Authors: Amy Auster Head of International Economics +61 3 9273 5417 [email protected]Katie Dean Senior Economist, International +61 3 9273 5466 [email protected]Jasmine Robinson Senior Economist, International +61 3 9273 6289 [email protected]Dr. Alex Joiner Economist, International +61 3 9273 6123 [email protected]Paul Braddick Head of Financial System Analysis +61 3 9273 5987 [email protected]Riki Polygenis Economist, Australia +61 3 9273 4060 [email protected]May 2007 ANZ International Economics Monthly Inflation ticking up, not taking off Our Vision: For Economics@ANZ to be the most respected, sought-after and commercially valued source of economics research and information on Australia, New Zealand, the Pacific and Asia. Economics@ANZ The stunning return of risk appetite this past month begs the question: will good old-fashioned consumer price inflation ever return? Yield curves are twitchy, but remain flat to inverse amid persistently low consumer price inflation (CPI), strong growth, surging input prices and flush liquidity. That the world has gone on this way for so long without CPI rising is a puzzle that is confounding those of us who practice the dismal science. In coming editions of this publication, we will investigate the two sides of inflation – cost-push and demand-pull – and see if we can sort through whether global CPI is about to rise and, if not, what central banks’ policy response might be. In this edition, we focus on cost-push inflation – in other words, the affect that rising input prices may or may not have on final consumer price inflation. Our investigation centres on the G7 economies, where we find that: • After five years of above-trend global growth, core inflation in the G7 has only just returned to trend levels. Inflation is decelerating in the US, rising in the EU and still hard to read in Japan. Low inflation in consumer goods prices has counteracted higher inflation in services prices in the US and the EU over the past several years. • While some observers have expressed concern that higher tradeables inflation will force goods prices to rise in the G7, we view a sudden shock as unlikely. Deflation from China may be easing, but this will be a slow process. • At the same time, the China-led rise in commodity prices seems to be gathering strength. A greater degree of pass through from elevated oil prices, rising base metals prices and the recent surge in agricultural commodities seems to us to be the greatest risk for cost-push consumer price inflation in the G7. • Differences in the calculation of inflation in the US and EU may make the EU more vulnerable to cost-push inflation pressures. We now expect 3 more ECB rate hikes this year, with risks to the upside. Inflation rising, but should be contained 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 00 02 04 06 08 % RBNZ RBA Fed ECB BOJ -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 99 00 01 02 03 04 05 06 07 % yearly change USA EU Japan Core inflation Policy interest rates Source: Datastream, Bloomberg, Economics@ANZ
Transcript
Authors:
Amy Auster Head of International Economics +61 3 9273 5417 [email protected]
Katie Dean Senior Economist, International +61 3 9273 5466 [email protected]
Dr. Alex Joiner Economist, International +61 3 9273 6123 [email protected]
Paul Braddick Head of Financial System Analysis +61 3 9273 5987 [email protected]
Riki Polygenis Economist, Australia +61 3 9273 4060 [email protected]
May 2007
ANZ International Economics Monthly
Inflation ticking up, not taking off
Our Vision:
For Economics@ANZ to be the most respected, sought-after and commercially valued source of economics research and information on Australia, New Zealand, the Pacific and Asia.
Economics@ANZ
The stunning return of risk appetite this past month begs the question: will good old-fashioned consumer price inflation ever return? Yield curves are twitchy, but remain flat to inverse amid persistently low consumer price inflation (CPI), strong growth, surging input prices and flush liquidity. That the world has gone on this way for so long without CPI rising is a puzzle that is confounding those of us who practice the dismal science. In coming editions of this publication, we will investigate the two sides of inflation – cost-push and demand-pull – and see if we can sort through whether global CPI is about to rise and, if not, what central banks’ policy response might be.
In this edition, we focus on cost-push inflation – in other words, the affect that rising input prices may or may not have on final consumer price inflation. Our investigation centres on the G7 economies, where we find that:
• After five years of above-trend global growth, core inflation in the G7 has only just returned to trend levels. Inflation is decelerating in the US, rising in the EU and still hard to read in Japan. Low inflation in consumer goods prices has counteracted higher inflation in services prices in the US and the EU over the past several years.
• While some observers have expressed concern that higher tradeables inflation will force goods prices to rise in the G7, we view a sudden shock as unlikely. Deflation from China may be easing, but this will be a slow process.
• At the same time, the China-led rise in commodity prices seems to be gathering strength. A greater degree of pass through from elevated oil prices, rising base metals prices and the recent surge in agricultural commodities seems to us to be the greatest risk for cost-push consumer price inflation in the G7.
• Differences in the calculation of inflation in the US and EU may make the EU more vulnerable to cost-push inflation pressures. We now expect 3 more ECB rate hikes this year, with risks to the upside.
Inflation rising, but should be contained
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% yearly change
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EU
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Core inflation Policy interest rates
Source: Datastream, Bloomberg, Economics@ANZ
Economics@ANZ ANZ International Economics Monthly – May 2007
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Consumer prices, asset prices
One of the enduring surprises of this economic cycle is the persistence of relatively low inflation despite strong demand and ever-rising commodity prices. As we have stated time and again in these pages, we are now in the 5th consecutive year of above-trend global growth. Yet, core CPI in the G7 has only just returned to trend levels of around 1.9% per annum. Now that we have arrived at trend and the Fed and ECB have moved to a tight policy stance, the question is: Does G7 inflation remain at or below trend? Or, given continued strong global growth and elevated commodity prices, does inflation accelerate further from here? Could a rise in tradeables inflation as China’s economy develops become the trigger for another leg up in G7 CPI?
Core inflation only just returning to trend
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Note: GDP based on 50 countries aggregated using ‘purchasing power parity’ weights. Inflation based on CPI in the G7 countries aggregated on a PPP basis.Sources: National agencies, Datastream, OECD and Economics@ANZ.
Global annual GDP growth
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Rampant asset price inflation is also contributing to concerns that CPI could accelerate. Wealth gains from asset price inflation must eventually lead to higher demand and higher inflation, or so the argument goes. Moreover, that commodity inputs such as oil and copper are developing as an asset class and are themselves becoming representative of financial market speculation provides a direct link from asset prices to consumer prices.
This note looks into consumer price trends in the G7 to discern the extent of pressures on CPI and where the risks may lie. Here we focus on cost-push inflation, or factors that cause the sub-components of the inflation indices to rise. Next month we will look further into wage trends and asset price inflation, and the implications for consumer price inflation - eg, the demand-pull side of the equation.
The phenomenon of low inflation The decline in consumer price inflation in the G7 has many potential explanations. The advent of independent central banks, innovation in the setting and managing of inflation expectations and micro-economic reform that broke the link between inflation and wages have been central to the decline in the rate of inflation and its volatility over the past three decades. In Europe, the creation of a single central bank also entailed the adoption of stable and orthodox economic policies by continental Europe.
The charts below show the recent evolution of headline and core consumer price inflation in the US and in Europe. Both central banks have set an informal inflation target of 2% or below for core CPI, with the Fed having indicated a “comfort zone” of 1% to 2% inflation, while the ECB has stated that inflation should be close to but under 2%.
US CPI above target, EU slightly below
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Source: Bloomberg, Economics@ANZ
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As the US economy accelerated to above-trend growth over 2004-2006, core CPI also accelerated and rose to just above the Fed’s comfort zone in late 2004, where it has remained since in the face of a continued interest rate rises. In contrast, the Euro area experienced disinflation in an environment of sluggish growth that lasted right up until last year, when growth finally rose above trend. While core inflation in the Euro area is still below the informal 2% ceiling set by the ECB, core inflation has reached 1.9% and looks set to rise further, at least in the near term.
The recent evolution of inflation in Japan is harder to read following the reweighting of the CPI index in August 2006. As seen in the chart below, Japan appeared set to emerge from deflation in the months preceding the reweighting, following several years of relatively strong growth. However, inclusion of more low-price electronic goods in the CPI basket caused the index to shift downward. The base effect suggests inflation may lift after August 2007.
Japan hard to read after last year’s reweighting
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Japan CPI – old vs new series
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Corporate goodsprice index
% YOY
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Japan CPI – current trends
Source: Datastream, Economics@ANZ
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 3
However, lagging household consumption and a recent decline in the corporate goods price index raises some doubt over how quickly CPI will rise. Although unemployment is low and both income growth and consumption have improved, Japan is likely to remain a very low inflation economy.
Goods prices fall while services prices rise
Further breaking down inflation in the US and EU – and ignoring Japan for the moment given deflation and the CPI series break – shows an interesting phenomenon. In the US, core inflation in the price of services has been running at above 3% for most of the past five years, and has accelerated from around 3% YOY at the start of 2006 to 3.6% YOY in March. In contrast, inflation in the price of goods has struggled to reach even 1% per annum over the period, and appears to be on a decelerating track. Moreover, the rise in inflation in 2006 was entirely driven by services prices, as goods exhibited a trend to disinflation that has continued this year.
Goods v services prices in US & EU
US goods v services EU goods vs services
Source: Datastream, Eurostat, Economics@ANZ
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% yearly change 3mma
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goods
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% yearly change
A similar divergence in services versus goods prices is observed in the EU, although inflation in services has been lower relative to the US while goods price inflation has been higher. The recent jump in EU core inflation has been driven by rising prices for both major categories, although goods prices seem to be accelerating more rapidly. Thus, while depressed goods prices seem to have been a key factor in contributing to low US inflation, both goods and service are driving EU inflation.
The differences between the evolution of inflation in the US and the EU may be in part due to differences in the CPI basket. As seen in the following table, the US CPI basket has a heavy weighting on housing, of which 23.8% is homeowners’ equivalent rent on owner-occupied homes. The services component of US CPI is a huge 59.6% of the index; services less rent of shelter is 27.3%. The surge in house prices that accompanied the Fed easing in 2002-2003 promulgated inflation through this channel, even as the price of goods collapsed over this period.
In contrast, the EU Harmonised Index of Consumer Prices (HICP) has a more balanced distribution of goods and services prices. The weighting ascribed to
food and clothing are higher than in the US, while the weights for medical and education services are lower. The housing weight is much lower as homeowners’ equivalent rent is not included. Services less housing rent accounts for 34.7% of the EU HICP compared with just 25.6% of the US CPI, lowering the impact of the housing cycle on measured CPI in the EU.
