Asian Economic Region Is ‘Underachieving Its Own Potential,’ World Bank Says

Economic

Summary:

Asian economies are not doing as well as they could and growth in the region is forecast to slow to 4.5% this year from 5.1% in 2023, the World Bank said in a report released Monday.

Debt, trade barriers and policy uncertainties are dulling the region’s economic dynamism and governments need to do more to address long-term problems such as weak social safety nets and underinvestment in education, the report says.

Asia’s economies are growing more slowly than before the pandemic, but faster than other parts of the world. And a rebound in global trade — trade in goods and services grew by only 0.2% in 2023 but is projected to grow by 2.3% this year — and easing financial conditions as central banks cut interest rates will help offset weaker growth in China.

“This report demonstrates the region is outperforming much of the rest of the world, but it’s underachieving its own potential,” Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, said in an online briefing.

“The leading firms in the region are not playing the … role that they should,” he added.

A key risk is that the U.S. Federal Reserve and other major central banks might keep interest rates higher than before the pandemic. Another comes from the nearly 3,000 trade-distorting measures, such as higher tariffs or subsidies, that were imposed in 2023, the report said.

Most of those policies were set by major industrial economies such as the U.S., China and India.

China’s ruling Communist Party has set an official target for about 5% growth this year, just below the 5.2% annual pace of last year.

The World Bank is forecasting that growth will slow to 4.5%.

“China is aiming to transition to a more balanced growth path but the quest to ignite alternative demand drivers is proving difficult,” the report says.

Mattoo said Beijing still has a way to go in shifting its economy away from reliance on real estate construction to drive business activity, and just spending more money won’t fix the problem.

“The challenge for China is to choose efficient policies,” he said. “Fiscal stimulus will not fix structural imbalances,” he said. What is needed are stronger social welfare and other programs that will enable households to spend more, boosting demand that will then encourage businesses to invest.

The region could be doing much better with improved productivity and greater efficiency, Mattoo said.

Vietnam, for example, is drawing huge amounts of foreign investment as a favored destination for foreign manufacturers, but its growth rate of about 5% is below its potential.

“To be happy that Vietnam is growing at 5% reflects the kind of underachievement we should not be happy about,” Mattoo said in an online briefing.

One key problem highlighted in the report is lagging improvements in productivity, the report said. Leading companies in Asia are far behind the leaders in wealthier nations, especially in technology-related areas.

The report faults governments for imposing restrictions on investment that prevent foreign companies from entering key parts of regional economies, a need to build skills and weak management. Opening to more competition and investing more in education would help, it said.

Source: Fortune

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Zi Cheng

Traders' Opinions

Economic

In February, UK mortgage approvals surpassed expectations, reaching their highest level in 17 months, as indicated by official data reflecting the decline in borrowing costs since mid-last year.

According to the Bank of England, net mortgage approvals for house purchases increased to 60,400 in February from 56,100 in January. This figure exceeded economists' expectations of 56,500 in a Reuters poll and marked the highest level since September 2022.

The "effective" interest rate, representing the actual interest rate paid on newly drawn mortgages, dropped by 0.29 percentage points to 4.9 percent in February, the lowest rate recorded since August 2023, as reported by the central bank.

Source: Bank Of England

Interest rate setters closely monitor mortgage approvals and house prices as they serve as timely indicators of the property market's health, which in turn influences the broader economy and plays a crucial role in monetary policy decisions.

The data released on Tuesday suggests that the housing market recovery is ongoing, driven by the decline in mortgage rates from their peak levels in the summer of 2023.

The decrease in most quoted fixed rates since the latter half of last year reflects the anticipation of a potential interest rate cut by the Bank of England from the current 16-year high of 5.25 percent.

Although some quoted mortgage rates have slightly increased since February due to persistent services inflation, as evidenced by Nationwide's month-on-month drop in March, analysts believe that the property market is showing signs of improvement.

Simon Gammon, managing partner at broker Knight Frank Finance, noted, "The recovery in housing market activity is gaining traction despite a somewhat uncertain start to the year for mortgage rates." He added, "While hotter-than-expected inflation data in January and February led to a few lenders raising mortgage rates, dampening sentiment, it hasn't been enough to stall the market's momentum."

