The Asian Engine Pwc

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The Asian Engine Pwc

  1. 1. www.pwc.com/jpThe Asian enginefor global growthPrepared by PwC for APEC CEO Summit 2010 Yokohama
  2. 2. robust economic recovery in the To APEC CEO Summit 2010 region. Even in the West, corporate profits are up, financial stocks have participants, rallied at the prospect of substantive reform, and deal-making is accelerating. So, businesses are not allowing a sluggish and uncertain recovery to derail their plans – and those plans invariably include We live in challenging times. From changed strategic priorities in the recession to recovery, from trade Asia-Pacific region. imbalances to Basel III, from fiscal stimulus to austerity and fiscal That most of the region defied restraint – a dizzying menu of economic contraction in 2009 helped unfolding and contradictory events vault Asian companies higher in has fuelled uncertainty about the global rankings: the largest banks in direction of the world economy and the world (by market cap) are based how global business leaders should in China, for example, and Japan, react. There’ s no question that the Korea and China combined are now optimism we felt in January about home to nearly the same number of the global recovery has been Fortune Global 500 companies as the dampened by a turnaround that is US. It’ s clear that Asia-Pacific is slower than expected. In North increasingly taking the lead. America and Europe, unemployment remains stubbornly high, housing Asian companies have taken up the markets are stagnant, and fiscal mantle of leadership and are deficits are raging. investing in growth initiatives. Asia-Pacific investment in clean Yet those developments don’ t energy rose in 2009, for example, characterise the entire global while the economic crisis eroded business story. Many Asian similar investments in Europe and companies are doing well; riding a North America. These investments1 The Asian engine for global growth
  3. 3. could simultaneously build the strong economic recovery in theAsia-Pacific’ s position in a high region into sustainable growthgrowth, value-added sector, and play globally.a vital role in addressing globalclimate change. I look forward to seeing you at the Summit to discuss these and otherOver the past few months, my important topics.conversations with CEOs have borneout the growing focus on Asia as the Sincerely yours,source of future growth. Somecompanies are using the recession asa pretext to accelerate their strategicagendas. They are retooling to adaptto new circumstances and takingadvantage of opportunities intechnology, cost containment, talent Dennis M Nally,availability, and global markets that Chairman, PricewaterhouseCoopers Internationaldidn’ t exist before the recession.This is particularly true here in Asia.That’ s one reason why the theme ofthe APEC CEO Summit – Asia-Pacificas the Driving Force for GlobalGrowth: Seeking Prosperity afterCrisis – is so timely and important.With a growing middle class ofconsumers in Asia, new opportunitieswill bloom in a variety of sectors,from consumer electronics to naturalresources. APEC plays an essentialrole in making sure trade andeconomic policies in Asia translate Over the past few months, my conversations with CEOs have borne out the growing focus on Asia as the source of future growth The Asian engine for global growth 2
  4. 4. forecast to deliver 2.4% growth in The Asian engine for 2011, while the European Union will crawl along at 1.5%. By comparison, global growth growth across APEC (which includes the US) will surge ahead at 3.8% in 2011. Driving growth in the region is the powerful momentum generated Just a few years ago, the US economy by China and the ASEAN economies: was considered the locomotive of China is projected to grow 9.3% global growth, with US consumption percent in 2011 while the six largest said to fuel output from the rest of countries of ASEAN are forecast to the world. Now, Asia-Pacific is in the grow between 4.3% and 7.1%. (See lead position, while many other figure.) The only soft spot in major economies still struggle with Asia-Pacific is Japan. Even still, the after-effects of the economic Japan’ s 1.7% growth forecast for crisis. 2011 seems like good news in that it’ s more than twice the average Based on the most recent estimates growth rate over the years from PwC, the United States is 1992-2009. Most countries in Asia Pacific boast much stronger economic fundamentals and significantly improved supervision of their financial institutions3 The Asian engine for global growth
  5. 5. What has made the economic recovery Such strong fundamentals were government balance sheets, building in Asia-Pacific so fast and impressive? achieved largely as a result of an up foreign exchange reserves to expensive and painful lesson: the self-insure against external shocks, It’ s hard to make broad 1997-98 East Asian financial crisis intensifying supervision of financial generalisations across such a large that caused near meltdown of the institutions, and deepening regional and diverse region. Yet, some themes financial system in the region, and a economic integration. As a result, do emerge in the aggregate, even if short but deep recession in some of when the global economic crisis different countries vary in their fit. the key economies in Asia-Pacific. In broke out in 2008, the governments And those themes may surprise those the wake of that crisis, governments in Asia-Pacific had enviably strong accustomed to the view that in many Asia-Pacific countries fiscal positions; banks there had developing countries have weak fiscal undertook a series of steps that, in robust balance sheets; central banks discipline, loose supervision of retrospect, made the region as a in were in possession of trillions of financial institutions, and insufficient whole better prepared for the global dollars of foreign exchange reserves economic integration with one economic crisis relative to many to stave off financial panic; and another. Notably, most countries in Western counterparts. integrated regional trade Asia-Pacific actually boast much compensated for some of the lost stronger economic fundamentals and Specifically, many Asia-Pacific demand from the United States and significantly improved supervision of countries undertook combinations of Europe. their financial institutions. measures including strengthening Forecast GDP growth, 2011 World APEC EU 3.1% 3.8% 1.5% Russia Canada 4.5% 2.5% US 2.4% Korea Japan China JAPAN 9.3% 3.9% 1.7% SOUTH KOREA Chinese Taipei CHINESE TAIPEI 4.2% Vietnam 7.1% Hong Kong SAR THAILAND 4.5% PHILIPPINES Mexico Thailand 3.7% 4.3% Brunei Philippines 1.0% 4.8% Malaysia MALAYSIA 5.0%Singapore Indonesia Papua New Guinea Peru 4.8% 6.2% 5.5% 5.7% Australia AUSTRALIA 3.3% Chile 5.9% New Zealand 3.2% Source: IMF; PwC forecasts The Asian engine for global growth 4
