3rd Nov.

2014

EMERGING ASIA
ECONOMICS WEEKLY
.

Editors: Gareth Leather and Daniel Martin

How much slack is left in the NIEs?

There are indications that the amount of spare capacity in the Newly Industrialised Economies
(NIEs: Hong Kong, Singapore, Taiwan and Korea) is starting to be used up. As a result, while
there is probably scope for growth in these economies to pick up a bit over the next year on
the back of stronger export demand, it wont be too long before supply-side constraints start to
bite. (See pages 2-3.)

Australia, Thailand and Malaysia all have scheduled monetary policy meetings over the coming
week. We expect interest rates will be left on hold in all three economies. Meanwhile, Indonesia
is due to publish its Q3 GDP growth figures on Wednesday. We expect growth slowed again last
quarter. Finally, the manufacturing PMIs are likely to show the recovery in Asias manufacturing
sector remains uneven and slow going.

Data Previews (pages 4-6)

Manufacturing PMIs (Mon. 3rd Nov.) Recovery to remain slow going
Australia Policy Rate (Tue. 4th Nov.) Set for a prolonged hold
Indonesia GDP (Q3) (Wed. 5th Nov.) Another weak quarter
Thailand Policy Rate (Wed. 5th Nov.) Monetary policy to stay accommodative
Malaysia Policy Rate (Thu. 6th Nov.) On hold for now

Economic Diary (page 7)

Recent Publications (page 8)
North America
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Managing Director
Chief Asia Economist
Asia Economist
Asia Economist
Asia Economist
India Economist

Roger Bootle (roger.bootle@capitaleconomics.com)

Mark Williams (mark.williams@capitaleconomics.com)
Gareth Leather (gareth.leather@capitaleconomics.com)
Daniel Martin (daniel.martin@capitaleconomics.com)
Krystal Tan (krystal.tan@capitaleconomics.com)
Shilan Shah (shilan.shah@capitaleconomics.com)
Emerging Asia Economics Weekly 1

How much slack is left in the NIEs?

There are indications that the amount of spare
capacity in the Newly Industrialised Economies
(NIEs: Hong Kong, Singapore, Taiwan and Korea)
is starting to be used up. As a result, while there is
probably scope for growth in these economies to
pick up a bit over the next year on the back of
stronger export demand, it wont be too long
before supply-side constraints start to bite.

the case in some western economies, low

unemployment could simply be the case of
workers dropping out of the labour market
altogether. In the case of the NIEs, labour force
participation rates have been broadly stable, which
suggests there is little evidence that low
unemployment is the result of people leaving the
labour force. (See Chart 2.)

How to measure slack?

There are various measures we can use to measure
the amount of slack or spare resources in the
economy. While none of them are perfect, we
think that a combination of the unemployment
rate, labour participation rates, real wage growth
and core inflation, should give us a decent
measure of the amount of spare capacity in the
economy.

CHART 2: LABOUR FORCE PARTICIPATION RATES (%)

Low unemployment
The obvious place to start is by looking at
unemployment. Despite a couple of years of
subdued economic growth, unemployment rates in
the NIEs have remained very low (see Chart 1),
which would point to limited spare capacity. In
Taiwan, for example, the unemployment rate in
September fell to just 3.9% the lowest since
2006. Korea, where the unemployment rate has
crept up a bit recently, is something of an
exception.

Hong Kong

Taiwan

Singapore

Korea

0
02

03

04

05

06

07

08

09

10

11

12

13

80

14

Source Thomson Datastream

Labour force participation

However, there are problems with just looking at
unemployment as a measure of slack. As has been

Past year

80

Past decade

60

60

40

40

20

20
0

0
Singapore

Korea

Hong Kong

Taiwan

Sources Thomson Datastream, CE

Real wages
If tight labour markets were a sign that these
economies were running into capacity constraints,
then we would expect to see wages starting to
increase as employees take advantage of their
bargaining power to force through hefty pay rises.
CHART 3: REAL WAGES (% Y/Y)
2.5

