By Frederic Neumann
How suddenly things can turn. Think back to the first quarter. Not only in Asia, but across the world, growth appeared robust. Even the battered US economy was generating a critical amount of jobs. Europe, meanwhile, lead by Germany, was riding high on the back of a rapid rebound in manufacturing. In this region, too, output was soaring, with Korea’s exports continuing to hit record highs. After the dark days of the Global Financial Crisis, the future seemed at last a little brighter.
Such confidence, it now appears, may have been misplaced. By April, economic data turned quickly and has been sliding ever since. In the United States, employers eased off on hiring workers, which puts the tentative recovery in consumer spending at risk. In Europe, the German engine seems to be sputtering and the continent is facing deepening financial tensions around sovereign debt in its periphery. Asia, meanwhile, long the pillar of world economic growth, was also shaken, first, quite literally, by an earthquake that devastated parts of Japan, and then by a sudden weakening in demand from China.
Is this, then, the beginning of a hard landing for the global economy, another recession, perhaps, with equally devastating consequences as the bust in the wake of the collapse of Lehman Brothers? Certainly, challenges abound. The Federal Reserve, for example, will end its quantitative easing program this month, and the U.S. government is set on a course of rapid fiscal tightening over the coming years, which will weigh on growth in America. In Europe, gradual monetary tightening and further fiscal consolidation in the periphery will also present persistent headwinds.
But, it’s not all bleak. In fact, the temporary drags on global growth outweigh the structural challenges. As these lift, growth should strengthen once more in the third quarter, especially in Asia. Korea above all, highly dependent on external demand, will thus see the economy pick up steam again over the second half of the year. Consider some of these temporary factors in more detail.
First is the issue of Japan. Supply disruptions following the tsunami quickly affected the global car and electronics industries, leading to a slowdown in production. Output is now coming back on line, and at a faster pace than previously hoped. In the United States, the full resumption in car production may add up to one percentage point to economic growth in the third quarter alone. In Asia, the lift will come not only from easing supply chain bottlenecks but from reconstruction demand itself, which should boost exports to Japan from the rest of the region.
Second, and even more importantly, energy prices are falling. The effect of gasoline prices on consumer spending is especially important in the United States, which remains, despite its weakened growth performance, an important export market for Asia. The rise in gasoline price between January and May of this year was equivalent to a $130 billion tax hike for US consumers.
As oil drifts down, this burden will turn into a boost for shoppers – not only in America, but across the world. The recent decision by the International Energy Agency to release 60 million barrels of oil from strategic stocks should help to bring down the price of crude a little further. This is equivalent to 2.5 percent of global demand over the coming month – not a trifling sum. Upon this news, in fact, benchmark crude prices eased back to levels last seen before turmoil in Libya erupted in February.
Third, and critically for Asia, China will hold up. Financial markets have recently been abuzz with fears that Asia’s growth engine may have stalled. And, to some extent, there are signs that demand on the Mainland has weakened in recent months.
However, this is mostly due to a deliberate move towards policy tightening by the government to wring inflation out of the system. This seems to have worked. HSBC’s flash PMI reading for June shows that input and output price pressures have dropped sharply. This is important: easing inflation allows the authorities to eventually re-stimulate demand. China, therefore, is near an inflection point where growth will stabilize and likely pick up again over the coming months.
Korea shares these global trends more than others given that its economy is highly exposed to the regional trade cycle and overseas demand. As growth picks up overseas, this should provide a powerful boost to local firms.
The Bank of Korea, in fact, appears to be sharing a more optimistic view of the economy, having raised rates this month against the expectations of many bearish investors. Looking ahead, if growth does indeed bounce back as appears likely, more rate hikes may be on the horizon. This, alas, is a good thing: to prevent inflation from becoming entrenched, another tweak to policy rates may be needed. Luckily, the economy is robust enough to take it.