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The Asian engine
for global growth
Prepared by PwC for APEC CEO Summit 2010 Yokohama
To APEC CEO Summit 2010
participants,
We live in challenging times. From
recession to recovery, from trade
imbalances to Basel III, from fiscal
stimulus to austerity and fiscal
restraint – a dizzying menu of
unfolding and contradictory events
has fuelled uncertainty about the
direction of the world economy and
how global business leaders should
react. There’ s no question that the
optimism we felt in January about
the global recovery has been
dampened by a turnaround that is
slower than expected. In North
America and Europe, unemployment
remains stubbornly high, housing
markets are stagnant, and fiscal
deficits are raging.
Yet those developments don’ t
characterise the entire global
business story. Many Asian
companies are doing well; riding a
1 The Asian engine for global growth
robust economic recovery in the
region. Even in the West, corporate
profits are up, financial stocks have
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
changed strategic priorities in the
Asia-Pacific region.
That most of the region defied
economic contraction in 2009 helped
vault Asian companies higher in
global rankings: the largest banks in
the world (by market cap) are based
in China, for example, and Japan,
Korea and China combined are now
home to nearly the same number of
Fortune Global 500 companies as the
US. It’ s clear that Asia-Pacific is
increasingly taking the lead.
Asian companies have taken up the
mantle of leadership and are
investing in growth initiatives.
Asia-Pacific investment in clean
energy rose in 2009, for example,
while the economic crisis eroded
similar investments in Europe and
North America. These investments
could simultaneously build
Asia-Pacific’ s position in a high
growth, value-added sector, and play
a vital role in addressing global
climate change.
Over the past few months, my
conversations with CEOs have borne
out the growing focus on Asia as the
source of future growth. Some
companies are using the recession as
a pretext to accelerate their strategic
agendas. They are retooling to adapt
to new circumstances and taking
advantage of opportunities in
technology, cost containment, talent
availability, and global markets that
didn’ t exist before the recession.
This is particularly true here in Asia.
the strong economic recovery in the
region into sustainable growth
globally.
I look forward to seeing you at the
Summit to discuss these and other
important topics.
Sincerely yours,
Dennis M Nally,
Chairman, PricewaterhouseCoopers
International
That’ s one reason why the theme of
the APEC CEO Summit – Asia-Pacific
as the Driving Force for Global
Growth: Seeking Prosperity after
Crisis – is so timely and important.
With a growing middle class of
consumers in Asia, new opportunities
will bloom in a variety of sectors,
from consumer electronics to natural
resources. APEC plays an essential
role in making sure trade and
economic 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
The Asian engine for
global growth
Just a few years ago, the US economy
was considered the locomotive of
global growth, with US consumption
said to fuel output from the rest of
the world. Now, Asia-Pacific is in the
lead position, while many other
major economies still struggle with
the after-effects of the economic
crisis.
Based on the most recent estimates
from PwC, the United States is
Most countries in Asia Pacific boast much
stronger economic fundamentals and
significantly improved supervision of
their financial institutions
3 The Asian engine for global growth
forecast to deliver 2.4% growth in
2011, while the European Union will
crawl along at 1.5%. By comparison,
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
by China and the ASEAN economies:
China is projected to grow 9.3%
percent in 2011 while the six largest
countries of ASEAN are forecast to
grow between 4.3% and 7.1%. (See
figure.) The only soft spot in
Asia-Pacific is Japan. Even still,
Japan’ s 1.7% growth forecast for
2011 seems like good news in that
it’ s more than twice the average
growth rate over the years
1992-2009.
What has made the economic recovery
in Asia-Pacific so fast and impressive?
Such strong fundamentals were
achieved largely as a result of an
expensive and painful lesson: the
1997-98 East Asian financial crisis
that caused near meltdown of the
financial system in the region, and a
short but deep recession in some of
the key economies in Asia-Pacific. In
the wake of that crisis, governments
in many Asia-Pacific countries
undertook a series of steps that, in
retrospect, made the region as a
whole better prepared for the global
economic crisis relative to many
Western counterparts.
It’ s hard to make broad
generalisations across such a large
and diverse region. Yet, some themes
do emerge in the aggregate, even if
different countries vary in their fit.
And those themes may surprise those
accustomed to the view that
developing countries have weak fiscal
discipline, loose supervision of
financial institutions, and insufficient
economic integration with one
another. Notably, most countries in
Asia-Pacific actually boast much
stronger economic fundamentals and
significantly improved supervision of
their financial institutions.