Additionally, the data released by the Bank of England on Tuesday indicates that the impact of higher interest rates is diminishing, with cash deposits in household bank accounts increasing in February, driven by inflows into instant access accounts.

Ashley Webb, an economist at research company Capital Economics, commented, "This further indicates that households are no longer seeking higher interest rates by locking up funds in fixed-term accounts."

However, the figures from Nationwide, which placed the average property cost at £261,142, were worse than anticipated. Economists surveyed by Reuters had expected a month-on-month increase of 0.3 percent in March and an annual rise of 2.4 percent.

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Alex

Central Bank

Economic

he world’s advanced economies are moving towards an easing of a central bank interest rates but the Reserve Bank of Australia (RBA) has hinted that cuts might be slower to emerge here.

Minutes of the RBA board’s March meeting, released on Tuesday (2 April), would not rule in or out any official cash rate movements, either up or down, but did hint that cuts in 2024 may be off the table.

“Market participants continued to expect that many advanced economy central banks would begin reducing policy rates from around the middle of the year,” the Board noted, before watering down expectations that Australia would be leading any charge towards rate cuts.

“(Board) Members noted that fewer reductions in the policy rate were expected in Australia than in many other advanced economies.

“They observed that, in part, this was likely because the cash rate had not risen as high as policy rates in other economies, as the Board had chosen to return inflation to target gradually over time in order to preserve the gains in employment.

“Members further observed that market expectations were for policy rates to be at broadly similar levels by the end of 2025 across many advanced economies, including Australia.”

The suggestion Australia would have fallen in line with the likes of the US and UK by the end of 2025 contradicts forecasts from the Big Four banks and other economists that rates would likely be cut towards the end of 2024.

Global financial risks also remained high, the RBA Board said, in justifying its most recent decision to keep rates at 4.35 per cent.

“Further weakness in the Chinese property sector could interact with longstanding macro-financial vulnerabilities. If stresses in the Chinese economy and financial system intensified or broadened, they could spill over to the rest of the world (including Australia) through trade channels and an increase in global risk aversion.

“Worse-than-expected macroeconomic outcomes – for example, arising from global inflation proving more persistent than expected or a geopolitical shock – could result in a disorderly adjustment in financial asset prices.

“Events in recent years had demonstrated the potential for this adjustment to be amplified by vulnerabilities in non-bank financial intermediaries in key global financial centres. RBA Casts Doubt Over 2024 Interest Rate Cut Prospects_1

RBA Casts Doubt Over 2024 Interest Rate Cut Prospects_1

“Tight market spreads, if they persisted over an extended period, could contribute to a build-up of leverage and future risks to financial stability.”

Domestic considerations also pointed to the RBA keeping rates steady for a while yet.

The RBA noted real household disposable income had started growing again — thanks to dissipating inflation and wages growth — and would pick up further this year once Stage 3 tax cuts take affect and disinflation continues.

“Strong conditions in the labour market and the large savings buffers accumulated during the pandemic were helping households adapt to challenging economic conditions and restrictive monetary policy,” the minutes stated.

The RBA minutes show the board considered implications for the cash rate if productivity did not pick up as assumed, and any economic adjustment associated “may not be smooth or immediate”.

The immediate response of the Australian dollar following the release of the minutes was to stay flat, suggesting the market saw no imminent change to the RBA’s interest rate policy.

If borrowers were to glean any optimism from the latest RBA meeting it is that, for the first time since it began its aggressive run of rate hikes, the Board did not consider the option of a rate rise.

“Members observed that inflation had continued to moderate over prior months, broadly as expected,” the minutes noted, before again watering down rate cut expectations.

“That said, services inflation remained high and the recent slowing in the pace of monthly inflation had been influenced by several temporary factors.”

The RBA forecasts inflation, currently 3.4 per cent on its most recent measure, will not fall within its 2 to 3 per cent target band until December 2025.

Bringing inflation back to target “remained the board’s highest priority”, but the board admitted it would “take some time before they could have sufficient confidence that this would occur within a reasonable timeframe”.