The makeup of CPI indices in US and EU
US EU
Food and beverages 14.9 16.1
Housing 42.6 15.6
Owner’s equiv rent 23.8
Household energy 4.4
Apparel 3.8 6.6
Transport 17.3 15.5
Medical care 6.3 3.8
Recreation 5.5 10.3
Education 6.0 1.1
Source: Bureau of Labour Statistics, Eurostat
Despite the different makeup of CPI, a common theme appears in US and EU inflation: over the past five years, low consumer goods prices have had an important dampening effect on overall CPI. Thus the concern emerges: what is the potential for the price of goods to rise further, and provide a second leg up for CPI given continued high services prices?
The risk of China shocks One of the favourite theories circulating among inflation hawks seems to be that tradeables inflation – or the price of imported products – is on the cusp of a sharp rise. Proponents of this view believe it is only a matter of time before we see an unwinding of the downward pressure that the relocation of mass manufacturing to low cost producers such as China has wrought. China’s share of global exports rose from just 3% in 1995 to 8% in 2006; according to the UN Conference on Trade and Development, this coincided with an explosion in global export volumes while the value of all global exports was nearly flat.
The deflationary pull of China
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Source: Datastream; UNCTAD; Economics@ANZ
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The arguments of a rapid unwind of the “China factor” seem to focus on two potential changes in the domestic dynamics of China. The first argument is that the cost of labour is rising quickly in China and will soon be reflected in higher export prices. The second argument is that the Chinese government will force export prices to rise in order to reduce trade tensions with the US – whether by raising the price of inputs, or adjusting the exchange rate, of both.
However, we are sceptical of the argument that China’s export prices are set to rise dramatically in the coming months. In regards to the labour market, it is true that capacity constraints seem to be emerging in what was once considered a nearly bottomless pool of untapped labour. However, these constraints are not across the whole economy, but rather in particular geographies and sectors. China is in the midst of an ever-growing skills shortage that is leading to higher wage inflation for educated workers. Producers of low-end goods in the traditional manufacturing zones along the eastern corridor also report upward pressure on wages. This seems to be due to a decline in the rate of migration from west to east, particularly as the government has focused on forcing incomes to rise in the rural interior.
However, it is a mistake to assume that China’s low cost of production arises solely from cheap labour. As seen below, China has never had the lowest cost labour in Asia. It is true that labour costs have been rising in some provinces, but the increases are not uniform. Moreover, China’s manufacturing wages are still extremely low when compared to OECD economies. As China moves up the value add chain of production from low-end consumer goods to electronics and appliances, its relatively low cost of labour will continue to exert the same downward pressure on goods prices that we have seen in the recent past.
China labour costs an unlikely threat
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Source: CEIC, ABS
Rather than cheap labour costs, we believe that the key to the success of China’s exports has been the role played by government incentives that have reduced the cost of capital for exporters. For years the government threw financial incentives at foreign
companies to enter China’s export sector, which is why 65% of China’s exports are still produced by foreign-invested firms. Tax, land and funding incentives as well as years of low-cost energy and investment in infrastructure have lowered the cost of production for exporting firms to well below that of other countries with a low cost of labour. The below chart that compares energy efficiency with other Asian economies highlights one symptom of China’s approach to industrialisation.
China’s cheap energy creates massive inefficiency
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CHI THAI INDON KOR US AUST JAP
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Mn tonnes equivalent of energy required to produce US$1 bn of GDP
Source: BP Statistical Yearbook, IMF, Economics@ANZ
Discussions with the US administration on trade have increasingly focused on this issue of capital costs, which the US government broadly terms as subsidies. Progress in the US-Chinese Strategic Economic Dialogue and recent court action to unilaterally impose countervailing duties on exports of select paper goods from China has put renewed pressure on the Chinese government to look at this issue. Moreover, from an economic point of view, the government is more aware of the risks to the economy that are presented by continued rises in the massive trade surplus, and are now looking for ways to reduce it.
Thus over the past several months, the Chinese government has announced a number of measures that wind back incentives for exporters, thus potentially raising the cost of production. Other regulations to bring pollution under control are related, in that their enactment would raise the cost of production in heavy manufacturing. Some of the measures adopted over the past six months include:
• Unification of the corporate income tax rate that has raised the CIT for foreign-invested companies from 10-15% to 25%;
• Inclusion of emissions ceilings in the targets for regional government leaders, which is the first time that targets have included much other than employment generation;
• Removal or reduction of VAT rebates for exporters, and higher taxes imposed on the importation of new plant and equipment;
• Imposition of restrictions on the use of land and power, including a higher tax on land
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 5
appreciation and minimum prices for land for industrial development; and
• Most recently, an export tariff on 85 types of steel products.
There is little question that measures such as these imply a rising cost basis for the firms that are affected. However, the response of firms may not necessarily be to directly pass on costs to customers. In the steel industry, for example, informed observers note that the profit margin for producers varies by a wide margin according to product type and key geographic export market. The export of steel plate to the EU has a margin of more than US$400/t, while the export of wire rod to the US has a margin of US$220/t. Shifting sales to markets with relatively more demand is an obvious option for producers in some sectors.1
In other sectors such as textiles where production is more country-specific and less likely to shift quickly, rising taxes are expected to force small operators to close and bring about some consolidation in industry sectors. If this does occur, the consolidation process would release labour and equipment into the market, and allow manufacturers to reduce their costs in other areas of their business.
As such, while the Chinese government and market forces both seem to be heading in the direction of causing China’s export prices to rise, we do not anticipate that this process will occur suddenly, sharply, or uniformly across all products coming out of China or within all of China’s major export markets. Deflation in the prices of some goods may ease, but this is expected to occur only slowly. Moreover, the continued expansion of China’s export production toward higher value added merchandise – where tax incentives are still in place – will exert deflationary pressure on a new set of products.
And what of a currency adjustment? We continue to view this as unlikely, for several reasons that have been described at length in this publication. Our RMB forecasts call for a slow 5% annual rise of the RMB against the US dollar, in nominal terms, over the next few years. At the same time, it is important to note that the RMB has weakened significantly against the euro, and that the EU absorbs as many Chinese exports as does the US.
Overall, whether considering the currency or other policy measures, we believe it is simply implausible that the Chinese government will look to initiate a sudden economic adjustment. Slow and steady is the name of the game, in our view, with any impact on tradeables inflation to be felt gradually over time.
Ongoing pass through gets our vote Rather than tradeables inflation, we view the continuation and spread of high commodity prices as the key inflation risk. Consolidation of China’s manufacturing industry - if this does occur – seems
1Steel Business Briefing; SBB Analytics China, 28 May 2007
unlikely to temper demand for commodities, and prices are expected to remain elevated. Many commentators observed that the inflation China has generated with its commodities demand has been offset by the deflation that Chinese production has exerted on consumer goods. While we do not think that China will soon start exporting goods inflation, it seems that the pace of commodity price inflation is accelerating and broadening to the point where the China deflation offset may start to break down.
Studies of the second-round effects of rising oil prices in the past have suggested a 12-18 month lag from the time that energy prices start rising to the time when producer prices rise in response. The International Energy Agency estimates that a sustained US$10/bbl rise in oil prices adds 0.5 percentage points to OECD CPI in the first year and 0.6 percentage points. Since 2004 when oil prices first reached US$52/bbl, OECD CPI rose from 2.3% in 2004 to 2.5% in 2005 and 2.6% in 2006. This oil price pass through has therefore been insufficient to bring overall inflation to above trend levels.
However, it is important to note that while oil prices reached their peak in July 2006 at US$77/bbl, base metals prices have continued to rise. Nickel prices have risen by 90% and aluminium prices by 12% since July 2006. Copper prices are up around 1%, after rebounding sharply from an early 2007 slump. Over this time, Chinese production rose by 27% for aluminium, 17% for nickel but just 1% for copper.
Substantially higher base metals prices run a risk of further pass-through to the US and EU economies. As the chart below illustrates, oil intensity in both the US and Europe is far surpassed by the consumption of steel – which relies on many base metals in the production process- in per capita terms. Likewise, consumption of raw base metal materials in these economies, when aggregated, is likely to be of a similar if not bigger intensity compared with oil.
Economics@ANZ ANZ International Economics Monthly – May 2007
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The US and Europe use more than just oil
Oil intensity Metals and steel intensity
Source: IMF, BP World Energy Review, Economics@ANZ
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In addition to base metals prices, persistently higher primary energy prices are starting to have second round effects on soft agricultural commodities. Massive investment in the development of biofuels as an alternative to fossil fuels has led to surging demand for corn, palm oil and other biofuels inputs. While there is a greater potential for a more rapid supply side response for agricultural commodities than is the case for primary energy, forward curves are still indicating that prices are expected to remain at what have become elevated levels.
Biofuel input prices on the rise
Rapeseed oil prices Sugar prices
Source: Datastream, Economics@ANZ
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As discussed above, food prices represent 15% of the CPI indices in the US and the EU. Energy commodities are 4% of the US CPI, and a much larger 10% for the EU. While volatile food prices are omitted from core CPI in the same way as oil prices, a more persistent rise in food prices should over time find its way into core inflation. Moreover, whereas central banks have previously ignored food price volatility because it is usually generated by transient factors such as weather, this may be changing. The knock-on effects of demand for biofuels could be a more enduring feature, as could water shortages arising from climate change. If so, central bankers may start to take sustained rises in food prices into account when pondering interest rate decisions.
EU rate forecast lifted, with upside risks Taking together the factors discussed in the above sections, it seems that exogenous factors pose more of a risk for inflation in the EU than in the US. Economic activity in the EU is still picking up, and inflation is still rising. We have already raised our forecast for the ECB policy rate to 4.5% by year-end, or three more rate hikes this year.
Moreover, the cost-push risks to inflation arising from external factors seem more likely to affect inflation in the EU than in the US. The EU HICP has a higher weight than does the US on consumer goods prices, so any adjustment there through the tradeables sector may come through more strongly (although we still tend to think on balance slightly higher production costs in China would be offset by the stronger euro).