  6. 6. Putting f iscal houses in experiencing the same level of debtor order pressure that countries such as Asia-Pacific entered the global Greece and Ireland suffered. economic crisis with relatively strong As growth returns, economies in public finances. In 2004-08, fiscal Asia-Pacific are also reporting balances in 10 major Asian improved fiscal positions. In fact, economies (China, Hong Kong, India, on average, their fiscal deficits are Indonesia, South Korea, Malaysia, shrinking at a much faster rate than Taiwan, Singapore, Thailand, the those of many European economies. Philippines) averaged -0.6%, compared with a -3.2% average for Stashing rainy-day reserves G-7 economies.*1 The overall level of One key lesson learned by public debt is similarly low. policy-makers in the major For example, public debt in China is economies in Asia-Pacific from the under 20% of GDP (excluding East Asian financial crisis is that they non-performing loans in the banking must have sufficient foreign exchange system); Hong Kong has virtually no reserves to combat financial panic. public debt, South Korea’ s public Thus, through tighter financial debt is 24% of GDP, Indonesia’ s is management and pro-export policies, 27%, and Thailand’ s is 40%.*2 Asian economies have amassed more The health of public finance allowed than enough reserves to prevent governments in these countries to similar runs on their currencies. implement substantial fiscal stimulus Hoarding low-yielding foreign packages to revive growth in the exchange reserves is arguably not the depth of the crisis without most productive way of investing5 The Asian engine for global growth
  7. 7. scarce capital. But the crisisvindicated stability-mindedpolicy-makers (even though they for Asia-Pacific has earnedthe most part did not actually dip intoreserves to prop up their currencies): a reputation as the worldsmost Asian currencies remained most dynamic exporting zone,remarkably stable over the past twoyears. yet it is also becomingReining in household debt a more closely integratedAnother source of vigour for the economic blocregion is the overall low level ofhousehold debt. In Asia’ s mostdeveloped economies, such as Japan,Korea and Taiwan, household debt isroughly 70% of GDP (significantlylower than in the US and parts ofEurope). In developing Asia, South Korea, Thailand andhousehold debt is much lower (due to Indonesia). Consequently, mostthe limited availability of consumer financial institutions avoidedfinance), roughly 10% of GDP in high-risk financial engineering andChina and Indonesia, for example.*3 deal-making before the crisis.Low household debt levels in these Overall leverage was low, and directcountries are one reason why exposure to risky financialconsumer demand throughout the instruments originated in the Westregion has remained steady during was minimal. So, while manythe crisis. It also provides scope for Western financial giants enfeebled byfaster growth in consumer spending the crisis grew reluctant to lend,in the coming years. access to credit in Asia-Pacific remained largely unimpaired duringKeeping close watch the recession and recovery.Long derided for having‘under-developed’ (if not primitive) Working togetherfinancial systems, countries in Asia-Pacific has earned a reputationAsia-Pacific significantly improved as the world’ s most dynamicthe supervision of their financial exporting economic zone, with theinstitutions following the short but US and Europe accounting for 46%devastating East Asian financial crisis percent of Asia’ s total exports in(which originated, in part, from terms of final demand.*4 Yet the *1 : ADB, Asian Development Outlook 2010 Update.massive borrowing by poorly region is also becoming a more *2 : 2009 estimates from CIA World Factbook. *3 : Economist Intelligence Unit.supervised financial institutions in closely integrated economic bloc, *4 : ADB, Asian Development Outlook 2010 Update. The Asian engine for global growth 6
  8. 8. thanks mostly to growth in intra-regional trade and investment. In the early 1990s, Asian economies had few linkages with one another. Since 1997, economic integration in Asia (as measured by the correlation of output) has approached intra-European levels.*5 Greater intra-Asia interdependence helped cushion the region from the fall in global trade during the crisis. Seen another way, multinationals from Asia Among the short-term risks, the most are confident of their growth prominent is that posed by large prospects going forward – but they capital inflows (driven by low interest expect their growth to come from rates and anaemic growth in within the region. Four out of five developed economies). Such inflows Asia-Pacific CEOs expect their Asian could fuel inflation, generate asset operations to grow in 2010, while only bubbles, and put upward pressures two of five believe their European on exchange rates. China, for operations will expand.