Stressed borrowers not an RBA concern

The still-high interest rate environment was not perceived as a major burden on borrowers by the nine members at the meeting or the ten other economic experts present.

“Members noted that most Australian households remained able to service their debts and meet essential expenses, and this was expected to remain true even if inflation were to prove more persistent than anticipated.

“Many borrowers, including those on lower incomes, had also increased the savings they held in offset and redraw facilities over the preceding year; some were likely to have reduced consumption in order to facilitate this.”

There was, however, some qualified empathy.

“Members recognised that a small group of borrowers, typically those with modest savings or income buffers, remained under acute financial pressure owing to the effects of high inflation and higher interest rates.”

If interest rates are a source of financial stress, as they were for 26 per cent of respondents to API Magazine’s latest quarterly Property Sentiment Report, relief may still be some way off.

Source：apimagazine

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Samantha Luan

Economic

Commodity

Iron ore’s reset to around $100 a ton is indicative of a broader reshaping of China’s commodities markets that favors the new economy over the old.

The steelmaking material plunged to $95.40 a ton on Monday, a 10-month low, before nosing back into three figures, testimony to the damage still being wrought by a years-long property crisis that appears far from over. In early January, Singapore futures hit $143.50 a ton, their highest since June 2022.

Iron ore’s weakness comes amid tentative signs that the wider economy is beginning to heal. Factory activity snapped a five-month contraction in March, beating estimates and adding to modest signs of recovery. Iron Ore’s Reset Lower to $100 Heralds China’s New Economy Shift_1

Iron Ore’s Reset Lower to $100 Heralds China’s New Economy Shift_1

That divergence between a manufacturing-led upswing and a languishing property market is likely to deepen as Beijing pursues new drivers of growth in sectors like renewable energy and advanced technology. At its peak in 2018, real estate accounted for nearly a quarter of China’s economy, according to Bloomberg Economics. Now it’s less than a fifth.

Property still makes up the bulk of steel demand. But Beijing has held off on delivering the degree of fiscal stimulus — principally infrastructure spending — that could fully offset the housing crash. Ballooning debt levels at local governments are one obstacle. Meanwhile, the usual lift to construction activity in the spring has also failed to properly materialize, creating uncertainty over when consumption might revive.

All to say, President Xi Jinping’s crackdown on property and his drive for “new productive forces” could well herald an era in which iron ore plays a lesser role to the metals set to benefit from the energy transition.

Structural Shift

“It’s understandable if the weakness lasts for a week or two,” said Cao Ying, chief ferrous metals analyst at SDIC Essence Futures Co. “Any longer than that and the market will start to adjust its expectations as it will look more like a structural shift.”

Iron ore can’t stay below $100 a ton for too long without higher cost producers shutting up shop. That would thin out supply and put a floor under prices in the near term. But it’s the long-term demand side of the equation that’s causing most concern. The government in Australia, China’s biggest supplier, expects free-on-board prices of $95 a ton this year, $84 next year, and then levels in the $70s out through 2029.

The market’s crash contrasts starkly with another commodities bellwether, copper, which is closing in on a yearly high. Supply issues are the immediate driver, but the metal’s central role in the energy transition is driving predictions of outsized gains in the years to come. Steel and iron ore markets just won’t enjoy the same level of support from that secular shift in commodities consumption.

“There seems to be no end to the real estate crisis, local governments can’t sustain current investment levels, consumers are still very cautious,” said Tomas Gutierrez, analyst at Kallanish Commodities Ltd. There should be a seasonal demand recovery in the second quarter, “but this is not likely to be strong enough to really turn markets around,” he said.

Source：Bloomberg

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Zi Cheng

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Economic

In March, German inflation experienced its third consecutive month of easing, reinforcing predictions that the European Central Bank will commence interest rate reductions in June. According to data from the statistics office, consumer prices increased by 2.3% annually last month, a decline from February's 2.7% and below the median estimate of 2.4%

Source: Destatis

Following France's report of a deceleration on Friday, similar trends were observed in Italy and Spain, where price gains accelerated. This aligns with policymakers' cautions that achieving the 2% target won't be straightforward. Across the region, as governments phase out aid measures introduced during the period of soaring energy costs, inflation is experiencing fluctuations due to one-off effects. This pattern is evident in Germany as well, where tax adjustments and the introduction of a discounted transport ticket in 2023 are expected to contribute to upward pressure, as noted by Deutsche Bank economist Sebastian Becker.