Specifically, many Asia-Pacific
countries undertook combinations of
measures including strengthening
government balance sheets, building
up foreign exchange reserves to
self-insure against external shocks,
intensifying supervision of financial
institutions, and deepening regional
economic integration. As a result,
when the global economic crisis
broke out in 2008, the governments
in Asia-Pacific had enviably strong
fiscal positions; banks there had
robust balance sheets; central banks
in were in possession of trillions of
dollars of foreign exchange reserves
to stave off financial panic; and
integrated regional trade
compensated for some of the lost
demand from the United States and
Europe.
Forecast GDP growth, 2011
World
3.1%
APEC
3.8%
EU
1.5%
Russia
Canada
4.5%
2.5%
US
China
9.3%
2.4%
Korea
Japan
JAPAN
3.9%
1.7%
SOUTH
KOREA
Chinese
Taipei
CHINESE
4.2TAIPEI
%
Vietnam
7.1%
Hong Kong SAR
4.5%
PHILIPPINES
THAILAND
Thailand
4.3%
Malaysia
Mexico
3.7%
Brunei
Philippines
1.0%
4.8%
MALAYSIA
5.0%
Singapore
Indonesia
4.8%
6.2%
Papua New Guinea
Peru
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
Putting f iscal houses in
order
Asia-Pacific entered the global
economic crisis with relatively strong
public finances. In 2004-08, fiscal
balances in 10 major Asian
economies (China, Hong Kong, India,
Indonesia, South Korea, Malaysia,
Taiwan, Singapore, Thailand, the
Philippines) averaged -0.6%,
compared with a -3.2% average for
G-7 economies.*1 The overall level of
public debt is similarly low.
For example, public debt in China is
under 20% of GDP (excluding
non-performing loans in the banking
system); Hong Kong has virtually no
public debt, South Korea’ s public
debt is 24% of GDP, Indonesia’ s is
27%, and Thailand’ s is 40%.*2
The health of public finance allowed
governments in these countries to
implement substantial fiscal stimulus
packages to revive growth in the
depth of the crisis without
5 The Asian engine for global growth
experiencing the same level of debtor
pressure that countries such as
Greece and Ireland suffered.
As growth returns, economies in
Asia-Pacific are also reporting
improved fiscal positions. In fact,
on average, their fiscal deficits are
shrinking at a much faster rate than
those of many European economies.
Stashing rainy-day reserves
One key lesson learned by
policy-makers in the major
economies in Asia-Pacific from the
East Asian financial crisis is that they
must have sufficient foreign exchange
reserves to combat financial panic.
Thus, through tighter financial
management and pro-export policies,
Asian economies have amassed more
than enough reserves to prevent
similar runs on their currencies.
Hoarding low-yielding foreign
exchange reserves is arguably not the
most productive way of investing
scarce capital. But the crisis
vindicated stability-minded
policy-makers (even though they for
the most part did not actually dip into
reserves to prop up their currencies):
most Asian currencies remained
remarkably stable over the past two
years.
Reining in household debt
Another source of vigour for the
region is the overall low level of
household debt. In Asia’ s most
developed economies, such as Japan,
Korea and Taiwan, household debt is
roughly 70% of GDP (significantly
lower than in the US and parts of
Europe). In developing Asia,
household debt is much lower (due to
the limited availability of consumer
finance), roughly 10% of GDP in
China and Indonesia, for example.*3
Low household debt levels in these
countries are one reason why
consumer demand throughout the
region has remained steady during
the crisis. It also provides scope for
faster growth in consumer spending
in the coming years.
Keeping close watch
Long derided for having
‘under-developed’ (if not primitive)
financial systems, countries in
Asia-Pacific significantly improved
the supervision of their financial
institutions following the short but
devastating East Asian financial crisis
(which originated, in part, from
massive borrowing by poorly
supervised financial institutions in
Asia-Pacific has earned
a reputation as the world's
most dynamic exporting zone,
yet it is also becoming
a more closely integrated
economic bloc
South Korea, Thailand and
Indonesia). Consequently, most
financial institutions avoided
high-risk financial engineering and
deal-making before the crisis.
Overall leverage was low, and direct
exposure to risky financial
instruments originated in the West
was minimal. So, while many
Western financial giants enfeebled by
the crisis grew reluctant to lend,
access to credit in Asia-Pacific
remained largely unimpaired during
the recession and recovery.