The higher food weighting in the EU index means there is potential for greater pass through from the continual bump up in the price of agricultural commodities into EU inflation. Finally, as seen above, the EU is less oil intensive but more metal intensive than in the United States. Thus the ongoing surge in base metals prices seems more threatening to the outlook for EU inflation than for US inflation.
In contrast, in the United States economic activity is weakening and the decline in the housing market is exerting downward pressure on consumer price inflation. Unless activity picks up rather strongly, it seems more than likely that consumer price inflation will reach the Fed’s comfort zone by the end of this year. Strong corporate profitability and wealth effects from a rallying equity market – if this continues to be the case – could put the Fed off of cutting interest rates. Nonetheless, the risk of higher inflation from the tradeables sector and/or commodity price pass through seems more muted in the US than in Europe.
Overall, it seems the risks to inflation are higher in the EU than in the US. Financial markets have not yet fully priced in the three rate hikes this year that we are forecasting for the ECB. We therefore believe that there is risk of financial market movements around the evolution of inflation in the Euro area. If interest rates do rise as we expect, we believe this would also put additional pressure on the euro to appreciate against the US dollar.
Amy Auster Head of International Economics [email protected] +61 3 9273 5417
Alex Joiner Economist, International [email protected] +61 3 9273 6123
Economics@ANZ ANZ International Economics Monthly – May 2007
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Financial Markets Update
Exchange rates, US$ per local currency unit, indexed
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Exchange rates
• The Australia dollar has eased from its April peak as speculation regarding pre-election interest rate hikes have died down.
• The Japanese yen and Taiwan dollar have both been weighed down by carry trades throughout the month. However, we did see an uptick in the Taiwan dollar late in the month on speculation that the Central Bank of China was intervening in the market to stem the currency’s depreciation.
• It has been another strong month for most South East Asian currencies. The Philippines peso, Indonesian rupiah and Malaysian ringgitt have performed particularly well. These currencies have been supported by improving economic fundamentals, strong investor interest in financial markets and a willingness on the part of central banks to allow for a sustained appreciation.
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• With inflation continuing to moderate across much of South East Asia real exchange rate appreciation has been driven by sustained growth in nominal exchange rates. Stronger currencies across the region have assisted in getting inflation under control by limiting imported price rises, especially from higher global oil prices.
• Japan’s real exchange rate continues to be driven downwards by a weak nominal rate and little inflation to speak of. On a positive note, this has led to the yen being undervalued and has thus supported a relatively strong export performance recently.
• China’s real exchange rate has remained elevated in recent months despite little change in the rate of yuan appreciation. This is due to higher rates of inflation in China, with cost pressures emerging for both consumers and producers in recent months.
Policy rates
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• Policy rates in North Asia continue to be slanted towards a tightening bias. China is using policy rates, amongst other instruments, to try and cool the economy and in particular investment. Interest rates in Taiwan meanwhile continue to ‘normalise’ with a further rate rise expected when the Central Bank of China holds its quarterly meeting next month.
• We continue to expect the Bank of Japan to raise interest rates this year, just as soon as the economy and inflation start to gain some momentum.
• South East Asia is a different story, with inflation broadly in control interest rates are continuing to be cut. Thailand recently cut rates by 50 bps to 3.5% in an effort to kick-start the economy.
• Despite the pace of interest rate cuts by Bank Indonesia slowing recently, we still expect they have some way to go. Governor Abdullah said last week that Bank Indonesia’s forecast for policy rates is now 7.5%, considerably lower than the current level of 8.75%.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 8
Government Bond Index
1
2
3
4
5
6
7
Oct-06 Jan-07 May-07
Hong Kong
Yield (on traded index)
Australia
New Zealand
China
Japan
Korea
US
1
3
5
7
9
11
13
Oct-06 Jan-07 May-07
Indonesia
Thailand
Yield (on traded index)
Philippines
Malaysia
Singapore
Source: JPMorgan
Philippines’ index is the 10-year bond yield as there is no GBI index.
Bond markets
• With much of the policy interest rate hike speculation over in Australia and New Zealand, bond yields in these countries have risen in line with the recent upward trend in US yields. Consequently, the premium in Australian and New Zealand yields continues to increase above lower yielding countries such as Japan, despite recent increases in Japanese interest rate expectations.
• Bond yields in China have continued to rise as policy rates are increased and higher rates of inflation begin to emerge. Bond yields in Hong Kong meanwhile have increased in line with yields in the United States which have been pushed up as expectations for the Fed to cut interest rates before the end of this year have been scaled back.
• Yields in South East Asia continue to trend downwards reflecting lower interest rates and inflation and strong international investor inflows, underpinned by an improving economic and financial environment.
100
150
200
250
300
350
400
Oct-06 Dec-06 Jan-07 Mar-07
Gold
Copper
Oil (Tapis)
Jan 2004=100
Base metals
Commodity Prices
Source: Datastream
Commodities
• Some relatively soft US housing data combined with an increase in Chinese copper stocks saw copper prices fall significantly in the month. This is despite China's imports of copper and alloys more than doubling in the first four months of 2007.
• Prices for other base metals, such as nickel and aluminium, have also lost ground in recent weeks, pushed down by an increase in perceived risk to the outlook for the Chinese economy and equity market.
• Oil prices continued to rise in May with factors driving the price increase including: ongoing geopolitical tensions in the Middle East; refiners increasing demand in the US to boost relatively low fuel inventories; and civil unrest in Nigeria.
• The price of gold has dropped sharply from a high above US$680/oz to now be just above US$650/oz. A notable rise in gold sales by some global central banks along with a rebound in the US dollar is behind this price decline.
Share price indices
100
120
140
160
180
200
220
240
260
280
300
Oct-06 Dec-06 Feb-07 Apr-07
1 Jan 2004 = 100
Japan
Korea
Taiwan
China
Hong Kong
75
100
125
150
175
200
225
250
275
300
Oct-06 Dec-06 Feb-07 Apr-07
1 Jan 2004 = 100
Singapore
Malaysia
Indonesia
Philippines
Thailand
Source: Datastream
Equity markets
• The growth in the Chinese equity market continues at a staggering pace. Since the so-called correction in March the Shanghai index has gained over 35%. The gains in the market are an ongoing concern for the Chinese authorities who have recently tripled stamp duty on shares to 0.3% from 0.1% in an attempt to cool the market. This bull market is starting to look vulnerable with former Fed Governor Greenspan recently warning that there could be a “dramatic correction” in the Chinese equity market.
• Equities markets in South East Asia continue to perform well. Keen interest from foreign investor has driven rallies in equities markets, which in turn has underpinned currency strength. The notable exception to this has been Thailand where investors remain cautious in the midst on ongoing political unrest.
Economics@ANZ ANZ International Economics Monthly – May 2007
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 10
Macro Economic Forecasts Real GDP Growth (%)
2005 2006 2007f 2008f
Australia 2.8 2.7 2.9 3.8
Cambodia 13.4 8.1 7.6 7.7
China 9.9 10.7 9.8 9.6
Hong Kong 7.3 6.8 5.5 6.0
India+ 9.0 9.3 8.7 8.5
Indonesia 5.6 5.6 6.0 6.4
Japan 2.6 2.4 2.1 2.0
Korea 4.0 5.1 4.4 4.2
Malaysia 5.2 5.9 5.4 5.7
New Zealand 2.1 1.6 1.6 2.3
Philippines 5.1 5.4 6.0 5.0
Singapore 6.3 7.9 6.2 5.6
Taiwan 4.0 4.6 4.2 4.4
Thailand 4.5 5.0 4.3 5.6
United States 3.2 3.3 2.1 3.1
Vietnam 8.4 8.2 8.1 8.1
Nominal GDP (US$ bn)
2005 2006 2007f 2008f
Australia 709.8 759.6 872.4 893.9
Cambodia 6.3 7.1 8.0 8.9
China 2233.7 2529.6 2888.9 3234.3
Hong Kong 177.7 188.7 203.2 221.2
India+ 753 872 1005 1150
Indonesia 281.2 336.4 378 423
Japan 4758.2 4882.2 5024.6 5181.5
Korea 787.2 845.6 913.8 985.5
Malaysia 130.8 144 154 167
New Zealand 108.5 103.6 114.3 104.5
Philippines 98.4 116.9 128.6 142.0
Singapore 116.6 127 136 145
Taiwan 346.2 355.5 376.3 402.1
Thailand 176.5 194 206 223
United States 12,456 13,247 13,843 14,539
Vietnam 53.1 61.3 70.1 80.2
Inflation (%)
2005 2006 2007f 2008f
Australia 2.7 3.5 1.9 2.8
Cambodia 5.8 4.7 5.0 5.1
China 1.8 1.5 3.2 2.9
Hong Kong 0.9 2.0 1.7 2.3
India+ 4.2 6.0 6.0 5.5
Indonesia 10.5 13.3 6.1 5.0
Japan -0.2 0.0 0.6 1.0
Korea 2.8 2.7 3.3 3.5
Malaysia 2.9 3.6 2.1 2.3
New Zealand 3.0 3.4 1.9 2.6
Philippines 7.8 6.3 4.0 5.0
Singapore 0.5 1.0 1.0 1.3
Taiwan 2.3 0.6 1.5 2.0
Thailand 4.5 4.7 2.0 2.2
United States 3.4 3.2 2.6 2.1
Vietnam 8.2 7.5 6.9 6.7
Fiscal Balance (% of GDP)*
2005 2006 2007f 2008f
Australia 1.2 1.7 1.6 1.2
