Global: Asia Needs a New Consumer
Stephen Roach (New York)
An unbalanced global economy has come to rely on two major sources of growth — the Chinese producer on the supply side of the equation and the American consumer on the demand side. This is not a recipe for sustainable global growth, in my view. An overheated Chinese economy now faces the imperatives of a slowdown. And overly extended American consumers face the need for a sobering adjustment of their own. This poses a profound challenge for Asia’s externally led growth paradigm: Unless the region uncovers a new source of autonomous domestic demand, it may well be confronted with a serious challenge to its growth potential in the years ahead.
The Asian consumer is largely a myth, in my view. The small ASEAN economies of Thailand and Indonesia are possibly exceptions, but these countries collectively account for only 7% of pan-Asian GDP (as measured on a purchasing-power-parity basis). The biggest countries in the region — especially Japan, China, India, and Korea, which collectively make up 82% of pan-regional GDP — all suffer from chronic weakness in private consumption. That’s especially true of Japan — the newest recovery hope in Asia. While the Japanese economy accelerated to a 4.5% growth pace in the second half of 2003 and seems to be holding near that solid clip in early 2004, the Japanese consumer has been a significant laggard in this turnaround. Private consumption growth held at 1% in the second half of last year, and our Japan team looks for consumer spending growth to average only 1.4% over the 2003-04 period, less than half the 3.2% pace of real GDP growth they forecast over this same interval. The combination of high unemployment, structurally high underemployment, hesitant wage increases, and a now-depressed personal saving rate underscores a lingering sense of job and income insecurity that is likely to crimp the Japanese consumer for years to come. There can be no mistaking the pent-up demand of the nation’s long-stagnant consuming public. But in a lingering deflationary climate, the odds are low that such a shortfall will be recouped in short order.
Nor does the Chinese consumer qualify as a new Asian powerhouse. As Andy Xie has noted, the consumption share of Chinese GDP fell to a record low of 54% in 2003 — down markedly from the 59% average of the 1990s and the 65% average of the 1980s (see his April 16 Global Economic Forum dispatch, “China Needs to Spread Its Wealth”). Sure, there are some signs of sharply improving consumption trends in China’s coastal region, but the comparisons are coming off a very low base. For example, domestic car sales surged 70% last year to 1.7 million units; however, with an urban population now in excess of 520 million, new vehicle penetration remains remarkably low. A similar concentration is evident in the durable goods spending patterns traceable to bubbly property markets in Shanghai and Beijing. The macro case for Chinese consumption demand remains tough, in my view. With job losses from ongoing reforms of state-owned enterprises still estimated at 7-9 million annually, and with China’s workforce lacking the safety net of social security, private-sector pensions, and retraining programs, the Chinese consumer remains predisposed toward saving. That shows up very clearly in the numbers: Household saving deposits rose to 89% of Chinese GDP by the end of 2003, up from 62% in 1997. Autonomous support from private consumption in China remains at least three to five years away, in my view. When I say that in Beijing, they accuse me of being wildly optimistic.
Similar stories are evident elsewhere in the larger economies of the region. Korea is a case in point, where private consumption fell by 1.4% in real terms in 2003 following the unwinding of the country’s credit and property bubbles; the deterioration has ebbed a bit in early 2004, but the January-February average was still 0.1% below the comparable period of 2003. Like other high-wage economies, Korea is suffering from a jobless recovery of its own. While the seasonally adjusted unemployment rate fell to 3.3% in February, our Asia team notes that on an unadjusted basis, it climbed to nearly a three-year high of 3.9% as the number of unemployed rose 9.2% y-o-y (see their March 22 report, Korea: Searching for Meaningful Labor Market Improvement). Lingering labor market pressures and consumption do not mix well in a post-bubble Korean economy.
