recovery. While China's growth has been remarkable, other parts of Asia have lagged behind, except for a few remarkable performers like Thailand. With exports increasing and household savings rates decreasing, the momentum is building. However, the crucial ingredient for a lasting recovery remains elusive: corporate investment. Sun Bae Kim, the chief Asian economist at Goldman Sachs, points out that prolonged under-investment has the potential to set the stage for a multi-year cyclical expansion. This expansion would be fueled by increased capital expenditure, which in turn would drive employment growth and consumption. Moreover, a broader investment trend across the region would strengthen intra-regional trade, reducing Asia's dependence on US and European demand.

Key Takeaways:

  • China's fixed investment as a proportion of gross domestic product is hovering around 40%, a significant departure from the Asean economies and Japan, where it has fallen from over 35% before the Asian crisis to less than 25%.
  • Sun Bae Kim, chief Asian economist at Goldman Sachs, believes that prolonged "under-investment" has the potential to set the stage for a multi-year cyclical expansion.
  • Increased corporate investment is critical for fueling employment growth and consumption, which in turn would drive a sustainable economic recovery.
  • A broader investment trend across the region would strengthen intra-regional trade, reducing Asia's dependence on US and European demand.
  • Cornered by commodities? The danger of soaring commodities prices squeezing corporate profit margins and unleashing inflation appears limited, with Asia still emerging from disinflation or deflation.
  • Countries like the Philippines, South Korea, and Taiwan are the most exposed to commodity price increases, but even in these nations, commodities make up a relatively small percentage of the producer price indices.
  • Indonesia and Malaysia, as net exporters of commodities, would actually benefit from higher commodity prices.
  • China's commodities trade deficit is too small to threaten its growth, despite being a voracious consumer.

Statistics:

  • China's fixed investment as a proportion of gross domestic product is around 40%.
  • The US has been running at about 35% over the past few years, despite its own downturn.
  • In the Asean economies and Japan, fixed investment as a proportion of gross domestic product has fallen from well over 35% before the Asian crisis to less than 25%.
  • The Philippines, South Korea, and Taiwan are the most exposed to commodity price increases, but commodities make up only 35%, 25%, and 20% of their producer price indices, respectively.
  • Indonesia and Malaysia, as net exporters of commodities, would actually benefit from higher commodity prices.
  • China's commodities trade deficit is 2% of GDP.

Sources:

  • Sun Bae Kim, chief Asian economist at Goldman Sachs
  • Goldman Sachs analysis of commodity prices in regional producer price indices
  • The Financial Times' Asia news editor, Dan Bogler