Cambodia -5.6 -5.8 -6.0 -6.1
China -1.1 -2.0 -1.9 -2.1
Hong Kong -0.4 -0.2 -0.5 -0.5
India+ -4.2 -3.8 -3.6 -3.5
Indonesia -0.5 -1.0 -1.5 -1.3
Japan -6.2 -6.0 -5.8 -5.5
Korea -0.3 -0.8 -0.2 0.1
Malaysia -3.8 -3.5 -3.4 -3.3
New Zealand 4.1 7.3 4.0 2.9
Philippines -12.1 -4.9 -6.0 -4.0
Singapore 0.2 -0.8 -0.3 0.1
Taiwan -2.5 -2.0 -2.6 -2.0
Thailand 0.1 -0.8 -2.0 -1.0
United States -2.6 -1.6 -1.2 -1.3
Vietnam -2.1 -1.8 -1.9 -1.8
Current Account (% of GDP)
2005 2006 2007f 2008f
Australia -5.8 -5.4 -5.6 -5.6
Cambodia -10.9 -10.6 -10.3 -10.2
China 7.2 9.5 9.8 9.6
Hong Kong 11.4 9.0 8.0 8.5
India+ -0.9 -1.7 -2.3 -2.8
Indonesia 0.1 2.6 1.6 1.0
Japan 3.6 3.7 3.5 2.5
Korea 2.4 1.7 1.2 1.1
Malaysia 15.3 15.8 15.3 15.0
New Zealand -9.0 -8.9 -7.7 -7.6
Philippines 2.4 5.0 4.0 5.0
Singapore 24.5 27.5 25.0 24.0
Taiwan 4.7 5.8 5.5 6.0
Thailand -4.5 1.6 2.5 1.5
United States -6.4 -6.5 -5.8 -5.7
Vietnam 0.9 1.5 1.7 1.9
Foreign Exchange Reserves (US$ bn)
2005 2006 2007f 2008f
Australia 43.3 55.1 n/a n/a
Cambodia 0.94 1.09 1.2 1.3
China 818 1066 1400 1750
Hong Kong 147 154 160 162
India 131.0 170.2 200 220
Indonesia 33 40.7 50 55
Japan 828 865 880 900
Korea 215 225 230 234
Malaysia 69.3 81.7 89 95
New Zealand 9.1 13.1 n/a n/a
Philippines 18.5 22.3 23.0 24.0
Singapore 115.3 136.3 150 160
Taiwan 301 313 320 325
Thailand 50.5 65.1 70 75
United States 37.84 41.5 n/a n/a
Vietnam 7.0 8.9 12.9 16.5
+: Fiscal year beginning April; *:Fiscal balance for Australia, New Zealand, Malaysia and Singapore corresponds to fiscal year
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 11
Long Term Foreign Currency Government Bond Ratings Investment Grade Sub-Investment Grade
Moody’s S&P Moody’s S&P
Aaa AAA Ba1 BB+ Australia Australia Costa Rica Colombia Canada Canada Egypt Egypt France France Morocco El Salvador
Germany Germany Panama Morocco Japan Singapore Peru
New Zealand United Kingdom Brazil Singapore United States Ba2 BB
United Kingdom Brazil Costa Rica United States Colombia Jordan
Fiji Panama Aa1 AA+ Guatemala Guatemala
Belgium Belgium Jordan Vietnam New Zealand
Aa2 AA Ba3 BB- Italy Hong Kong Peru Cook Islands
Japan Vietnam Indonesia Aa3 AA- Turkey Philippines
Cayman Islands Qatar Serbia Hong Kong Taiwan Turkey
Kuwait Venezuela Qatar Ukraine
Taiwan UAE A1 A+
Czech Republic Italy B1 B+ Macau Kuwait Papua New Guinea Argentina
Saudi Arabia Philippines Ghana Suriname Pakistan
A2 A Ukraine Uruguay China Chile Indonesia Cambodia Chile China Pakistan
Cyprus Cyprus Uruguay Hungary Korea B2 B
Israel Oman Honduras Fiji Kuwait Venezuela Papua New Guinea Poland Cambodia
Saudi Arabia A3 A- B3 B-
Korea Czech Republic Argentina Bolivia Malaysia Hungary Bolivia Lebanon
Oman Israel Lebanon Paraguay Malaysia
Baa1 BBB+ Mexico Bulgaria Caa1 and below CCC and below
South Africa Hungary Cuba Ecuador Thailand Poland Ecuador
Russia Nicaragua South Africa Paraguay Thailand
Baa2 BBB Mauritius Mexico Tunisia Tunisia Russia Russia
Baa3 BBB-
Bulgaria Romania India India
El Salvador Romania
At the end of May, Moody’s changed its ratings methodology and established new country ceilings that are 1 or 2 notches above the sovereign credit rating for many countries rated A and below. Bloomberg’s CSDR page now shows the new country ceilings rather than the old sovereign bond ratings. We are evaluating the change and how we will interpret the new rating.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 12
Country Update: Australia Wages growth remains well-contained…
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Mar-01 Mar-03 Mar-05 Mar-07
Private
Public
Total
Annual % ch.
Labour Price Index
Source: Australian Bureau of Statistics
…despite further tightening in the labour market
Employment growth
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
01 02 03 04 05 06 07
Annual % change
Unemployment rate
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
01 02 03 04 05 06 07
%
Source: Australian Bureau of Statistics
• The Australian economic landscape is currently characterised by strengthening domestic demand and tightness in the labour market but soft inflation and well-contained wages growth.
• Retail sales and capital expenditure highlight the underlying strength of the domestic economy. Retail sales rose by a solid 2.2% in the three months to April. Meanwhile, real private sector capital expenditure rose by a massive 4.7% in the quarter (excluding the impact of the privatisation of Telstra). The main exception to this picture of economic strength is residential building approvals, which fell by 11.4% QOQ in March to the lowest level since 2001. This translates into a dwelling ‘completions rate’ of just 135,000 dwellings, which is considerably lower than our estimate of underlying demand of 168,000 dwellings.
• The labour market has continued to tighten, with the unemployment rate falling to a new three-decade low of 4.4% and employment growth accelerating to 3.1%. Notwithstanding this, the Wage Price Index (WPI) increased by a relatively tame 1.0% QOQ in March 2007, down from 1.1% QOQ in December 2006. This was despite a delay in last year’s federal minimum wage decision, which pushed up private sector wage growth in the quarter. Annual growth in the WPI is running at 4.1% a year. While a touch higher than the 4.0% growth recorded through much of 2006, it has remained in a band between 4 and 4¼% for the past two years.
• The 2007-08 Budget again benefited from stronger than expected revenue flows allowing the Government to cut taxes by $32bn over four years and fund other policy decisions costing around $40bn whilst still leaving Budget surpluses of $10-14bn (1-1¼% of GDP) per annum. As was the case in 2006-07, we believe measures in the Budget such as tax cuts and increased child care assistance will have a net stimulatory impact on household spending, despite the Budget remaining in surplus.
• Benign inflation and wages growth will ensure the Reserve Bank remains on hold until after the Federal election. But continued strength in domestic demand raises the prospect of further monetary policy tightening in the medium term.
Riki Polygenis
Economic data – Australia Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Building Approvals, 000’s 13.3 12.4 12.7 12.4 12.2 13.3 11.8 n/a Retail Sales, % YOY 6.1 6.8 6.7 6.4 6.6 6.8 7.7 6.2 Exports, % YOY 15.7 16.4 14.0 4.6 14.3 7.6 7.0 3.2 Imports, % YOY 11.5 16.5 4.9 8.8 5.5 10.8 8.8 4.3 Trade Balance, AUD bn -0.90 -1.40 -0.86 -1.49 -0.84 -0.76 -1.62 -0.96 Foreign Exchange Reserves, US$ bn 46.2 50.1 51.3 55.1 59.3 53.7 57.5 67.4 Quarterly data Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Real GDP, % YOY 2.9 2.9 3.2 3.3 2.4 2.3 2.8 n/a - Private consumption 3.4 2.6 2.4 2.7 2.8 3.0 3.8 n/a - Government consumption 3.8 2.8 3.5 2.6 4.6 5.0 2.6 n/a - Gross fixed capital expenditure 7.7 10.0 9.7 10.9 6.7 3.2 2.0 n/a Consumer Price Index, % YOY (nsa) 2.5 3.0 2.8 3.0 4.0 3.9 3.3 2.4 Current Account, AUD bn -11.9 -13.1 -14.1 -13.2 -13.3 -12.6 -15.1 n/a Capital Account, AUD bn (nsa) 11.1 14.9 13.8 12.9 11.8 14.4 14.7 n/a
Sources: Australian Bureau of Statistics, RBA Note: data seasonally adjusted unless otherwise stated
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 13
Country Update: Cambodia
Tourism to Cambodia is booming
0
200
400
600
800
1000
1200
1400
1600
1800
2000 2001 2002 2003 2004 2005 20060
20
40
60
80
100
120
140
160
Number of tourist arrivals (LHS)
000s arrivals
Average tourist arrivals per month (RHS)
000s arrivals
Source: Cambodian Ministry of Tourism
Asia is Cambodia’s biggest tourist market
02468
1012141618
Kore
a
Japan
USA
Taiw
an
Chin
a
Vie
tnam
Mala
ysia
Thaila
nd
UK
France
% of totalTourist Arrivals – 2006
Source: Cambodian Ministry of Tourism
• Moody’s has just assigned its first-ever sovereign rating to Cambodia. This follows Standard & Poor’s foreign currency sovereign rating of Cambodia last month. Moody’s has rated Cambodia’s foreign-currency and local currency government bonds at B2 with a stable outlook. This rating is five notches below investment grade and puts Cambodia on par with Honduras and Venezuela and one notch below the Philippines and Indonesia.
• Moody’s has also assigned a slightly higher foreign currency bond ceiling of B1 to Cambodia. This reflects the high likelihood that a payments moratorium would be put in place in the event of a government bond default.
• These ratings may provide a small boost to foreign investor confidence in Cambodia. However, further progress in strengthening Cambodia’s institutional environment is essential if the country is to continue to attract foreign investment. Areas for reform include improving governance, transparency and the legal framework, increasing the efficiency and effectiveness of the public service and reducing corruption.
• Removing regulatory barriers to trade and investment will also support ongoing investor interest in Cambodia. To this end, the Cross Border Transport Agreement, signed by Cambodia, China, Laos, Myanmar, Thailand and Vietnam in March, is an important step. This agreement streamlines the regulations and procedures for crossing between borders in the Greater Mekong Subregion and aims to encourage greater transport of goods and people within this area.
• In the meantime, Cambodia’s strongly performing economy is the main attraction for foreign investors. One sector that continues to boom is tourism. Tourist arrivals data for 2006 have recently been released and show that the number of visitors increased by 33.1% last year to a record 214 665 persons.
• The Asian region is becoming an increasingly important tourism market to Cambodia. Asian countries account for seven of the top ten sources of visitors to Cambodia. Korea is Cambodia’s most important tourism market, accounting for around 17% of total arrivals last year.