2.5
Past decade

Past year
2.0

2.0
1.5

CHART 1: UNEMPLOYMENT RATE (%)

100

100

* Korea data is since 2008,

not past decade

1.5

1.0

1.0

0.5

0.5

0.0

0.0
-0.5

-0.5
Hong Kong

Taiwan

Singapore

Korea *

Sources Thomson Datastream, CE

The evidence here is mixed. Real wages in Hong

Kong have been stagnant over the past year. (See
Chart 3.) Although real wage growth has picked up
in the other three economies, they are still only
growing by around 1.5% a year, which is lower
than average labour productivity growth in recent
years.
Emerging Asia Economics Weekly 2

perhaps not much of a surprise. Singapore in

contrast, probably has the least spare capacity,
although with real wages relatively subdued and
core inflation only increasing gradually, it doesnt
look as though the economy is at full capacity just
yet. Korea and Taiwan look somewhere in
between.

Core inflation
If rising real wages were an indication that
capacity constraints were starting to bite, core
inflation would probably start rising too. The
overall picture is again pretty mixed. Core inflation
looks to be heading down in Hong Kong, but has
been on a gradual upward trend in the other three
economies since 2012. (See Chart 4.)

The amount of slack or spare capacity left in the

economy has big implications for the growth
outlook. All of the NIEs are relatively trade
dependent, so they should see a pick-up in
demand, if as we expect the global recovery finally
gains momentum. The more spare capacity there is
in their economies, the more scope the NIEs will
have to grow above trend without overheating. By
our estimates, trend growth in the NIEs is now
around 3.0%. We expect them to do better than
that over the next couple of years (see Chart 5), but
structural constraints will start to bite not long
after.

CHART 4: CORE PRICES (% Y/Y)

Taiwan
Korea
Singapore
Hong Kong

7
6
5

7
6
5

-1

-1

-2

-2
2006

2007

2008

2009

2010

2011

2012

2013

2014

Sources Thomson Datastream, CE

Conclusion
To bring all of this together, Table 1 assigns a
score out of 3 to each country for the four factors
we identified. Adding them together gives a score
out of 12, with a higher number indicating less
spare capacity in the economy. While there is
nothing scientific about this, it does help identify
which countries may have more spare capacity
than others.

CHART 5: NIES GDP (% Y/Y)

12

12

10

10
CE Forecasts

-2

-2

-4

-4

-6

-6
-8

-8

The overall picture is quite varied. With real wages

stagnant and core inflation trending downwards,
Hong Kong appears to have the most spare
capacity. Given the recent weakness of the
economy growth was very subdued in Q1 and
the economy actually contracted in Q2, this is

06

07

08

09

10

11

12

13

14

15

16

Sources Thomson Datastream, CE

Gareth Leather
+44(0) 20 7811 3916

TABLE 1: MEASURES OF SPARE CAPACITY

Unemployment

Participations
rates

Real wages

Core inflation

Overall Score
(out of 12)
10

Singapore

Taiwan

Korea

Hong Kong

Source Capital Economics; (1 = no sign of capacity constraints, 3 = capacity constraints) *Methodology available upon request

Emerging Asia Economics Weekly 3

Data Preview Manufacturing PMIs

Mon. 3rd Nov.

Recovery to remain slow going

A host of Asian countries will release October
purchasing managers indices (PMIs) at the start
of November. The September numbers were
generally disappointing (see Chart 6), and we
expect next weeks figures to underline that the
regions manufacturing recovery remains
uneven and slow going.
This would fit with preliminary business surveys
for October that suggest global manufacturing
activity is struggling for momentum. A
composite of the October flash manufacturing
PMIs for major economies US, euro-zone,
Japan and China slipped slightly from 52.7 to
52.6. The headline PMI for the US fell, and
while the PMI in the euro-zone, China and

