The recently released Asian Development Outlook 2015 (ADO) report by the Asian Development Bank (ADB) believes that Developing Asia will continue with strong economic growth in 2015 and 2016 helped on by a strengthening of the large industrial economies led by the US, and weak commodity prices with GDP growth estimates matching the 2014 rate at 6.3% for 2015 and 2016.
Since 2009 the region has contributed almost 60 per cent of global GDP growth, being 2.3 of the 4%. China, Sri Lanka and Laos have all exceeded 7% annual growth since that time. China is expected to grow at 7.2% in 2015 and will be outpaced by India with a 7.8% growth forecast for 2015-16 and well matched to its ASEAN neighbours.
The Indian Government has brought in a raft of structural changes, unblocking some of the bureaucratic roadblocks and freeing up capital for major infrastructure investment. These reforms are giving investors huge confidence in the economy and growth is expected to grow from the 2014-2015 7.4% to 7.8% in 2015-16 and 8.2% the following financial year.
China has entered the “new normal” bringing in a range of reforms and has also seen a shrinking in real estate values. But even though the highs of 8.5% growth are no longer expected, a very respectable 7.2% in 2015 and 7.0% in 2016 is considered achievable by the ADB.
Without a crystal ball it is impossible to say whether any of these forecasts will hold true. While the cheap price of oil has boosted the economies of India and China and any rise in prices may have a detrimental effect, a number of other factors could affect any one of the views above, not least India failing to implement any of its reforms and spending programmes, and China to gain confidence in the “new normal”. Additional macro factors such as Russia’s recession – already a factor pushing down sub-regional growth in Central Asia curbing export and remittance flows with average forecasts at 3.5% in 2015 and 4.5% in 2016 – as well as issues spilling across the Eurozone spurred on by Greece’s woes will impact the global economy.
Finally, the likely rise in US interest rates, as predicted by Federal Reserve Vice Chairman Stanley Fischer, would see a stop to net capital outflow into Asia. A higher interest rate encourages people to save, discouraging investment and ultimately affecting net capital outflow – the higher rates discourage US investors from buying foreign assets and in theory encourages foreign investors to buy US assets – but would a US Government Bond have a rate attractive enough to provide the growth returns Asian investors are looking for?
US Rate Rises
Mr Fischer announced to the Economic Club of New York on the 23 March that increasing interest rates “likely will be warranted before the end of the year”. It would seem that the rate rises will be erratic: “A smooth path upward in the federal funds rate will almost certainly not be realized”.
There is no real hint as to when a rate rise might occur, but it is unlikely to be before June, that is before the Fed has had the opportunity to be “reasonably confident” inflation is rising toward its 2% goal before moving and to be guided by the labour market readings with the March payrolls report that was due on 3 April. So far the first couple of months of the year saw an increase of 534,000 new jobs with the unemployment rate falling to 5.5% in February: “We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” said Fischer.
Fischer wants rates pricing to become normalised reducing the amount of forward guidance. “As monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased.”
The one point that has become clear is that the Fed currently doesn’t appear to have a plan, it is patiently waiting to see what happens with data and other macro factors before implementing any rate rises.
It’s not just cricket
What does New Zealand have in common with Serbia, Oman and Angola? You may not believe it, but I have discovered that our trans-Tasman friends come 9th on the 2015 list of Trade Losers according to Bloomberg Surveys.
New Zealand are among another 39 economies forecast to post deficits in their current accounts in 2015. While some of the economies are not a surprise, New Zealand is joined by the United Kingdom (exporters struggling with a strong pound) and Brazil (suffering from tumbling commodity prices).
New Zealand’s woes come from the 37 per cent fall in world dairy prices since early 20145, with dairy products equating to more than a quarter of their exports.
Following a Free Trade Agreement signed between New Zealand and China in 2008 dairy exports increased nine-fold over the ensuing five years. The New Zealand Government will be concerned with the Free Trade Agreements made between Australia and China and South Korea. The agreements will potentially put Australian producers head to head with the New Zealand exporters.
Australia’s Department of Foreign Affairs and Trade has stated that total food exports from Australia to China grew by more than 50 per cent in 2014. Whether these sort of growth figures will translate to the dairy sub-group, and whether they are sustainable in the long-term – particularly in markets that have a history of prevailing lactose intolerance – is yet to be seen. But just as with their sport, whatever the outcome, the trans-Tasman neighbours will always be friends off the pitch.