Sources: Datastream, National Institute of Statistics of Cambodia
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 14
Country Update: China Investment rising, but not in largest
manufacturing provinces
0
5
10
15
20
25
30
35
05 06 07
% annual growth
Fixed asset investment in five largest provinces*
0
10
20
30
40
50
60
70
80
05 06 07
% annual growth
Jilin
Anhui
Fujian
Liaoning
Source: CEIC; Economics@ANZ
*Guangdong, Shandong, Jiangsu, Zhejiang, Henan
Provinces with fastest FAI growth
Prices still seem headed up
-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07
% annual growth
Heavy industry
Light industry
Construction
Ex-factory prices in key sectors
Source: CEIC; Economics@ANZ
-15
-10
-5
0
5
10
15
02 03 04 05 06 07
% annual growth
Food
Shelter
Transport
Education, entertainment
Sub-components of CPI
• Authorities have announced additional measures to cool growth as data remains strong. Most significantly, export tariffs ranging from 10-20% were imposed on a range of steel products, although this does not appear to have yet altered expansion plans among the largest producers. Steel has been a particularly sore point with US trade negotiators; a similar approach by the Chinese to address other areas of concern could see action on wood and paper products, petrochemicals, textiles and metal industries.
• Fixed asset investment has risen in 2007, but provincial level data indicate that it is not the largest manufacturing provinces where this investment has been located. Rather, investment has surged to more than 35% annual growth in outlying provinces; in our view, this is most likely related to the current political cycle that culminates in the election of the Communist Party Central Committee in the fourth quarter. However producer prices are starting to rise and have been mirrored in domestic inflation, which has been at or above 3% over the past 2 months.
• The PBOC moved to dampen inflation and investment again this month. The reserve requirement ratio was raised twice in May, reaching 11.5%, and interest rates were raised again. The lending rate was raised by 18 bps and the deposit rate by 27 bps (partially reversing a decision last year in which the lending rate was raised but the deposit rate was not). The daily trading band for the RMB was widened from +/-0.3% on either side of the daily fixing to +/-0.5%; we view this as a nod to the Americans that is unlikely to affect the pace of currency appreciation.
• What has the authorities concerned most of late is the heat in the equity markets, with the Shanghai stock exchange up more than 40% since the start of this year, with P/E ratios also up above 40. In the first of what is likely to be a number of steps to allow for increased capital outflows, the authorities announced Qualified Domestic Institutional Investors (QDII) licensed institutions would be able to start buying equities offshore, particularly in Hong Kong.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 15
Country Update: Hong Kong China drives the Hang Seng to record highs
Hang Seng Composite
Source: CEIC, Economics@ANZ
0
500
1000
1500
2000
2500
3000
3500
02 03 04 05 06 07
Index
Hong Kong Composite
Mainland composite
Hang Seng Composite
0
5
10
15
20
25
30
03 04 05 06 07
PE Ratio
Hong Kong Composite
Mainland composite
Hang Seng composite
Exports to most major markets are softer
Exports Exports by destination
Source: Bloomberg, Datastream, Economics@ANZ
-15
-10
-5
0
5
10
15
20
25
30
05 06 07
% yearly change (12mma)
Domestic exports
Total exports
Re-exports
0
5
10
15
20
25
05 06 07
% yearly change (12mma)
Japan
US
China
UK
Ger
• The expansion of China’s QDII scheme, which allows qualified mainland investors to purchase equities in Hong Kong, sent the Hang Seng Index to a record high in May. The rise was underpinned by a further sharp increase in the Hang Seng Mainland Composite index, which tracks H shares in China. Local stocks were also pushed higher but, with a price-earnings ratio of 13.7% are still trading at a considerable discount to the Mainland stocks which currently have a price-earnings ratio of 19.2%.
• Recent trends in the Hang Seng illustrate the increasing links between the Chinese and Hong Kong economies and financial systems. Despite this, HKMA Chief Joseph Yam has this month confirmed that that there are no plans to peg the Hong Kong dollar to the Chinese yuan. Yam stated that the continuation of the peg with the US dollar remains the most appropriate option for Hong Kong.
• Turning to the real economy now and GDP expanded by 5.6% in the year to the March quarter. This brings the rate of economic growth to slightly below the five-year average and well below the strong rates of expansion recorded in the second half of last year.
• A weaker export performance is the main factor behind the slowdown in the Hong Kong economy. Export growth has eased notably, from an average rate of 12.0% YOY in Q4 2006 to 9.2% YOY in Q1 2007. Part of the slowdown in exports reflects a sharp drop in the small domestically produced exports sector. Hong Kong’s re-exports, which make up around 95% of total exports, have also slowed, although growth in these sales remains stronger than this time last year.
• The slowdown in exports sales has been fairly broadly-based across most of Hong Kong’s major export destinations. Exports to China, the United States, Japan and Germany have all been on a downward trend in recent months. One notable contrast is the United Kingdom, where sales have risen sharply.
Katie Dean
Economic data – Hong Kong Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Visitor Arrivals, %YOY 2.4 2.5 1.0 9.3 -1.0 18.5 2.9 2.3 Retail Sales, % YOY 5.9 5.2 5.0 8.3 -4.9 25.3 3.6 n/a Consumer Price Index, % YOY 2.1 2.0 2.2 2.3 2.0 0.8 2.4 1.3 Exports, % YOY 4.5 7.5 13.8 13.4 8.5 10.8 6.2 11.8 Imports, % YOY 7.9 10.8 15.9 14.2 13.4 0.6 10.3 13.9 Trade Balance, US$ bn -1.5 -0.4 -1.1 -2.7 -0.6 -1.0 -3.6 -2.6 Foreign Exchange Reserves, US$ bn 130.0 131.0 133.0 133.0 134.0 136.0 135.0 137.0 Quarterly data Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Real GDP, % YOY 7.5 8.6 8.1 8.0 4.9 7.2 7.7 5.5 - Private consumption 2.5 4.0 3.1 5.1 5.8 4.6 5.4 5.6 - Government consumption -2.3 -1.6 -3.9 1.1 -1.5 -1.1 2.3 2.3 - Gross fixed capital expenditure 5.0 3.2 8.9 7.3 4.5 10.3 9.4 3.9 Nominal GDP, US$ bn 44.3 45.0 45.8 46.3 46.5 47.9 48.9 n/a Current Account, US$ bn 4.5 4.6 5.9 4.8 1.9 6.7 7.2 n/a Capital Account, US$ bn -0.2 -0.1 -0.1 -0.1 0.1 -0.2 -0.1 n/a Source: Datastream
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 16
Country Update: India Strong currency helps to reduce trade deficit
Export and Import trends Trade Balance
Sources: Bloomberg, Datastream
-7
-6
-5
-4
-3
-2
-1
0
03 04 05 06
US$ bn
0
10
20
30
40
50
60
03 04 05 06
% YOY, 3-mth mvg avg
Exports
Imports
Inflation eases but pressures persist
Inflation Credit growth
Sources: Bloomberg, Datastream
2
7
12
17
22
27
32
37
03 04 05 06
Annual % change
0
2
4
6
8
10
12
14
16
03 04 05 06
Annual % change
Total WPI
Fuel
Claims on the private sector
• Strong capital inflows continue to support the Indian rupee which reached its strongest level against the US dollar since 1998. Since the start of 2007, the rupee has climbed by 9% against the US dollar. The rising currency, while assisting in containing imported inflation, has also made exports less competitive.
• The value of exports, in US dollar terms, was up just 11% YOY for the first three months of this year compared with 29% YOY during January-March 2006. Import growth slowed to 16.7% YOY, thanks to the strong currency, resulting in a smaller trade deficit of US$11.6 bn for the first three months of 2007. The current account deficit is expected to have narrowed in Q1 2007, largely reflecting the strong invisibles surplus mainly constituting overseas remittances and software exports. This deficit, however, is more than offset by portfolio inflows and overseas borrowings.
• Inflation, as measured by the wholesale price index, eased in May, falling to 5.27% YOY in the week ending 12 May down from an average 5.9% YOY in April. The tight monetary policy measures are helping to arrest the acceleration in credit growth. However, inflation pressures are expected to persist as capital inflows stay strong. Domestic demand is also expected to remain relatively healthy. Market expectations are for real GDP to expand by 9.7% YOY in the March quarter, bringing growth for the FY2006/07 (year ending March) to 9%, the second successive year of above 8.5% expansion. The government has forecast a slight moderation in growth to around 8.5% in FY2007/08. However, the Confederation of Indian Industry (CII) has projected a stronger growth track of 9.2%. We expect the economy to expand by around 8.7%.
• On the political front, elections in Uttar Pradesh – the country’s largest state - saw the Bahujan Samj party (BSP), which has a strong support base among the lower castes, win an unexpected majority of seats (210 out of 403 seats). India’s ruling Congress party faced a setback, securing only 21 seats, down from 25 in the 2002 elections. The main opposition rival, the Hindu nationalist BJP was also marginalised.
