China
A slowdown is expected for China’s growth engine in 2012 as uncertainties continue to cast clouds over the world’s second largest economy amid festering European debt woes and painstaking macro-control policies. Many analysts are expecting economic growth below nine per cent, the slowest in 10 quarters. A slowing Chinese economy is inevitable due to weaker exports and fixed-asset investment. While short-term demand shrinks, China’s mid-and long-term growth potential will decrease because of factors such as an aging population, rising labor costs and less room for infrastructure improvement.
The outlook for exports, one of the three main drivers of China’s growth, is “very worrisome. China targets about 10 per cent annual growth in its foreign trade in 2012, significantly slower than in 2011. Compared with January, 2011, year-on-year export growth in December was down by 24.2 percentage points to 13.4 and import growth fell by 39.8 percentage points to 11.8 per cent. However, a former advisor for China’s central bank is of the opinion that the export outlook may be better than expected, anticipating no real recession in the European economy in 2012.
China rebounded quickly from the 2008 global crisis and its economy expanded by a healthy 9.2 per cent last year but growth has declined as Beijing tightened credit and investment curbs to prevent overheating. The IMF is forecasting 8.2 growth this year for China but that could be reduced by up to four percentage points if Europe’s crisis causes large declines in credit and output. The IMF estimates that a stimulus equal to about three per cent of China’s annual economic output spread over 2012-13 would limit the decline in Chinese growth to about one percentage point.
The inflation rate in China has come down to comfortable levels at around 4%. Since China is the largest importer of many goods and raw materials, some policy easing in China will result in a hardening of prices in the commodity markets. Inflation has peaked but will continue to be vulnerable to supply-driven food price increases. Inflation fell to 4.1 per cent at end-2011 and will continue to decline steadily in the first few months of this year.
China’s foreign trade still faces big challenges this year amid slowing global growth, especially in large export destinations like the Europe, the US and Japan. The trade surplus has been shrinking since the global financial crisis erupted in 2008.In 2009 the surplus decreased by 30 per cent to $196 billion, and dropped again by 6.4 to $183 billion in 2010.In the first 11 months of last year, China’s trade surplus fell 18.2 per cent to $138.4 billion. China’s import and export growth would shrink this year despite their shock contraction in January. Due to growing downward pressures in the world economy, the external environment for China’s imports and exports is getting tougher and overall, the situation remains grim.
Meanwhile, China’s foreign direct investment shrank for the third consecutive month in January as firms in crisis-embroiled Europe slashed spending by over 40 percent, casting another pall over the outlook of the world’s economic growth engine.Data from the commerce ministry showed China drew $9.997 billion in foreign direct investment in January, down 0.3 percent from a year ago. Inflows from the 27-member European Union plunged 42.5 to $452 million. Investment from the United States rose 29 per cent to $342 million while that from 10 Asian countries including Japan edged up a mere 0.8 per cent to $8.586 billion.
India
The Indian government expects its economy to grow this financial year at its slowest pace in three years, estimated at 6.9 per cent, as a bout of monetary tightening takes its toll on investment amid weak global conditions. Growth estimates for Asia’s third-largest economy in the current fiscal year to end-March have been cut several times from an earlier estimate of about 9 percent and the latest climb down beat forecasts of 7 to 7.5 per cent for the full year. India’s economic growth is likely to go up to 7.4 per cent in 2012-13, from the estimated 6.9 per cent this fiscal year, as interest rates ease with fall in inflation. The economy had expanded by 8.4 per cent in 2010-11.
Inflation fell to a two-year low of 7.47 per cent in December 2011 and RBI has hinted that it may go in for rate cuts if inflation remains at moderate levels for some time. India’s most closely watched inflation rate declined to its lowest level in 26 months in January, improving the odds for a round of monetary easing by the central bank as it prepares for its next policy review in March. The Wholesale Price Index based inflation dropped to 6.55 last month from 7.47 per cent in December as prices fell across the board.
The Reserve Bank of India (RBI), in its monetary policy review last month, had predicted that inflation will fall to 7% only by the close of the fiscal year at end-March. The Finance ministry is confident that the inflation rate would moderate further in the coming months, although a “softening in the prices of manufactured goods, despite the rapid decline in non-food primary inflation, may be more gradual”. It expects the March-end inflation rate to be closer to six per cent.
Core inflation, a measure of price increases in non-food manufactured items, declined to a year’s low of 6.7 from 7.7 per cent a month ago. Although the drop in the January inflation rate seems to have enthused the market, it’s not yet convincing enough proof that prices are falling by the desired extent. What is important is to note that despite recording an average monthly inflation of 9.5 for two years at a stretch, the index (WPI) has not come off from the elevated levels, thereby indicating that it is merely the base effect at play rather than prices actually coming off. Inflation in January a year ago was 9.46 per cent.
