The factory machinery is humming in Asia, and the ports once again clank with the sound of cranes loading containers onto ships. Asia is exporting to the rest of the world.
But a major sliver of the economies in Asia is lacking. The cranes are unloading containers that are empty. The consumer, increasingly influential, is not convinced that the worst financial effects of the pandemic are over. Concerned about their careers, the heads of Asian households are keeping the purse strings tight. Malls may be active as a source of some sort of social life. But a lot of windows are getting shopped.
So while Asia's economic rebound has been the most pronounced in the world, it is production-driven. China forced its factories back into operation, and incentives elsewhere in the region have slowly had the same effect. But no one can lure shoppers back into stores.
"The popular narrative is Asia is leading the recovery and digging the world out of a big hole. This is not quite right," Standard & Poor's Asia economists Shaun Roache and Vishrut Rana write in their report Asia, We Have A Demand Problem. "Demand from the rest of the world is helping Asia out of the hole."
Korean, Taiwanese and Chinese stocks are all up by more than one-third in the last year. Those are all heavily export-driven economies, ones that have blossomed as consumers in the West concentrate their spending on goods rather than the shuttered services sector. In lockdown, it's electronics, health-care equipment and products, sporting goods and the like that have been flying off store shelves. Asia's specialty.
Consumption patterns are the reverse. The spending rebound has been greater in Europe and the United States than in Asia. Retail sales as of the end of the year in Asia were either still lower than the same time a year ago, or in the case of China, rising slightly, at less than the pre-pandemic rate. "There has been no sign of pent-up demand," Roache and Rana note, despite plenty of speculation that Asians would engage in what we've dubbed out here "revenge spending." Let that virus have it!
The coronavirus, despite having its epicenter in China, has not hurt the region as might have been expected. Thanks to the rapid and widespread adoption of masks, the case rate per million people in Asia stands at 81 in early February. That's far below the 1,066 rate in the European Union, which is similar but not quite as high as the 1,339 cases per million in the United States.
There's a "revealing" level of detail in the output numbers here in Asia, the S&P team note. Domestic savings are increasing while investment remains depressed. Since the middle of last year, there's been a sharp spike in the savings level, which is now approaching 30% of GDP in Asia ex-China, with similar trends at play inside China, too. The savings rate is up by two percentage points of the entire economy in Asia, both households and corporations tightening their belts. Despite hefty stimulus, government largesse has not replaced those missing dollars, yen and yuan.
Savings are falling in Europe and the United States. The lack of spending in Asia creates a problem in the rest of the world, since while goods are flowing from Asia out of the continent, imports into it are absent. It would benefit factories in the West were that to resume.
Are these trends just temporary? Roache and Rana believe Asian spending should restart if and when Asian wage earners become confident that, basically, they are not right about to lose their jobs.
Asians are also not, of course, able to spend outside the region because free travel has yet to resume. That's extremely significant when it comes to Chinese travelers, who have become the dominant source of spend in many markets. For the first nine months of 2020, travel-related spending and outflows from Asia fell by US$93 billion compared with the same time in 2019. That's a lot of empty Balenciaga boutiques and Tiffany stores.
Why do these dry economic readings matter?
"Until Asia starts pulling its weight in the demand recovery, global growth will fail to live up to its potential," the S&P team explain. "The recovery will remain over-dependent on stimulus and consumers in Europe and the U.S."
Asia may see "persistent economic slack," which would feed into low inflation, and lower-than-expected growth. We are already seeing that the surprising economic rebound in Asia is not being sustained. The latest figures out of Singapore show that December retail sales fell 3.6%, worse than expected and worse than the prior 1.7% decline. In Indonesia, private consumption - around 60% of the economy - fell 3.6% in Q4 2020, better than the prior quarter's 4.1% drop but still not encouraging.
Taiwan has been just about the most effective nation in the world at containing the coronavirus. The island of 23.6 million people has posted only 927 positive cases since the onset of the outbreak. That's startling, given Taiwan's proximity and close ties to mainland China. What's more, only nine people have lost their lives to the virus. Nine! That many people have died from the virus every half hour in the United States over the course of the last week.
Taiwan's private consumption is also still falling, even though life is largely back to normal. Consumer spending fell 1.1% in Q4, the fourth straight decline. Sentiment is still very cautious. Here in Hong Kong, where we have had 10,635 cases and 186 deaths in total, the mood remains depressed. Private consumption fell a dramatic 7.6% in Q4, dragging the entire economy down.
The slack demand from Asia will make life difficult for the administration of President Biden. There's likely to be little progress on trade if Asian shoppers refuse to pull out their wallets. Technically, rising current account surpluses are a by-product of low consumer spending, and are also cited as evidence of currency manipulation by the U.S. Treasury if the rate rises above 2%. It stands at 3% for Asia as a whole, with Vietnam already on the U.S. list of currency manipulators. It does not bode well for China, India, Japan, Kore, Malaysia, Singapore, Taiwan and Thailand, which are all on the Treasury watchlist of currency manipulators.
For Biden, rolling back tariffs on China will be hard to justify unless Chinese consumption and the buying of U.S. goods resumes. Expect poor retail sales and spending in Asia to be a political point of contention and a problem for Western manufacturers in the year ahead. U.S. companies that generate a hefty share of sales from Asia will have to wait before their earnings rebound.
It's a puzzle as to how to encourage Asia's population that the worst is over. The vaccine rollout has been slow to non-existent in Asia, and that might help. One way or another, Asian households need to be encouraged to spend.
"There are good domestic and international reasons for Asia to find a solution to its domestic demand problem," Roache and Rana write.