Japan picked up, the readings are consistent

with only a gradual pace of recovery.
CHART 6: HEADLINE PMIS
56

56

Expanding

54

54

52

52

50

50

48
46

48

Jun-14

Jul-14

Aug-14

Sep-14

Contracting

46

44

44

Source Thomson Datastream

Data Preview Australia Policy Rate

11.30 SGT Tue. 4th Nov.

Forecasts

Previous

Median

Cash rate

2.50%

2.50%

Capital Economics
2.50%

Set for a prolonged hold

The Reserve Bank of Australia (RBA) left its policy
rate on hold at 2.5% at its meeting at the start of
October, and re-iterated that the most prudent
course was likely to be a period of stability in
interest rates. As such, it is very unlikely that the
RBA will make any changes to its policy rate this
week.
In fact, we expect rates to be left on hold until
2016. Consumer price inflation dropped sharply
in Q3 (see Chart 7) and is unlikely to become a
concern for the central bank any time soon, given
the slack in the labour market. Moreover, the
sharp negative shift in Australias terms of trade
this year, along with falling mining investment,
will leave the economy in need of support.

However, the RBAs concerns over the pace of

house price growth are likely to rule out further
rate cuts in this cycle.
CHART 7: AUSTRALIA CONSUMER PRICES (% Y/Y)
7

7
Headline CPI

CPI exc. Volatile Items

Medium-term CPI target is 2-3%

0
04

05

06

07

08

09

10

11

12

13

14

Source Thomson Datastream

Emerging Asia Economics Weekly 4

Data Preview Indonesia GDP (Q3)

Forecasts
GDP q/q(y/y)

Wed. 5th Nov.

Previous
(+5.1%)

Median
(+5.1%)

Capital Economics
(+5.0%)

Another weak quarter

Indonesias economy has slowed markedly over
the past two years due to a combination of falling
commodity prices, monetary tightening and poor
policymaking. While we doubt growth will slow
much further from here, we dont expect growth
to rebound much either.
Firstly, commodity prices are likely to remain
depressed, which will drag on exports and
investment. Secondly, monetary policy is likely to
remain fairly tight (see Chart 8) amid concern that
rate cuts would cause the current account deficit
to increase. We also think it unlikely that a postelection rise in investor sentiment will trigger a
turnaround. While the new president, Joko
Widodo, offers Indonesia the prospect of a fresh

start, he will have his work cut out. In particular,

he could find it difficult to pass legislation through
a parliament that is controlled by the opposition.
CHART 8: INDONESIA INTEREST RATES (%)
9

9
BI Rate

8
7

4
3

3
CE Forecasts

2
2010

2011

2012

2013

2014

2015

2016

Sources Thomson Datastream, Capital Economics

Data Preview Thailand Policy Rate

Forecasts
Repo Rate

Fasbi

15.30 SGT Wed. 5th Nov.

Previous
2.00%

Median
2.00%

Capital Economics
2.00%

Monetary policy to stay accommodative

The Bank of Thailand (BoT) has held its policy
rate on hold at its current low of 2.0% since
March, and we dont expect any changes at its
meeting this week.
The latest data suggest the Thai economy has
continued to struggle since the end of the political
crisis. For instance, the BoTs private consumption
and investment indices, which tend to move quite
closely with national accounts data, have
remained lacklustre. (See Chart 9.)
Given that inflation is unlikely to emerge as a
major policy concern, the BoT has scope to keep
monetary policy accommodative in the coming
months. We expect the policy rate to remain

unchanged at the current low of 2.0% for some

time yet.
CHART 9: BOT CONSUMPTION & INVESTMENT INDICATORS
(%, 3M Y/Y)
30

12

Investment (LHS)

25

10

Consumption (RHS)