*6 An unsung instance, is now combating both hero in Asia-Pacific’ s economic rising inflation and a significant real integration is Japan. Even though the estate bubble. Trade protectionism is Japanese economy has stagnated another risk. As trade surplus since the early 1990s, large Japanese nations, often with artificially companies have been pioneers in not under-valued currencies, countries in only technological innovation at Asia-Pacific, especially export home, but also expansion of off-shore powerhouses like China and South investment and production. Korea, are facing a backlash from their trading partners in the West. Those economic fundamentals, A third risk is that of financial products of both fortuitous contagion originating in renewed circumstances (such as high savings financial panic caused by the debt and restrained public spending) and crisis in the Eurozone. Asia-Pacific effective government policies, have may be resilient, but it is not entirely made most economies in Asia-Pacific immune to such external financial resilient and dynamic. But to shocks. maintain their momentum, they need to address both short-term risks and Longer-term challenges for long-term constraints on growth. Asia-Pacific are more daunting.7 The Asian engine for global growth
  9. 9. Chief executives from the region are simultaneously more concerned aboutAsian economies have grown a greater range of threats to growthaccustomed to unlimited access tothe markets in developed economies. and more confident than their global peersBut their export-dependent growthmodel has to change as part of theglobal economic re-balancingprocess. Exports to developed Asia-Pacific cant lead the worldeconomies are bound to slow or fall, through a fragile recovery byso Asian countries might choose toboost domestic demand, especially itself; the region and the rest ofhousehold consumption, to generate the world have to agree to get onnew sources of growth. A secondlong-term challenge is investment in the same track togetherhuman capital. Asian countries havedone relatively well in theiraccumulation of physical capital, butto sustain growth and avoid the build large reserves are consideredso-called ‘middle-income trap’ unsustainable. In October, G-20(a term referring to economic growth nations agreed to “pursue the fullstalling before per capita income range of policies conducive toreaches US$ 10,000), broadly reducing excessive imbalances.”speaking, the region might need toboost productivity and build growth Indeed, the more Asia-Pacific’ son knowledge and innovation, not on economic clout grows, the moreinvestment in capital stock. attention there will be on its integration in global economicAsia-Pacific’ s leaders seem acutely governance. It is hard to imagine thataware of these challenges, and are the world will regain its pre-crisiscertain they can manage them. Chief prosperity without leadership fromexecutives from the region, for the rising economic stars inexample, are simultaneously more Asia-Pacific. But Asia-Pacific can’ tconcerned about a greater range of lead the world through a fragilethreats to that growth and more recovery by itself; the region and theconfident than their global peers.*7 rest of world have to agree to get onLessons learned from past crisis have the same track together.served the region well to date. Still,the region may not be able to rely on *5 : ADB, Asian Development Outlook 2010 Update.the same tactics forever. For example, *6 : PwC 13th Annual Global CEO Survey (2010)measures that allowed exporters to *7 : PwC 13th Annual Global CEO Survey (2010) The Asian engine for global growth 8
  10. 10. Recent publications: See the future The old economic order is shifting. As the global economy recovers some emerging markets are likely to grow faster than traditional economic powers. At the industry level, these shifts are even more apparent with accelerating capital flows, fundamental demographic changes, and the rise of state capitalism reshaping the world map for many sectors. PwC’s Global economic outlook Developing economies carry on powering the growth of the global economy, whilst some developed economies continue to exhibit weakness. Confidence amongst consumers and businesses is weak, but increasing levels of exports should create growth opportunities. Economy briefs: BRIC Economic growth for BRIC economies is likely to accelerate in 2010, boosted by the global recovery as well as monetary and fiscal stimulus measures. The key medium term challenge for the BRICs will be to gradually re-balance growth towards domestic demand and away from reliance on exports to developed markets - where only muted growth expected. For our latest thinking, please see www.pwc.com/researchandinsights About PwC: PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. We build relationships and use our expertise to work with our clients and our people to create the value they are looking for.9 The Asian engine for global growth
  11. 11. Contacts for further information:Cynara Tan Masataka Mitsuhashi Sophie LambinRegional Marketing Director Executive Officer, Clients & Markets Global Thought Leadership & External AffairsPricewaterhouseCoopers Ltd. PwC Japan PricewaterhouseCoopers International Limitedcynara.sl.tan@hk.pwc.com pwcjppr@jp.pwc.com sophie.lambin@uk.pwc.com+852 2289 8888 +81 3 3546 8650 +44 20 7213 3160 The Asian engine for global growth 10
  12. 12. Produced by the Global Thought Leadership GroupThis publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. Youshould not act upon the information contained in this publication without obtaining specific professional advice. No representation orwarranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences ofyou or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.© 2010 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms ofPricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Eachmember firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any servicesto clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of theirprofessional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firmnor can it control the exercise of another member firm’ s professional judgment or bind another member firm or PwCIL in any way.

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