Waiting For Asia To Change Gears - the Asian economy - Brief Article - Statistical Data Included

Business Asia, June, 2000 by Richard Martin

Asian economies may be on the rebound, but RICHARD MARTIN says poor domestic demand remains a worry

THE DRAMATIC surge in first-quarter growth in parts of Asia raises as many questions as it provides answers to those looking for signs of a new, post-Asia crisis growth phase.

Sustained high growth, virtually region-wide, was a major source of stability in the decade up to 1997. The current growth surge is not evenly spread. Its epicentre lies in the "newly industrialised countries" (NICs). While Asia's biggest NIC, South Korea, continued to rack up double-digit growth in the first quarter (12.8 per cent year on year), there is clearly an element of delayed bounce-back in Hong Kong's 14.3 per cent surge. Taiwan and Singapore also expanded strongly.

An immediate observation is that the NICs of the 1980s and '90s are remarkably well positioned to participate in, and benefit from, the surge in growth of a rapidly globalising IT market.

This strong link into the high valued-added end of the global IT market appears to be one of the key factors that separates Asia's first-quarter growth winners from the also-rans. Thailand, the Philippines and Indonesia rely on lower value-added manufacturing and commodity exports.

The key growth driver in every one of the higher growth NICs over the past six months has been the astoundingly prolonged US expansion now well into record territory. The US spending surge continues to be a boon for East Asian exporters.

But there is a problem with this pattern of growth. It simply continues the pattern that emerged in the first phase of Asia's recovery in 1999 when a strong export recovery across East Asia lifted most countries from negative or flat growth in 1998. But it has yet to trigger a strong and sustainable recovery in domestic demand.

The government sector has been by far the strongest source of domestic demand across all of East Asia over the past two years. The swing of government budget balances from surplus to negative (worryingly equal to 130 per cent of GDP in Japan) pretty much mirrors the current account balance swing from negative territory into healthy surpluses, replacing one economic concern with another.

What government spending (usually 18 to 22 per cent of GDP) cannot completely make up for is the weakness of consumer demand (usually 55 to 65 per cent of GDP). Consumer demand is coming back slowly in some of the stronger Asian markets. But it is still weak even in the countries with the strongest economies, while in other markets -- Japan, China and Hong Kong -- deflation is still apparent.

For Asia's next phase of growth to really take hold, consumer spending will have to return to its pre-1997 role of being a significant growth driver.

Finally, there is corporate spending (another 18 to 22 per cent of GDP) and here there are significant problems.

At present most of the heavy lifting is being done by foreign multi-national companies. Capital spending by local firms remains weak.

Fortunately, every month of the continued US expansion helps lubricate Asia's recovery. If this transforms into a soft-landing this year (US growth down to 2.5 per cent plus from 4 per cent plus) it should not upset Asia's steady recovery. But without Asia's domestic demand engine firing, a sharp fall in US growth would collapse the recovery across Asia.

RICHARD MARTIN, Richard Martin is managing director of IMA-Asia and director of The Economist Conferences Asia Forecasting Conference (Melbourne--August 22, and Sydney--August 23), For information on the conferences, call (612) 9955 2848 or e-mail richard.martin@imapl.com.au.