Nor is the Indian consumer likely to emerge as Asia’s savior. The nation’s consumer demand is just too small in the aggregate to make a real difference at this point in time. Its economy, as well as its per capita income ($597 in 2003), is half the size of China’s. Moreover, World Bank data point to a declining trend in the underlying Indian consumption dynamic: Over the 1990 to 2001 period, household final consumption expenditure rose in per capita terms at just a 2.6% average annual rate in India, down markedly from the 3.6% trend of the 1980s. With the Indian work force expanding at a 1.5% to 1.8% average annual rate, chronically high unemployment remains a major stumbling block to the emergence of the Indian consumer. As Chetan Ahya, our India economist, notes, even impressive GDP growth of 5.1% over the past four years has not been enough to stem a significant decline in employment in the organized sector of the Indian economy (see his February 3, 2004, report, India: Appending Itself to the Global Labour Supply Chain). Like China, the net job creation needed for sustained vigor in Indian consumption may require GDP growth rates of at least 8%. Even then, India’s consumer is not likely to emerge overnight.
Lacking in autonomous support from private consumption, Asia’s economies continue to lean heavily on external demand as their major source of growth. The American consumer has long been the mainstay of that support. Those days are nearing an end, in my view. The combination of a stunning shortfall in job creation, together with anemic increases in real wages, has crimped underlying US income generation as never before. By our calculations, private-sector wage and salary disbursements — by far, the largest piece of US personal income — are currently running $360 billion (in real terms) below the average profile of the previous six business cycle upturns. Lacking the support of internally generated wage income, US consumption growth has been underpinned by the “toxic” forces of open-ended tax cuts, reduced saving, the extraction of purchasing power from over-valued assets such as property, and sharply rising household indebtedness required to monetize such wealth effects. Barring a sustained resurgence of job creation and increased real wages — highly unlikely in the current climate, in my view — the over-extended American consumer is running out of time. And so is an Asian economy that remains so heavily dependent on this one source of growth. The risk is that Asia’s strategy could backfire if US consumption growth starts to wane, as I suspect could well be the case later this year.
Lacking in domestic consumption support, the modern-day Asian economy is clinging to the only growth paradigm it has really ever known — reliance on external demand. That’s especially true of China, where the scope and scale of its export capabilities have now reached the critical mass that qualifies it as an engine of growth for other economies in Asia and elsewhere in the world. The resulting “China factor” — underscored by the 40% surge in the nation’s imports in 2003 — is now playing an important role in driving Japan, Korea, and Taiwan, as well as, to a lesser degree, Germany and the United States.
Of course, the export platforms needed for such trade-intensive activities also require infrastructure and production facilities of their own — sources of “derived demand” that add to the direct trade effects. That’s especially the case in Japan, where capacity expansion is currently concentrated in those industries that are increasing their trade with China. Such investment spending should not be confused with autonomous domestic demand. It is nothing more than a derivative of the export-led growth dynamic. Without external support — mainly from the American consumer — there would probably be little impetus to capex other than the replacement of worn-out facilities. Asia’s lack of support from domestic private consumption remains a glaring weakness of its growth and development strategies. In my view, the region’s central banks are only compounding this problem by running monetary policies with an aim to curtailing any currency appreciation (see my April 16 dispatch, Pitfalls of Asian Central Banking). That diminishes the urgency for Asian economies to wean themselves from long standing externally driven growth strategies.
One of the most basic premises of economic development models is that external demand eventually begets internal demand — that income and employment associated with exports ultimately gives rise to a new class of consumers. It is hard to argue with that notion. The problem comes in the order of magnitude. Externally focused production — whether it is in goods or services — still involves a relatively small segment of Asian workforces. In Japan, that share is around 11%; in China and India, back-of-the envelope guesstimates put the ratios at only about 8% and 6%, respectively. In my view, these ratios would have to increase by a multiple of at least two or three to spark a meaningful transformation of external into domestic demand. Yet that would likely entail a massive shifting of jobs from the high-wage industrial world — sparking intensified trade frictions and protectionist risks. That is not a sustainable outcome for Asia or the rest of the world.
There’s nothing wrong with relying on trade as an engine of economic development. The problem arises when there is undue reliance on such external demand. That’s a clear risk in Asia today. The region needs to do far more than pin its hopes on an export-led creation of private consumption. That’s especially the case since the over-extended American consumer is continuing to play a disproportionate role in supporting the demand side of the global economy. Asia needs to uncover a new consumer. And it should start by looking in the mirror.
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