Working together
Asia-Pacific has earned a reputation
as the world’ s most dynamic
exporting economic zone, with the
US and Europe accounting for 46%
percent of Asia’ s total exports in
terms of final demand.*4 Yet the
region is also becoming a more
closely integrated economic bloc,
*1 : ADB, Asian Development Outlook 2010 Update.
*2 : 2009 estimates from CIA World Factbook.
*3 : Economist Intelligence Unit.
*4 : ADB, Asian Development Outlook 2010 Update.
The Asian engine for global growth 6
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
are confident of their growth
prospects going forward – but they
expect their growth to come from
within the region. Four out of five
Asia-Pacific CEOs expect their Asian
operations to grow in 2010, while only
two of five believe their European
operations will expand.*6 An unsung
hero in Asia-Pacific’ s economic
integration is Japan. Even though the
Japanese economy has stagnated
since the early 1990s, large Japanese
companies have been pioneers in not
only technological innovation at
home, but also expansion of off-shore
investment and production.
Those economic fundamentals,
products of both fortuitous
circumstances (such as high savings
and restrained public spending) and
effective government policies, have
made most economies in Asia-Pacific
resilient and dynamic. But to
maintain their momentum, they need
to address both short-term risks and
long-term constraints on growth.
7 The Asian engine for global growth
Among the short-term risks, the most
prominent is that posed by large
capital inflows (driven by low interest
rates and anaemic growth in
developed economies). Such inflows
could fuel inflation, generate asset
bubbles, and put upward pressures
on exchange rates. China, for
instance, is now combating both
rising inflation and a significant real
estate bubble. Trade protectionism is
another risk. As trade surplus
nations, often with artificially
under-valued currencies, countries in
Asia-Pacific, especially export
powerhouses like China and South
Korea, are facing a backlash from
their trading partners in the West.
A third risk is that of financial
contagion originating in renewed
financial panic caused by the debt
crisis in the Eurozone. Asia-Pacific
may be resilient, but it is not entirely
immune to such external financial
shocks.
Longer-term challenges for
Asia-Pacific are more daunting.
Asian economies have grown
accustomed to unlimited access to
the markets in developed economies.
But their export-dependent growth
model has to change as part of the
global economic re-balancing
process. Exports to developed
economies are bound to slow or fall,
so Asian countries might choose to
boost domestic demand, especially
household consumption, to generate
new sources of growth. A second
long-term challenge is investment in
human capital. Asian countries have
done relatively well in their
accumulation of physical capital, but
to sustain growth and avoid the
so-called ‘middle-income trap’
(a term referring to economic growth
stalling before per capita income
reaches US$ 10,000), broadly
speaking, the region might need to
boost productivity and build growth
on knowledge and innovation, not on
investment in capital stock.
Asia-Pacific’ s leaders seem acutely
aware of these challenges, and are
certain they can manage them. Chief
executives from the region, for
example, are simultaneously more
concerned about a greater range of
threats to that growth and more
confident than their global peers.*7
Lessons learned from past crisis have
served the region well to date. Still,
the region may not be able to rely on
the same tactics forever. For example,
measures that allowed exporters to
Chief executives from the region are
simultaneously more concerned about
a greater range of threats to growth
and more confident than their global peers
Asia-Pacific can't lead the world
through a fragile recovery by
itself; the region and the rest of
the world have to agree to get on
the same track together
build large reserves are considered
unsustainable. In October, G-20
nations agreed to “pursue the full
range of policies conducive to
reducing excessive imbalances.”
Indeed, the more Asia-Pacific’ s
economic clout grows, the more
attention there will be on its
integration in global economic
governance. It is hard to imagine that
the world will regain its pre-crisis
prosperity without leadership from
the rising economic stars in
Asia-Pacific. But Asia-Pacific can’ t
lead the world through a fragile
recovery by itself; the region and the
rest of world have to agree to get on
the same track together.
*5 : ADB, Asian Development Outlook 2010 Update.
*6 : PwC 13th Annual Global CEO Survey (2010)
*7 : PwC 13th Annual Global CEO Survey (2010)
The Asian engine for global growth 8
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
Contacts for further information:
Cynara Tan
Masataka Mitsuhashi
Sophie Lambin
Regional Marketing Director
PricewaterhouseCoopers Ltd.
[email protected]
+852 2289 8888
Executive Officer, Clients & Markets
PwC Japan
[email protected]
+81 3 3546 8650
Global Thought Leadership & External Affairs
PricewaterhouseCoopers International Limited
[email protected]
+44 20 7213 3160
The Asian engine for global growth 10
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