Jasmine Robinson
Economic data – India Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Industrial Production, %YOY 11.7 4.5 15.5 14.0 12.0 10.8 14.0 n/a Passenger car sales, % YOY 20.4 15.5 25.2 24.7 23.3 36.8 6.2 7.7 Consumer Price Index, % YOY 6.4 6.9 6.0 6.6 6.8 7.6 6.8 n/a Exports, % YOY 27.6 14.8 35.7 20.2 5.5 23.8 15.4 n/a Imports, % YOY 34.1 44.4 37.5 41.8 23.2 30.1 18.6 n/a Trade Balance, US$ bn -6.0 -6.9 -5.4 -5.7 -5.8 -4.7 -3.8 n/a Foreign Exchange Reserves, US$ bn 158.0 161.0 168.0 170.0 173.0 187.0 192.0 n/a Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Real GDP, % YOY (at factor cost) 8.6 8.4 8.0 9.3 9.3 8.9 9.2 8.6 - Agriculture 6.8 9.8 6.6 7.2 7.9 9.7 10.5 10.0 - Industry 1.5 4.0 4.0 8.7 5.5 3.4 1.7 1.5 - Services 11.4 9.8 9.7 10.0 10.8 3.7 11.1 11.3 Nominal GDP, US$ bn 175.9 170.2 169.9 193.4 196.4 185.3 182.5 222.6 Current Account, US$ bn 4.1 -3.6 -3.6 -3.8 1.8 -6.1 -6.9 -3.0 Capital Account, US$ bn 12.4 4.4 10.0 -0.6 10.9 10.7 8.6 10.7 Source: Datastream, Bloomberg
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 17
Country Update: Indonesia Economy tracking well
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07-5
0
5
10
15
20
% YOY
Source : Datastream
Investment
Real GDP
Private consumption
% YOY
Rupiah surges ahead
8500
8700
8900
9100
9300
9500
9700
9900
Jan-06 Jul-06 Jan-07
USD/IDR (inverted scale)
Sources: Bloomberg, Datastream
0
5
10
15
20
25
Jan 06 Jul 06 Jan 07
USD/IDR 30-day volatility
%
• First quarter economic growth figures released in May reveal that the economy is tracking well, expanding by 5.97% YOY, in line with our expectations. Growth was propelled by private consumption, which rose by 4.5% YOY or the fastest pace since Q3 2004, and net exports. Investment rose 7.5% YOY after a weak performance in 2005 and 2006. We have forecast real GDP to expand by 6% in 2007 from 5.6% in 2006 and to grow at a faster pace of 6.4% in 2008 as investment spending gains momentum. The government is pushing ahead with reform with the second phase of the policy packages encompassing the investment environment, financial sector and infrastructure likely to be announced soon along with a fourth package focusing on small-and-medium-sized enterprises.
• The fiscal deficit is expected to widen to 1.5%-2% of GDP from the initial target of 1.1% of GDP. This largely reflects additional urgent spending to cover natural disasters and to meet the government’s target on agriculture and energy-alternative programmes.
• The relatively healthy economic performance has been accompanied by easing inflation. Bank Indonesia’s inflation target of 6% (+/-1%) by year-end looks achievable. We have forecast inflation to average 6.1% in 2007 from 13.3% in 2006 leaving room for further cuts in the benchmark policy rate which is currently at 8.75%. Our forecast is for the BI rate to end the year at 8%. Despite the successive rate cuts, interest rate differentials with the US, although narrowing, still command a premium and are expected to continue to underpin strength in demand for IDR assets and the currency.
• The Indonesian rupiah breached the 9,000 mark in early May after trading in a tight range of 9,000-9,200 for the best part of this year. The rupiah appreciated by some 3.2% against the US dollar during the month to be one of the best performers in Asia. Improving domestic economic conditions, political stability, renewed strength in Asian currencies and buoyant liquidity conditions will continue to support further strength in the rupiah in the coming months.
Jasmine Robinson
Economic data – Indonesia Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Industrial Production, %YOY 1.4 -9.1 14.2 16.0 13.2 10.3 11.9 n/a Motor cycle sales, % YOY 9.1 -29.8 49.7 27.2 28.6 5.4 31.6 16.2 Consumer Price Index, % YOY 14.6 6.3 5.3 6.6 6.3 6.3 6.5 6.3 Exports, % YOY 17.6 9.6 29.6 16.9 10.5 12.4 22.6 n/a Imports, % YOY 14.8 -7.6 43.2 0.9 19.5 3.0 23.3 n/a Trade Balance, US$ bn 3.2 4.2 3.1 4.6 3.1 3.7 3.8 n/a Foreign Exchange Reserves, US$ bn 40.7 38.2 39.9 40.9 41.6 43.9 45.5 n/a Quarterly data Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Real GDP, % YOY 5.9 5.9 4.8 5.1 5.0 5.9 6.0 6.0 - Private consumption 3.8 4.4 4.1 3.0 3.0 2.9 3.8 4.5 - Government consumption -6.3 14.9 26.8 10.8 27.3 1.7 2.1 4.1 - Gross fixed capital expenditure 16.4 10.6 2.9 1.6 1.2 0.5 8.5 7.1 Nominal GDP, US$ bn 70.7 70.8 76.6 84.7 89.4 94.0 96.2 101.2 Current Account, US$ bn 0.4 -1.2 0.8 1.6 0.6 4.0 2.1 n/a Capital & Financial Account, US$ bn 0.5 -3.3 3.6 2.2 -0.1 -0.7 2.2 n/a Sources: Bloomberg, Datastream, Bank Indonesia
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 18
Country Update: Japan Partial data is gradually improving
Source: Datastream
Consumer prices
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
04 05 06 07
% yearly change
Total
Core
3.0
3.5
4.0
4.5
5.0
5.5
6.0
97 98 99 00 01 02 03 04 05 06 07
%
Unemployment
The market is increasingly convinced that policy normalisation will continue
Source: Bloomberg
2-year Japanese bond yield
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
96 96 97 98 99 00 01 02 03 03 04 05 06 07
%
• Key indicators have provided some encouraging news in Japan this month. Stronger than expected employment growth pushed the unemployment rate to a 9-year low of 3.8% in April. This in turn underpinned a rebound in household spending which unexpectedly rose by 1.1% YOY in April. Consumer prices meanwhile remain depressed by the base effects of last year’s re-weighting of the CPI basket. Nevertheless, CPI did tick up slightly to be flat in YOY terms in April while core prices fell by just 0.1% YOY.
• As the news on the economy gradually improves, the Bank of Japan has become increasingly vocal about the need for monetary policy to not be restricted to target only consumer price inflation. Rather, the Bank of Japan has emphasised the aim of policy to also promote stability in economic growth and asset prices.
• Against this backdrop, financial markets have increased expectations of a further normalisation in monetary policy in Japan. This has seen two-year Japanese government bond yields rise towards 1% in the last week to be at the highest level in 10-years. We are forecasting the BOJ to next lift rates in October, although an earlier move cannot be ruled out if the data continues to print strongly.
• The IMF completed its latest Article IV consultation on Japan in May and maintains a favourable outlook, projecting GDP growth of around 2.3% in 2007, slowing to 1.9% in 2008. CPI inflation is forecast to gradually pick up to average 0.0% in 2007 and 0.5% in 2008.
• The IMF has called for Japan to accelerate the pace of fiscal consolidation. At more than 80% of GDP, net public debt in Japan is uncomfortably high and under continued upward pressure from an aging population. The IMF emphasises that Japan’s favourable short-term economic prospects provide a good environment for faster deficit reduction. Such consolidation will reduce Japan’s vulnerability to external shocks and is desirable in light of the ongoing decline in home bias in the government bond market, as well as growing foreign participation and the likely shifts in Japan Post’s assets as its privatisation takes place.
Katie Dean
Economic data – Japan Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Industrial Production, %YOY 5.5 6.6 4.9 4.5 3.2 4.5 3.2 2.5 Retail Sales, % YOY 0.6 -0.1 -0.3 -0.3 -1.0 -0.2 -0.7 -0.6 Consumer Price Index, % YOY 0.6 0.4 0.3 0.3 0.0 -0.2 -0.1 0.0 Exports, % YOY 9.3 8.1 13.2 10.7 14.2 7.4 10.3 6.4 Imports, % YOY 11.0 13.8 8.7 8.7 6.0 7.9 0.2 1.8 Trade Balance, US$ bn 8.6 5.2 7.7 9.4 0.0 8.1 13.9 7.8 Foreign Exchange Reserves, US$ bn 861.1 865.6 875.9 874.6 874.5 884.0 888.0 894.3 Quarterly data Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Real GDP, % YOY 1.8 2.2 2.8 2.7 2.1 1.5 2.4 2.2 - Private consumption 1.3 1.7 2.7 1.8 1.4 -0.3 0.5 1.5 - Government consumption 1.5 2.5 0.7 -0.8 0.7 0.1 1.4 1.3 - Gross fixed capital formation 2.2 3.9 2.4 3.6 3.4 1.4 5.2 1.7 Nominal GDP, US$ bn 4800.1 4763.4 4728.6 4704.5 4669.7 4622.1 4640.6 4625.1 Current Account, US$ bn 171.3 169.3 194.0 182.8 168.1 174.2 206.9 204.9 Capital Account, US$ bn -2.7 -1.4 -11.9 -11.0 -5.2 -1.3 -3.0 -8.4
Source: Datastream
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 19
Country Update: Korea The won continues to rise against the yen
The current account deteriorates on stronger income payments
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
05 06 06 07
US$mn
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
7000
05 06 06 07
Goods balance
US$mn
Income balance
Services balance
Current account balance Drivers of the current account
Source: Datastream, Economics@ANZ
• The Bank of Korea’s (BoK) decision to keep interest rates unchanged at 4.5% in April was widely expected. Board members are forecasting the Korean economy will continue to expand at a mid-4% pace, slightly higher than ANZ’s forecast for GDP growth of 4.1% in 2007. While consumer price inflation has ticked up to 2.5% YOY in April, it remains at the lower limit of the BoK’s target range.
• Local authorities continue to see the rising won as a major threat to Korea’s export-driven economy. Strong foreign investor inflows, particularly into the local stock market, pushed the won up to a four-month high against the US dollar and a nine-year high against the Japanese yen in mid-May. The won has since retraced some of these gains as BoK authorities labelled the won “highly overvalued” and threatened to have “no other choice but to respond” by intervening in currency markets to prevent further won appreciation. Such BoK vigilance will make it hard for the won to make any further gains against the US dollar of yen in the short-term.
• Despite authority’s concern, to date the impact of the rising won on exports and profitability appears to have been more than offset by continued strong global demand. That the won has actually depreciated against the currencies of some key export markets, such as the euro and Australian dollar, is also providing an offset. Korean export growth is holding near two-year highs, accelerating by 15.4% in YOY trend terms in April. Strong sales of autos, electronics and ships are driving this robust trade performance.
• Local profitability is also proving resilient to the higher currency. Indeed, recent strong profit results are behind the unexpected deterioration in Korea’s external position last month. The current account widened to a 10-year high of $1.9 bn in April as a sharp rise in annual dividend payments to overseas investors more than offset a strong export performance. As this rise in dividends is a temporary seasonal factor, Korea’s current account should return to surplus next month.