20

15

10

-5

-2

-10

-4

-15

-6
-8

-20
05

06

07

08

09

10

11

12

13

14

Source Thomson Datastream

Emerging Asia Economics Weekly 5

Data Preview Malaysia Policy Rate

Forecasts
Overnight Rate

18.00 SGT Thu. 6th Nov.

Previous

Median

3.25%

3.25%

Capital Economics
3.25%

On hold for now

Concerns over Malaysias growth outlook have
increased recently following a slowdown in
export demand (see Chart 10) and the
announcement of more cuts to government
spending. Given that recent dovish comments
from the central bank (BNM) governor, we expect
rates will be left on hold this week.
While inflation is set to spike on the back of fuel
subsidy cuts that were announced in October and
the planned implementation of the Goods and
Services Tax in April, the BNM governor has
expressed confidence that the second-round
effects of these price increases will not be large.
As such, growth and financial stability risks will
be the key factors influencing future decisions.
Bank loans to households are a concern, as they

have been growing faster than nominal GDP. On

balance, we continue to expect at least one more
25bp rate hike over the next year.
CHART 10: MALAYSIA EXPORTS (%, 3M Y/Y)
40

40

30

30

20

20

10

10

-10

-10

-20

-20

-30

-30
-40

-40
03

04

05

06

07

08

09

10

11

12

13

14

Source Thomson Datastream

Emerging Asia Economics Weekly 6

Emerging Asia Diary

Date

Country
rd

Mon 3

th

Tue 4

th

Wed 5

Release/indicator/event

Time

Time

(SGT)

(GMT)

Aus AiG Performance of Mfg Index (Oct)

06.30

Aus TD Securities Inflation (Oct)

07.30

th

Fri 7

CE Forecast*

22.30

46.5

23.30

+0.1%(+2.2%)

Kor HSBC Manufacturing PMI (Oct)

08.00

00.00

48.8

08.30

00.30

+0.9%

Twn HSBC Manufacturing PMI (Oct)

10.00

02.00

53.3

VN HSBC Manufacturing PMI (Oct)

10.00

02.00

51.7

Idn HSBC Manufacturing PMI (Oct)

11.00

03.00

50.7

Idn Exports (Sep)

12.00

04.00

(+10.6%)

(-1.1%)

(-2.0%)

Idn CPI (Oct)

12.00

04.00

Ind HSBC Manufacturing PMI (Oct)

13.00

05.00

+0.3%(+4.5%) +0.3%(+4.7%)
51.0

(+4.5%)

Tha CPI (Oct)

14.30

06.30

-0.2%(+1.8%)

0.0%(+1.6%)

(+1.7%)

Kor CPI (Oct)

07.00

23.00

-0.1%(+1.1%)

-0.2%(+1.3%)

Aus Trade Balance (Sep)

08.30

00.30

-0.8bn

-1.8bn

Aus Retail Sales (Sep)

08.30

00.30

+0.1%

+0.3%

Aus Interest Rate Announcement

11.30

03.30

2.50%

2.50%

2.50%

Spr Official PMI

21.30

13.30

50.5

NZ Unemployment Rate (Q3)

05.45

21.45

5.6%

5.5%

5.5%

05.45

21.45

Twn CPI (Oct)

08.30

00.30

(+0.7%)

(+1.2%)

(+1.3%)

Php CPI (Oct)

09.00

01.00

+0.1%(+4.4%)

(+4.2%)

(+4.3%)

Ind HSBC Services PMI (Oct)

13.00

05.00

51.6

Ind HSBC Composite PMI (Oct)

13.00

05.00

51.8

Tha Interest Rate Announcement

15.30

07.30

2.00%

2.00%

2.00%

q/q(y/y)

Idn GDP (Q3)

th

Median*

Aus ANZ Job Advertisements (Oct)

NZ Employment Change (Q3)

Thu 6

Previous*

q/q(y/y)

+0.4%(+3.7%) +0.6%(+3.0%)

+2.5%(+5.1%) +3.0%(+5.1%)

NZ QV House Prices (Oct)

07.00

23.00

(+6.4%)

(+5.0%)
-

Aus Employment Change (Oct)

08.30

00.30

-29,700

+10,000

+20,000

Aus Unemployment Rate (Oct)

08.30

00.30

6.1%

6.1%

6.1%

Tha Consumer Confidence (Oct)

11.30

03.30

79.2

Mly Interest Rate Announcement

18.00

10.00

3.25%

3.25%

3.25%

Mly Exports (Sep)

12.01

04.01

(+1.7%)

(+2.3%)

(+2.0%)

Twn Exports (Oct)