However, the overarching trend continues to depict a widespread decline, providing the European Central Bank with an opportunity to signal to investors its intention for an initial reduction in borrowing costs come June. Euro-zone data, slated for release on Wednesday, are anticipated to reveal a decrease to 2.5%. A recent Bloomberg Economics nowcast, adjusted following the release of German figures, indicates a slightly lower estimate of 2.4%.

The Ifo institute reported on Tuesday that in Germany, a decreasing number of companies, especially those in consumer-related sectors, intend to implement price hikes. In March, an index reflecting these expectations reached its lowest point in three years.

Persistent apprehension revolves around the resilience of the labor market and the consequent substantial rise in wages, which could prolong elevated underlying inflation. Confirmation of a slowdown in wage growth will be gradual, leading most officials to rule out a rate cut at the upcoming policy meeting next week.

Last week, ECB Executive Board member Piero Cipollone cautioned against overemphasizing salaries, emphasizing that the fragile economy of the euro zone requires workers' pay to align with prices to support the anticipated gradual recovery.

The course of events following the initiation of monetary easing remains uncertain. While some officials have emphasized the importance of staying reliant on data and assessing developments on a meeting-to-meeting basis, others seem to advocate for a swifter relaxation of policies.

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Cohen

Forex

There’s just no getting past the supremacy of the dollar, much as skeptics of American influence wish for it or lonely yen bulls cry for relief. The greenback has been frequently tipped to retreat, only for it to blow away everything in front of it. This resilience might not last, but as long as it does, it reminds a world once in thrall to China’s ascent that the US is the essential economic force. Just ask all the central bankers quizzed as much, if not more, about the Federal Reserve’s intentions as their own. Sovereignty can be relative.

Events billed as heralding a pullback have barely made a dent: Japan’s decision to end eight years of negative interest rates fizzled in markets; the country’s finance minister has resorted to jawboning the yen stronger, and traders are handicapping the prospects of intervention by Tokyo. Even projections of rate cuts by the Fed aren’t doing it: Reductions are likely to be synchronous among the biggest authorities, preventing any major currency from outshining the dollar. This year was meant to be one in which the dollar fell, but a key index of its support is off to a strong start.

That’s the short term. Markets fluctuate and currencies, like stock and bond markets, have good years and times when things don’t turn out so stellar. But the buoyancy of the past quarter — and last couple of years — is built on something more than rate differences. The longer story of dollar firepower is one of a currency beating back challenge after challenge every few years. In the late 1990s, the coming euro was supposed to rival the dollar. A couple of years later, the current-account deficit became the totem of all that was wrong. (When I ran Bloomberg’s foreign-exchange news in the early 2000s, the most commonly-cited reason for any tough trading day for the dollar was the trade shortfall. A close second was the belief that the US had quietly dropped the strong-dollar policy developed during the Clinton administration.)

Then came the subprime collapse and quantitative easing, followed by the would-be rise of the Chinese yuan. The worry du jour: the aggressive use of sanctions, which critics said would lead to a global de-dollarization. It’s as though the rest of the world scouts for a savior every few years. Assertions that the dollar will be undone are overblown, according to a recent paper by Steven B. Kamin, a former head of the Fed’s international finance division, and Mark Sobel, who served as deputy assistant secretary of the Treasury. The Dollar Is More Armoured Division Than Currency_1

The Dollar Is More Armoured Division Than Currency_1

Kamin and Sobel write that dollar dominance is embedded in the global economic system in ways that are difficult to change. Even if it was to decline relative to another currency, the buck will remain first among equals. And the potential loss of access to US markets and the American banking industry would mean sanctions still matter greatly. The currency remains a vital geopolitical asset both to Washington, and its allies.The duo argue that whether or not the dollar stays top of the heap is the wrong question to ask. Better to inquire whether the factors that have supported such a place at the commanding heights will be sustained. They are confident it will, but add a chilling caveat: The biggest risk to the dollar may be the US itself.