• This month saw continued strength in the ringgit, which climbed by close to 1% against the US dollar. China’s decision to widen the Yuan trading band supported further ringgit gains with the USD/MYR currently near levels last seen in 1998. The ringgit’s appreciation has occurred amidst relatively low volatility which signals investor confidence in policy management and prospects for the economy.
• Strong current account surpluses (15.8% of GDP in 2006) and portfolio and direct investment flows as well as the rise in commodity prices will continue to underpin support for the currency. The government approved RM12.6 bn (US$3.7 bn) worth of manufacturing investment in Q1 2007, of which RM7.9 bn was foreign investment. If approvals continue at this pace, the total for 2007 could easily breach last year’s record of RM46 bn. The stockmarket has surged 22% since the start of the year and prices of Malaysia’s main commodities exports, namely rubber, palm oil and tin, have continued their strong run.
• The steady currency appreciation has helped to stem imported inflation. This, along with the diminished impact of fuel subsidy cuts announced last year, has returned annual inflation to sub-2% levels. While the increase in public sector wages of between 7.5% and 35% effective from 1 July as well as a rise in the cost of living allowance could generate price pressures, the impact is likely to be limited. We have forecast inflation to average 2.1% in 2007, down from 3.6% in 2006. The benign inflation environment has raised prospects for an easing in interest rates. We expect the central bank to begin cutting interest rates in the second half of the year. Bank Negara has kept its policy rate unchanged at 3.5% since April 2006.
• On the political front, Malaysia and Singapore are moving towards closer cooperation as competition from India and China intensifies. The Singapore government has agreed to invest in the RM47 bn Iskandar Industrial Park project in Johor and plans are underway to identify other areas for cooperation.
Jasmine Robinson
Economic data – Malaysia Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Industrial Production, %YOY 3.0 -1.6 7.9 7.0 1.8 -0.6 -2.7 n/a Motor Vehicle sales, % YOY -14.9 -37.3 -6.9 -24.3 -14.1 -13.6 -16.6 -16.8 Consumer Price Index, % YOY 3.3 3.1 3.0 3.1 3.2 3.1 1.5 1.5 Exports, % YOY 14.4 -1.2 22.7 13.0 16.7 3.9 1.4 n/a Imports, % YOY 9.9 0.7 25.8 8.9 26.1 4.6 7.6 n/a Trade Balance, US$ bn 2.8 2.6 2.5 3.3 1.9 2.0 1.9 n/a Foreign Exchange Reserves, US$ bn 79.9 79.8 80.9 81.8 83.8 87.5 87.6 n/a Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Real GDP, % YOY 4.1 5.4 5.2 5.7 6.2 6.0 5.8 4.1 - Private consumption 7.4 10.4 9.0 7.5 7.3 6.8 6.6 7.4 - Government consumption 0.6 4.7 12.6 3.9 7.2 13.0 6.9 0.6 - Gross fixed capital expenditure 6.7 9.6 0.4 11.4 7.6 3.4 9.9 6.7 Nominal GDP, US$ bn 32.0 33.6 34.1 35.5 37.1 38.0 38.4 32.0 Current Account, US$ bn 4.8 4.9 4.5 5.3 5.2 7.2 7.8 4.8 Capital & Financial Account, US$ bn 0.1 1.5 -12.4 -1.4 -0.1 -4.9 -5.5 0.1 Sources: Datastream, Bloomberg
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 21
Country Update: Philippines
The elections didn’t impact on financial markets
Philippines stock exchange index
Source: Bloomberg
3,150
3,200
3,250
3,300
3,350
3,400
3,450
3,500
3,550
02-May08-May15-May21-May25-May
Index
Election
Philippines peso
45.5
46.0
46.5
47.0
47.5
48.001-May
07-May
11-May
17-May
23-May
USD/PHP
Election
Bouyant external position underpins a pick up in GDP growth
Trade balance
Source: Bloomberg, Economics@ANZ
0
1
2
3
4
5
6
7
8
05 06 07
% yearly change
-600
-500
-400
-300
-200
-100
0
100
06 07
US$ mn (3mma)
GDP growth
• The mid-term congressional elections were held in mid-May. While officials described the elections as generally peaceful, the political process in the Philippines remains marred by scattered violence. Incidents of fighting, intimidation and poll irregularities were reported across the country and actually prevented polling in a few towns.
• Exit polls suggest that President Gloria Macapagal Arroyo is poised to retain the two thirds majority in the Senate that is required for her to survive any further impeachment attempts. That said, the results of the election may not be finalised until mid-June with the Commission on Elections recently delaying plans to proclaim the top nine winners of the senatorial race.
• Financial markets have proved oblivious to the ongoing political uncertainty in the Philippines, focusing instead on the fact that the elections occurred without significant incident. The local stock market has rallied by 5.5% this month so far to be on track for its biggest monthly gain since January.
• The peso is also performing strongly, rising to a 6-year high of 45.895 against the US dollar last week. Similar to authorities in Malaysia and Indonesia, authorities in the Philippines appear comfortable with further currency appreciation although they have expressed some concern about the volatility in the peso. Most recently, Finance Secretary Gary Teves suggested that a gradually appreciating currency is helpful to the Philippines as it aids in narrowing the budget deficit. BSP Governor Amondo Tetangco meanwhile sees a strong peso as good for taming inflation.
• The continued strong performance of the Philippines is underpinning international investor confidence. GDP expanded by 6.9% YOY in Q1, the faster pace in six years. This upturn in growth was underpinned by solid consumer spending and a robust export performance. Inflation in the Philippines meanwhile remains remarkable subdued. Total consumer prices increased by just 2.3% YOY in April while core inflation was only slightly higher at 2.6%.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 22
Country Update: Singapore Economy posts healthy growth
-20
-15
-10
-5
0
5
10
15
20
25
97 98 99 00 01 02 03 04 05 06 07
% YOY
Source: Datastream
Manufacturing
Real GDP
Services
Construction
Exports soften
Source: Datastream
Domestic electronics exports
-50
-40
-30
-20
-10
0
10
20
30
40
01 02 03 04 05 06
Domestic exports of electronics
Total non-oil domestic exports
-50
0
50
100
150
200
01 02 03 04 05 06
Domestic exports ofpharmaceuticals
Domestic pharmaceuticals exports
%YOY, 3mma %YOY, 3mma
• Economic growth in the first quarter came in at a stronger-than-expected 6% YOY, underpinned by robust growth in financial and business services sectors as well as a rebound in the construction sector which grew by 9.7% YOY – the fastest pace of expansion since 1998. Growth in the manufacturing sector, however, slowed to 4.3% YOY and followed an easing growth trend which we saw in 2006. Recent indicators of manufacturing activity have been particularly soft with industrial production down 2.9% YOY in March, non-oil domestic exports declining by 0.4% YOY in April and the purchasing managers’ index falling to below 50 in April for the first time in 13 months. Nevertheless, we expect the manufacturing sector to tick up in the second half of the year as inventories are re-built.
• The strong start to the year has prompted an upward revision to the official forecast range to 5-7% for 2007 from 4.5-6.5%. We have also lifted our projections for real GDP growth to 6.2%. Singapore’s competitive business environment will continue to draw investment and support further expansion in the manufacturing and services sectors. In the recently-released IMD World Competitiveness Yearbook for 2007, which covers 55 countries, Singapore was ranked second after the US. This was up from third place in 2006.
• The tourism sector will be given a boost with the recent announcement that Singapore will host a Formula One grand prix for five years from 2008 and that this will be the first such event to be run at night. Tourism is an important contributor to the economy. For the first three months of this year, tourist arrivals totalled 2.4 mn, up 4.2% compared with the same period in 2006. The average occupancy rate was 87%, up 4% points from January-March 2006.
• Retail spending should accelerate over the next month as consumers rush to purchase big ticket items ahead of the GST hike to 7% from the current 5% with effect from 1 July.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 23
Country Update: Taiwan GDP growth accelerated in Q1 on stronger
exports
0
1
2
3
4
5
6
7
05 06 07
% yearly change
Source: Datastream, Economics@ANZ
GDP Components of growth
-15
-10
-5
0
5
10
15
20
05 06 07
% yearly change
Exports
Investment
Household consumption
The outlook for Taiwan is modest
-10
-5
0
5
10
15
20
25
04 05 06
% yearly change (3mma)
Source: Bloomberg, Economics@ANZ
Industrial production
3.0
3.2
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
04 05 06 07
%
Unemployment Rate
• Taiwan’s economic growth accelerated to 4.15% YOY in the March quarter. Exports remain the driver of growth in Taiwan, rising by 6.3% YOY on the back of strong demand for electronic goods in China. Domestic demand in contrast is lackluster. Household consumption growth remained below trend at 2.3% YOY in the March quarter while private investment grew by just 1% in this period.
• Indicators suggest that outlook for the Taiwan economy is modest. Industrial production continues to soften in trend terms and employment growth is slowing, pushing the unemployment rate up to 3.96% in April, a 15-month high. Export orders offer the only bright spark, holding firmly above 10% in YOY terms last month.
• Against this backdrop, investor interest in Taiwan appears to have waned, with the local equity market and exchange rate notable underperformers in the region. In the last week the CBC has made a concerted attempt to restore confidence in the currency and equity market. Official intervention appears to have driven a recent surprise strengthening in the Taiwan dollar while the CBC has also met with mutual-fund managers to push for institutional investors to buy more domestic equities.
• Recent commentary by officials strongly suggests the central bank remains committed to raising interest rates in Taiwan to a ‘neutral’ level. We expect the discount rate to be raised to 3% when the CBC next meets in June, with a further rise to 3.125% likely in October.
• The uncertain political environment continues to cloud the outlook for the Taiwan economy ahead of parliamentary elections in December 2007 and the presidential election due in March 2008. In the last month Taiwan’s main political parties have chosen their presidential candidates. The ruling Democratic Progressive Party (DPP) has chosen former Taiwan premier Frank Hsieh while Taiwan’s main opposition party, the Kuomintang (KMT), have chosen former party chairman and Taipei mayor Ma Ying-jeou. Despite currently facing corruption charges, Ma Ying-Jeou and the KMT continue to lead in public opinion polls.
