Asia outgrows Japanese economy
By Rajat Bhattacharya
SINGAPORE (Reuters) – For the first time in more than three
decades Japan’s economy, the world’s second largest, is set to
be surpassed in size by the rest of Asia.
That milestone, says Lehman Brothers economist Robert
Subbaraman, signals the arrival of the Asian consumer as a key
growth driver and probably marks the turning point for Asia’s
export-led economic model.
While only a small number of Asia’s more than 3 billion
people are moving up to middle-class income levels, analysts
say the numbers are growing faster than any other region
worldwide, fuelling a consumption boom.
“A sea change is happening in terms of growth of the middle
class in Asia,” said Yuwa Hedrick-Wong, economic adviser to
Mastercard International which tracks consumer trends in Asia.
“More and more people are shifting from consumption for
basic necessities to discretionary consumption — like taking a
holiday abroad, going out to restaurants, visiting malls.”
Hedrick-Wong describes the Asian middle class as those who
earn more than $5,000 per year. As many as 80 million people in
China, 15 million in Thailand, 12 million each in India and
Indonesia, 9 million in Malaysia and 6 million in the
Philippines make the grade by that measure.
Another 200 million or so in India now have annual income
above $1,500 and they are buying shampoos, toothpaste, bicycles
and other basic consumer goods.
In China, an economic census found the country had
under-reported its booming services industries and GDP was 16.8
percent larger than previous estimates in 2004 — setting China
on course to become the world’s fourth-largest economy in 2005.
Lehman Brothers calculated the rest of Asia including India
will exceed Japan’s nominal gross domestic product, converted
into dollars, in 2005. According to Reuters calculations based
on International Monetary Fund data, this has not happened
since the late 1960s.
Goldman Sachs says the implications of this will be felt as
soon as next year, saying in a report that even if the U.S.
economy slows, Asian consumers are likely to pick up the slack
and help Asia, excluding Japan, grow 7.5 percent in 2006,
compared with 4.1 percent worldwide.
The Asian consumption upturn could still hit a roadblock if
oil prices stay around current levels or if birdflu escalates
into a pandemic. But for now, signs abound that the
traditionally high-saving Asian consumers have loosened their
“Consumption to GDP ratios are generally low in emerging
Asia — the flip side of high gross domestic saving rates,”
“As countries develop they should become less heavy
investment-based and more consumption-based.”
The “tiger” economies of South Korea, Taiwan, Singapore and
Hong Kong relied on exports to become some of the world’s
richest nations, emulating Japan’s success story following
World War Two.
The 210 million people in those five economies now form the
core of Asia’s middle class.
South Korea’s finance ministry has forecast growth in
private consumption of 4.5 percent in 2006, after it rebounded
by 3.1 percent in 2005 from a 0.5 percent contraction in 2004.
“For North Asia, Korea is the prime candidate to see
consumption-led demand in 2006, given the turnaround of
domestic spending,” said ABN AMRO Bank economist Irene Cheung.
“China is another one, in line with the government’s policy
to rebalance the growth driver of the economy from investment
and exports to consumption.”
And Asia’s emerging middle class is increasingly prepared
to pare savings and take on debt to buy what used to be
luxuries — cars, televisions, refrigerators and washing
Lehman Brothers estimates the share of household credit out
of total loans outstanding in South East and North Asia,
excluding Japan, has risen to 27 percent from 18 percent in
Consumers are not just spending at home. Almost 29 million
Chinese travelled overseas in 2004 creating new jobs and
fuelling local economies. China, Asia’s largest source of
tourists, expects that number to grow to 50 million by 2010.
Meanwhile, Asian central banks are taking a pro-consumption
stance despite inflationary pressures.
Goldman Sachs said they were unlikely to raise rates in
2006 anywhere as aggressively as the U.S. Federal Reserve
because they will allow stronger currencies to curb imported
“We think the case is building for Asia to become a more
independent source of growth for the global economy,” Goldman
economists Sun-Bae Kim and Adam Le Mesurier said in a note.