The fiscal deficit, however, is widely expected to be almost a percentage point higher than the government’s target of 4.6 per cent of gross domestic product for the fiscal year ending March 31, largely reflecting a slowdown in economic growth. The finance ministry is likely to peg the fiscal deficit for 2012-13 at around 4.9 per cent of the gross domestic product (GDP) in the Budget. It may also revise the figure for the current financial year from 4.6 to around 5.5 per cent in the Budget estimate.
If the fiscal deficit rises to, say 5.5 of GDP in 2011-12, against 4.6 per cent pegged by the government in Budget estimates, the government would rein in the deficit at 4.9 of GDP next year, a cut of 0.6 percentage points. However, the recommendation was to reduce the deficit to 4.2 per cent of GDP, which may not happen in the next financial year. The Finance Commission had asked the government to limit fiscal deficit to three per cent of GDP in 2013-14, and keep it at that level in 2014-15 as well. So, these targets are also likely to be pushed forward, and this means fiscal deficit at three per cent may not be seen in 2013-14 as well.
India’s merchandise exports continued to record a meagre growth with shipments in January 2012 increasing just 10.1 per cent year-on-year to $25.4 billion due to poor overseas demand especially in the traditional markets such as Europe. Meanwhile, imports in January 2012 rose much faster at 20.3 per cent to $40.1 billion, leaving a trade deficit of $14.7 billion. Exports in the fiscal April 2011-January 2012 so far grew by a robust 23.5 per cent to $242.8 billion. However, the global economic uncertainties, especially the Euro zone crisis, as well as the lack of confidence among consumers and investors will continue to impact India’s exports even in 2012-13.
In the ten months of the current fiscal year imports surged by 29.4 per cent to $391.5 billion, leaving a trade deficit of $148.7 billion. Trade deficit in January is large but it will narrow down in the next two months. Analysts estimate exports for the fiscal of around $295-305 billion and imports at about $460 billion with a balance of trade of about $160 billion. With a record high trade deficit of $160 billion for 2011-12, the current account deficit would be around 3.5 per cent of the GDP, according to the commerce ministry.
South Korea
South Korea is also bracing to shield its export-dependent economy from external risks as Europe’s crisis deepens. In 2011, Asia’s fourth-largest economy expanded 3.6, slowing from 6.2 growth in 2010 and a lower than the BOK’s earlier estimate of 3.8 per cent growth. The Bank of Korea forecast in December that the economy will grow 3.7 in 2012 and 4.2 in 2013 after a 3.8 per cent expansion in 2011. The IMF lowered its estimate for South Korea’s growth this year to 3.5 from 4.4 per cent.
The outlook for consumer prices, South Korea’s benchmark inflation gauge, is still unstable due to inflation expectations from consumers and geopolitical risks brought on by U.S.-Iran tensions. South Korea’s consumer prices grew 3.4 percent in January, with the growth rate falling below the 4 percent ceiling of the BOK’s target range for the first time in three months. Compared with the previous month, however, consumer prices continued to expand last month. The cooling down of consumer prices in the first month of 2012 was due largely to the base effect from sharp price hikes one year ago.
South Korea’s jobless rate rose in January from a month earlier, indicating job market conditions remain cloudy despite continued economic recovery. The jobless rate stood at 3.5 last month, up from three per cent in December. It was also higher than the annual average of 3.4 for last year. The economy still gained 536,000 more jobs in January compared to the previous year. The job data comes amid growing economic uncertainties, including a deepening Eurozone fiscal debt crisis and a possible worldwide global slowdown. That could pose a serious threat to South Korea’s economy, which depends heavily on exports for its growth.
South Korea’s trade balance turned into the red for the first time in two years last month due to a drop in exports. Overseas sales slipped 6.6 per cent on-year to US$41.54 billion in January from a revised $48.9 billion in December. Imports climbed 3.6 per cent to $43.5 billion. Korea’s trade balance swung into the red for the first time in two years. The trade shortfall was $1.96 billion, the first deficit since January 2010 compared with a surplus of $2.9 billion a year earlier. The government projects that country’s exports will go up 6.7 to $595 billion this year with imports rising 8.7 per cent to $570 billion. The 2012 surplus goal is set at $25 billion.
South Korea’s current account surplus fell in December from a 13-month high in November and the country may swing to a deficit in January, as the euro-zone sovereign debt crisis and stalling the US economy undercut global demand. The current account surplus totaled $3.96 billion in December, down from $4.56 billion in November and compared with a surplus of $956 million a year earlier. The 2011current-account surplus totaled $27.65 billion, below 2010’s surplus of $29.39 billion. The BOK expects the surplus to dwindle to about $13 billion in 2012.