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 24
Country Update: Thailand Poor sentiment prompts government to action
Sentiment indices
Sources: Bloomberg, Datastream
40
50
60
70
80
90
100
110
120
00 01 02 03 04 05 06
Index
Consumer confidence
Business sentiment
Exports resilient despite stronger Thai baht
External trade position USD/THB exchange rate
Sources: Bloomberg, Datastream
-20
-10
0
10
20
30
40
02 03 04 05 06 07
% YOY, 3-mth mvg avg
Imports
Exports
34
35
36
37
38
39
40
41
4202/01/06 11/09/06 21/05/07
THB (inverted scale)
Onshore rate
• The government is taking steps to lift economic activity against the backdrop of declining consumer and business sentiment. Consumer confidence has hit five-year lows while corporate profits fell in the first quarter of this year. The cabinet has decided to scrap plans to lift the VAT to 10% with effect from October 2007 and to leave it at the current rate of 7% for another year. Other measures being reviewed include cutting property-transaction taxes and lifting the tax deduction on mortgage interest to Bt100,000 per year from the current Bt50,000. In a bid to lift investment and production in the auto sector, the cabinet will consider the plan to cut excise taxes on small fuel-efficient cars.
• The government has also approved a Bt1 bn supplementary budget allocated for the military in a bid to quell the unrest in the southern provinces and improve security. More than 2,000 people have been killed since 2004.
• The above measures are likely to erode the government’s fiscal position in 2007 and 2008. However, given the current weak investor sentiment and soft consumer spending environment, further measures may need to be implemented in order to lift activity.
• Despite the strength of the Thai baht, exports have been resilient. Exports in the first four months of this year were 18.6% higher than the same period in 2006 while import growth has slackened as spending on oil, capital goods and consumer goods have slipped. This has generated large trade surpluses this year with the total over January-April amounting to US$4.4 bn compared with a deficit of US$0.7 bn during the same period in 2006. However, April saw a jump in import growth, leading to a narrower trade surplus of US$260 mn compared with US$2.2 bn in March. While it is early days yet, the rise in imports could signal a recovery in manufacturing activity going forward as exports stay healthy.
Jasmine Robinson
Economic data – Thailand Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Manufacturing Production, %YOY 5.1 5.7 8.1 6.5 9.6 5.2 4.0 n/a Car Sales, % YOY -10.4 -10.5 -8.9 8.5 -23.4 -18.2 n/a n/a Consumer Price Index, % YOY 2.7 2.8 3.5 3.5 3.0 2.3 2.0 1.8 Exports, % YOY 14.1 20.9 21.6 15.9 17.8 18.4 19.0 19.2 Imports, % YOY 9.2 8.9 6.3 6.1 4.0 6.3 0.5 10.0 Trade Balance, US$ bn 1.4 0.7 1.3 0.7 0.8 1.1 2.2 0.3 Foreign Exchange Reserves, US$ bn 60.0 60.7 62.8 65.3 65.0 66.4 69.1 n/a Quarterly data Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Real GDP, % YOY 3.6 4.6 5.4 4.4 6.2 5.1 4.6 4.2 - Private consumption 4.1 4.7 4.7 3.6 4.0 3.3 2.8 2.6 - Government consumption 14.0 12.8 18.8 9.4 6.9 5.7 4.9 -3.7 - Gross fixed capital expenditure 15.0 14.6 9.0 6.4 6.4 4.0 3.3 2.4 Nominal GDP, US$ bn 43.7 43.3 43.9 45.2 48.7 50.9 52.2 54.6 Current Account, US$ bn -2.4 -5.4 0.1 -0.2 0.6 -2.2 1.3 3.6 Capital & Financial Account, US$ bn 1.4 5.6 3.1 2.4 2.9 3.0 2.3 -0.7
Sources: Bloomberg, Datastream,
Economics@ANZ ANZ International Economics Monthly – May 2007
Page 25
Country Update: United States US employment has slowed
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
06 07
Employment: non-farm payrolls
annualised mthly % change, trend
0.0
0.5
1.0
1.5
2.0
2.5
06 07
Employment: HH survey
annualised mthly % change, trend
Source: Datastream, Economics@ANZ
Inflation continues to ease
1.0
1.5
2.0
2.5
3.0
3.5
06 07
Core PCE deflator
annualised mthly % change, trend
Core CPI
Percieved Fedtarget range
Core CPI ex HOER**homeowners equivalent rent
Core consumer price inflation
Source: Datastream
• Growth momentum in the US continues to ease, led by the slump in the housing market. Domestic demand growth fell to just 1.9% over the year to March 2007, down from 3.7% a year earlier.
• Residential building permits in April fell to their lowest level since 1997, foreshadowing ongoing declines in home building activity.
• To date, consumer spending has been the mainstay of economic growth. However the outlook is becoming increasingly ominous. Consumer sentiment has softened and annual trend retail sales growth fell to just 3.3% in April, down from 6.8% a year earlier. Gasoline prices have risen sharply and are now well above earlier peaks and will crimp real purchasing power in the months ahead.
• A buoyant labour market has supported household income and spending growth in recent years. However, employment has slowed significantly in 2007 and sharp falls in home building, a slump in durable goods orders and weakening business sentiment heighten the risk of a more significant slowdown in employment growth and economic activity in the second half of the year.
• The market’s persistent focus on trailing annual inflation rates masks the fact that inflation pressures have eased substantially. Core consumer price inflation peaked in the middle of 2006 and since then, has slowed significantly. In annualized trend terms, the Federal Reserve’s preferred inflation measure (the core personal consumption deflator) peaked in April last year at 2.6% and has eased steadily since then to just 1.6% in March. Similarly, the core CPI (ex home owner’s equivalent rent) shows inflation peaked at 2.7% in June last year and has fallen to just 1.3% in April (already below the Fed’s perceived target range).
Paul Braddick
Economic data – United States Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Building permits, 000’s 1654 1560 1527 1628 1566 1541 1569 1457 Retail Sales, % YOY 5.1 4.6 4.3 5.2 2.0 3.5 4.3 3.0 Consumer Price Index, % YOY 2.1 1.3 2.0 2.5 2.1 2.4 2.8 2.6 Core Consumer Price Index, % YOY 2.9 2.8 2.6 2.6 2.7 2.7 2.5 2.4 Exports, % YOY 19.5 16.2 14.8 12.5 12.2 9.8 9.8 n/a Imports, % YOY 9.7 3.3 4.5 5.2 1.8 2.7 7.0 n/a Trade Balance, USD bn -64.6 -58.9 -58.2 -61.5 -58.9 -57.9 -63.9 n/a Quarterly data Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Real GDP, % YOY 3.1 3.4 3.1 3.7 3.5 3 3.1 2.1 - Private consumption 3.8 3.8 2.9 3.4 3 2.7 3.6 3.4 - Government consumption 0.5 1 1.2 2 2 1.6 2.7 1.7 - Gross fixed capital expenditure 7.4 6.4 5.6 7.4 7.2 8.3 6 3.2 Unit labour costs (non-farm), %YOY 2.3 2 1.5 3.6 3.1 2.6 3.4 1.3 Current Account, US$ bn -193.3 -183.4 -223.1 -213.8 -217.7 -229.4 -195.8 n/a Capital & Financial Account, US$ bn 149.2 255.7 242.2 169.5 152.6 229.2 164 n/a
Sources: Datastream. Note: data seasonally adjusted unless otherwise stated
ANZ International Economics Monthly – May 2007
Page 26
Country Update: Vietnam The equity market is rebounding
• The correction in the Vietnamese equity market has proved short-lived. At one point in April the stock market was down 22.6% from its peak in March. In recent weeks however, investor interest has been re-ignited and in mid-May stocks were once again close to record highs.
• The rise in the stock market reflects continued strong international investor interest in Vietnam. In 2006, the foreign ownership ratio in the Vietnamese stock market nearly tripled, from 6% to 18%. This ratio has since leaped to be 25% in May with foreign investment into the stock market now estimated to be US$4 billion.
• The influx of foreign capital is driving an increase in liquidity growth. This has put considerable downward pressure on local interest rates. The 3-month interbank rate has fallen from 7.24% in early May to a current rate of 7.04%. The 6-month interbank rate meanwhile has dropped from 7.67% to 7.55% in this period.
• High liquidity growth is also putting pressure on inflation, which increased by 0.8% in May. Inflation is now running at a 7.4% yearly pace, the highest rate since August last year.
• The rebound in foreign capital inflows put some pressure on the Vietnamese dong to appreciatie. This sparked the State Bank of Vietnam (SBV) to intervene in currency markets, buying USD/VND around 5 bps higher than the market rate. Significantly, this is the first time the SBV has intervened in the market proactively, without request from market participants. Going forward we may see the SBV become more proactive in VND management as authorities pursue the goal of VND depreciation throughout the year.
• Current conditions highlight the tensions of Vietnam’s current policy regime. Liquidity growth, and thus inflation, is difficult to control when the capital account is open and the exchange rate is tightly managed (on a depreciating trend). The loss of control over monetary policy remains an ongoing macroeconomic issue for Vietnam.
Katie Dean
Economic data – Vietnam Monthly data Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 Industrial Production, %YOY+ 16.8 16.9 16.9 18.8 26.0 11.9 16.6 16.7 Retail Sales, % YOY 21.5 22.2 22.6 22.2 22.3 24.2 21.3 24.5 Consumer Price Index, % YOY 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 CPI-Food & Foodstuffs, %YOY 7.7 5.9 8.7 7.9 7.4 7.6 8.1 8.3 Exports, % YOY+ 24.2 24.2 23.7 22.1 7.7 23.5 17.9 22.0 Imports, % YOY+ 19.3 20.7 21.4 20.1 30.8 45.8 33.6 32.8 Trade Balance, US$ bn + -3.3 -3.8 -4.3 -4.8 0.5 -1.1 -1.7 -2.6 Tourist Arrivals, %YOY+ 4.5 3.6 3.8 3.3 5.7 11.3 13.4 12.5 Quarterly data Growth Q1-2007 Real GDP+, % YOY 7.7 Agriculture, forestry, fishery, % YOY 0.3 Industry & construction, % YOY 4.0 Services, % YOY 3.4 +: January-to date vs same period in previous year *: January to date ^: US$ bn
Source: Bloomberg, General Statistics Office of Vietnam
ANZ International Economics Monthly – May 2007
Page 27
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