Sunday, January 1, 2012
Fragile and Unbalanced in 2012
Nouriel Roubini
December 15, 2011
NEW YORK – The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.
At this point, a eurozone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.
The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.
Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.
Meanwhile, flaws in China’s growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.
They are not alone. On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.
Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved. But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.
Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.
At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.
But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.
Finally, policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.
Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.
As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.
Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”
Nouriel Roubini is Chairman of Roubini Global Economics and professor at the Stern School of Business, New York University. His detailed 2012 global growth outlook is available at www.roubini.com
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
Thursday, December 29, 2011
China’s bid to ‘rebalance’ economy favorable to PHL, says Neda
Neda Assistant Director General for Planning Ruperto P. Majuca told reporters that the Philippine economy will be able to gain an additional 0.5 percentage points annually in gross domestic product (GDP) between 2012 to 2016 if China is successful in rebalancing its economy.
This means that if the economy grows at its historical average of 5 percent, a successful implementation of China’s rebalancing act may increase this growth to 5.5 percent every year until 2016. For next year, if the economy is able to hit the government’s target of 4.5 percent to 5.5 percent, the China factor could increase local growth to 5 percent to 6 percent.
“In the medium term, it could be 0.5 percent of GDP average per year. Depending on the scenario, the highest impact would be 2014, depending on when they would successfully rebalance their economy, so we’re watching it very closely whether they successfully rebalance toward more consumption based and more imports based in which case it means more exports for us. We could penetrate their market [and] the Department of Trade and Industry [DTI] can work with all these promotions with them,” Majuca explained.
The Neda Official said that currently, China’s sources of economic growth include exports and investments which could not be sustained for a long period of time, considering there are a lot of imbalances. Majuca said around 50 percent of its GDP is composed of investments.
Majuca added that it is already part of China’s five-year plan to move to a more consumption-based economy. A consumption-based economy means that China takes advantage of the spending power of its more than a billion citizens. China is the world’s most populous country with 1.35 billion people.
“It presents a lot of opportunity because they are trying to rebalance their economy. The past economic paradigm of China is investment-led, exports-led, which cannot be sustained in the long run because there are a lot of imbalances,” Majuca said.
It can be noted that data from the National Statistics Office showed that exports to China accounted for 14 percent of total exports and was the country’s third-largest export market. Shipments amounted to $568.02 million as of October 2011.
In May 2007 the Center for Strategic and International Studies and the Peterson Institute for International Economics published the study titled The China Balance Sheet in 2007 and Beyond. The study supported the efforts of China to rebalance its economy since it will not only benefit China’s economy but the entire world.
The study stated that China provides a major boost to global economic growth. With the new growth strategy, domestic consumption demand in China will reduce its national savings rate relative to its investment rate and reduce its current account surplus.
“This adjustment should be facilitated by an appreciation of the Chinese currency, which would mitigate inflationary pressures that would otherwise emerge from the increase in consumption demand,” the report stated.
In 2005 personal consumption in China was 30 percent less in real terms than the level that would have been achieved if the household consumption share of GDP had remained at the 1990 level rather than falling by more than 10 percentage points.
Furniture makers eye higher local sales on condo boom
Furniture makers have discovered that the domestic market has become as lucrative as the foreign markets so they will now rely on local sales to achieve a 15-percent growth for 2012, the Philippine Exporters Confederation (Philexport) said.
Myrna Bituin, Philexport trustee, told the BusinessMirror there is now a growing awareness among exporters on the strong demand for furniture in the country, particularly with hotels and condominiums continuing to sprout in every major city here.
“Before, exporters were not really into the local market. Now, we have discovered that both the institutional and retail markets in the country could provide us billions of pesos in sales. In fact, we learned that one furniture retailer alone is selling over P1 billion annually,” Bituin said.
Exporters have been spending a lot in establishing a presence in export markets. They have also been devoting about 85 percent to 90 percent of their production abroad.
But this is bound to change, Bituin said.
To further develop the potential of the domestic market, she said, the industry has started connecting with developers contractors, and retailers to assure them that the local furniture makers can meet their requirements.
Bituin said they have already scheduled tours for developers to the different furniture production sites, particularly in Cebu and Pampanga.
What is also boosting their optimism, she said, is the growing preference for locally made products in the country.
“We can feel the growing sense of nationalism among hotel operators and condominium developers,” she said.
Bituin also said they have realized that they can compete with the imported furniture price-wise.
On the export front, Bituin said opportunities woulf be explored in new markets, including China, India and Russia.
“China is a market that we should not be afraid of. We should look at it as an opportunity. Just like us, they also want to buy imported [products]. But for me, I would always look into products that they do not touch. These are the high-end ones and carved items,” she said.
The industry will also start implementing branding programs, improve the value chain and undertake product development.