“Dollar dominance is not a means in and of itself,” Kamin and Sobel wrote in the paper for the American Enterprise Institute. “It is instead a critical reminder of the need to run sound policies, behave responsively at home, and maintain the world’s trust.” (The two expanded on the subject in the Macro Musings podcast last month.)

The dollar is also a strategic gift, often under-appreciated in geopolitical discussions, which tend to focus on the South China Sea or Donald Trump’s threats against treaty partners. Nor is the US-led economic order, with the greenback at its core, wholly a product of victory in World War II. Born in 1913, the Fed was an important behind-the-scenes player in the Great War. As President Woodrow Wilson was trying to broker peace between the Allied and Central powers in 1916, the Fed fretted that American banks were too invested in the prospects of a triumph by Britain and France, something by no means certain. The central bank warned US lenders against over-exposure, a step that sent European markets into a tailspin, wrote Philip Zelikow in The Road Less Traveled: The Secret Turning point of the Great War, 1916-1917. Allied powers realized they would soon struggle to finance the war.

Wilson hoped that by squeezing them, he could bring about a resolution.His efforts foundered after Germany resumed unrestricted submarine warfare in the Atlantic, and the US joined the conflict. The Fed reversed its stance and aid began flowing again — generously. Just as well: Britain’s cash reserves were perilously close to depletion. The baton of monetary leadership was passed.

Let’s hear it for the greenback, more useful than an aircraft carrier, and with greater life expectancy. If there is a historic break with its rule, it’s unlikely to be something as obvious as a turn in the cycle of contemporary borrowing costs. It may be something more subtle, though clear in hindsight. For now, consider keeping those prognostications about the eclipse of the dollar in the barracks.

Source：Bloomberg

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Samantha Luan

Economic

Inflation last month was led by an overall price jump in agricultural, livestock and fishery products, which advanced 11.7 percent on year in March compared to an annual gain of 11.4 percent the previous month.

Agricultural products soared 20.5 percent in March after gaining 20.9 percent in February on the back of apple prices, which skyrocketed 88.2 percent. It was the most rapid growth since data was first compiled in January 1980. The price of pears also soared 87.8 percent while that of tangerines accelerated 68.4 percent in March.

President Yoon Suk Yeol on the day vowed to inject an “unlimited” amount of funds with the intent of reining in agro and livestock products “without a time frame” until people feel that prices have stabilized.

Yoon added that the government will expand eligibility for support measures currently centered on major supermarkets to include small and mid-sized stores and traditional markets. Qualification for agricultural vouchers targeting vulnerable social groups will be also broadened.

“The price growth of agro and livestock products has started to slow somewhat from late March, but remains high,” said Yoon. “We will have to thoroughly prepare for climate change, which has become the new normal,” he added, as atypical weather has been partially blamed for the recent price surge.

The president promoted the utilization of digital technologies like artificial intelligence to run orchards and develop new breeds of agricultural products.

The stabilization pledge by Yoon comes ahead of the election on April 10, the outcome of which will affect his ability to execute his policies for the rest of his term before leaving office in 2027.

Core inflation, which excludes volatile food and energy prices, grew 2.4 percent in March, slowing from a 2.5 percent gain in February.

“The government will put in the utmost effort to quickly bring inflation to the 2 percent range amid uncertainties, including volatility in international oil prices as well as agricultural prices that remain high due to aggravated weather conditions,” said the Ministry of Economy and Finance.

The Bank of Korea (BOK) has also been doing its part to stabilize inflation by keeping its benchmark interest rate high at 3.5 percent since last January. The central bank said that it will be difficult to cut the benchmark rate in the first half of the year as it needs more evidence confirming that inflation is on a sustainable path down to the target 2 percent rate.

Core inflation is projected to gradually slow due to a weak recovery in private consumption, said the BOK on Tuesday. Consumer prices are also expected to present a downward trend, but the movement will not be smooth due to the volatility of oil and agricultural prices.

It added that price movement needs to be observed for a longer period before the bank can be certain that inflation is heading toward the target rate. The BOK’s next rate-setting meeting is scheduled for April 12.

The Finance Ministry expects prices in Korea to rise 2.6 percent this year.