16.00

08.00

(+4.7%)

(+5.9%)

(+6.0%)

(+7.7%)

(+6.3%)

Released during the period:

rd

3 -7

th

Pak CPI (Oct)

*m/m(y/y) unless otherwise stated; = previous day

KEY FORTHCOMING EVENTS/DATA

th

th

10 25 Nov Sri Lanka Interest Rate Announcement

th

13 Nov

th

17 Nov

th

Korea Interest Rate Announcement

24 26 Nov

th

Indonesia Interest Rate Announcement

24 28 Nov

13 Nov
13 Nov
th

New Zealand Business Manufacturing PMI (Oct)

th

14 Nov

th

13 20 Nov Pakistan Interest Rate Announcement

Malaysia GDP (Q3)

Thailand GDP (Q3)

th

th

Singapore GDP (Q3)

th

th

Philippines Budget Balance (Oct)

th

27 Nov

Philippines GDP (Q3)

Emerging Asia Economics Weekly 7

Selected Recent Publications

Date

Publication
th

Mon 27

Tue 28

th

th

Wed 29

Thu 30

Fri 31

st

th

Title

Capital Daily

Brazils markets wait on election result

Bank of Japan Watch

Lower energy prices another reason to ease more

Latin America Economics Update

Dilma scrapes home, quashing hopes of policy shift in Brazil

China Activity Monitor

Chinas growth remains on a downward path

Emerging Europe Update

Ukraine: encouraging election doesnt end political crisis

European Economics Update

Euro-zone Monetary Indicators Monitor (Sep.)

Middle East Economics Update

Tunisia election: return to political stability to support growth

Global Economics Update

How big is the economic threat from Ebola?

Africa Markets Monitor

South Africa outperforms struggling SSA markets

Canada Economics Outlook

Lower oil price adds to risks

Capital Daily

Ebola fears understandable, but global risks still appear small

Emerging Europe Update

Ruble crisis points to larger-than-expected rate hikes

Middle East Economics Update

Saudi Arabia: weakness in oil sector set to continue

Latin America Chart Book

Markets suffer as Brazil elections deliver more of the same

China Economics Update

Imports as well as exports look suspicious

Emerging Asia Chart Book

No sign of improvement

Emerging Markets Market Valuation Monitor

Low valuations should help to support EM equities

Capital Daily

Fed to end asset purchases, but likely to retain dovish rate guidance

Emerging Europe Update

Oil price slump raises deflation danger

Emerging Markets Economics Update

The end of QE and what it means for emerging markets

Latin America Economics Update

Chiles economy slowed further in Q3

Global Monetary Indicators Monitor

Monetary conditions set to remain loose

US Economics Update

Fed halts QE3 and takes slightly more hawkish stance

Capital Daily

US economy continuing to leave euro-zone far behind

China Chart Book

Bank lending under pressure from new deposit rules

Latin America Economics Update

Brazils central bank tries to claw back lost credibility

Middle East Chart Book

Little reaction in the Gulf to fall in oil prices

Emerging Europe Markets Monitor

Ruble crisis pushes central bank towards heavy FX intervention

Africa Chart Book

Slower inflation might delay, but not prevent, rate hikes

Latin America Economics Update

Lower oil prices wont derail the Mexican economy

Emerging Markets Activity Monitor

EM growth sinks further on BRICs weakness

US Employment Report Preview

Going from strength to strength

Global Central Bank Watch

Recent market turmoil to have mixed impact on monetary policy

Emerging Europe Focus

Five challenges for Romanias next president

ECB Watch

Political pressure keeping lid on QE for now

UK MPC Watch

Case for inaction remains robust

Capital Daily

Fed still on track to raise rates sooner than most expect

UK Economics Weekly

European Economics Weekly

Japan Economics Weekly

Emerging Asia Economics Weekly

How much slack is left in the NIEs?

US Economics Weekly

Canada Economics Weekly

For copies of any of these reports, please call +44 (0)20 7823 5000 or e-mail publications@capitaleconomics.com

Emerging Asia Economics Weekly 8