Fundamentals in property sector remain strong through 2011
THE year 2011 has been a success for the Philippine property sector across all sectors and stronger than 2010. In fact, CB Richard Ellis (CBRE) Philippines Chairman and Chief Executive Officer Rick Santos said there will be a continued show of confidence in 2012 in all sectors of the property industry.
“The success of 2010 was built on in 2011 and this continued show of confidence will be seen in 2012,” said Santos in an e-mail response to the BusinessMirror.
“The Philippine property industry is expected to continue its positive performance in 2012 given the upward momentum that continues to build up in the office sector relative to business-process outsourcing [BPO] office demand is strategic areas across the country, continued rise in overseas Filipino worker [OFW] remittances which is expected to reach $23 billion this year,” added Santos.
He noted that a major part of the disposable income of OFW households benefits the residential, retail, hospitality and leisure sectors of the Philippine property industry.
For instance, Santos said the industrial sector, particularly those that cater to the growing consumer market such as manufacturing and warehousing as well as logistics, is expected to fair well because of the upsurge in economic activities
Lui Matti, executive director for asset services group at CBRE Philippines, said in the same interview that 2011 was stronger than 2010 across all sectors. In the market, Matti said the commercial sector saw the entry of new major players in the BPO industry as well as the continued expansion of major firms.
He said the residential market also continued to enjoy good take-up, with developers focusing on the mid/affordable market segment. Earlier, CBRE said expatriate Filipinos comprised the bulk of the buyers in this segment. “Low interest rates and willingness of banks to lend to capable payers have made it easier for more people to own their first property in 2011,” said Matti.
Environment-friendly and sustainable construction have also emerged as major themes for 2011, with architects, engineers and developers seriously considering the US Leadership in Energy and Environmental Design (or LEED) and the Philippines’s Building for Ecologically Responsible Design (or BERDE) standards in the conceptualization, planning and construction of projects.
In its Philippine Property Market Monitor (November 2011 issue) posted on the company’s web site, Jones Lang Lasalle Leechiu reported that offshore and outsourcing(O&O) companies are looking to expand to next wave cities and urban areas. The company said total leasable floor area for sites in Manila, Tarlac and Davao has an approximate total of 21,000 square meters (sq m). Robinsons Land Corp. alone has started constructing two new BPO buildings in the Ortigas area, which will have around 80,000 sq m of leasable office space.
Based on the projection of a 20-percent growth rate from 2011-2016 by the Business Processing Association of the Philippines, Jones Lang Lasalle Leechiu said the prospect for the local O&O industry in the upcoming years is bright.
Victor Asuncion, executive director for global research and consultancy at CBRE Philippines, pointed out the drivers of the Philippine property industry for the last three years have always been and still are the BPO sector, OFW remittances and the tourism sector.
However, Asuncion said the gigantic collapse of the Lehman Brothers in September 2008 and the capital tightness in the US that lingered in 2009 slightly slowed down the growth of the industry. “However, given its strong demand fundamentals, the industry was able to shake off the negative influences of the sub-prime crisis in the US and resume its impeded growth,” he said. He is also confident the industry will continue to grow in 2012.
He said the affordable condominium market is one segment that has changed the landscape of housing development because it has attracted a lot of buyers from the middle-class and OFW households.
Designed for the middle-class segment, the affordable condominium is an ideal investment for young professionals working in the business districts of Metro Manila as well as start-up families or first-time buyers. This scenario is also being seen emerging in key urban centers such as Metro Cebu and Metro Davao.
As a result of the high demand for this product, Asuncion said major players such as Phinma Properties, DMCI Homes, New San Jose Builders and SM Development Corp. have established a niche in this market segment with more participants such as Camella Condo Homes of Vista Land and Amaia of Ayala Land.
At the rate property developers are putting up office, residential, retail and hospitality products, land bank are being depleted, Asuncion said there is a need to sustain business activity by finding and buying new developable land. “Thus, more hard asset acquisition and strategic business development by major players in the industry is expected going to in2012,” said Asuncion.
Asuncion said the high approval rating enjoyed by the Aquino administration is going to be a plus factor particularly in the property industry as it will continue to attract many investors starting in 2012.
Going into 2012, Santos said the trend to watch is the things that will happen in European economy and whether they will be forced to outsource to cut cost. “More large financial companies will be under increased pressure to save money and will thus outsource their banking support functions here,” he said.
Santos said there will also be a trend toward maintaining good property management of buildings to ensure the loyalty of tenants.
In 2012 Asuncion said he sees new property developments in secondary areas will take longer to sell or lease inventory relative to those situated in prime locations. “This will cause the total industry statistics such as vacancies and lease rates to be challenged,” he said.
For his part, Matti said the government should revise the implementing rules of the real-estate investment trust (REIT) to boost the market even further. Aside from the REIT, he said the government should continue to simplify the way to do business both in the national and local levels and keep the exchange rate within a competitive range.