Japan PM calls snap election, delays sales tax hike

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Japanese Prime Minister Shinzo Abe called a snap election on Tuesday, and announced a delay in the second sales tax hike by 18 months after the country fell into recession.

The move comes after growth numbers on Monday showed the world’s third-largest economy shrunk by an annualized 1.6 percent in the third quarter after a 7.3 percent contraction in the second quarter, shocking the markets.

“I have decided not to raise the consumption tax to 10 percent next October and I have decided to delay a consumption tax hike for 18 months,” Abe said at a press conference.

Japan has suffered since the first consumption tax hike from 5 to 8 percent in April. Abe said the rise in the sales tax “acted as a heavy weight and offset a rise in consumption”. A second consumption tax hike was set for October 2015 which would have seen a 2 percent increase to 10 percent.

Snap elections

Abe also said the lower house of parliament would be dissolved on November 21 and an election would be called in a move to strengthen his mandate for “Abenomics” – his set of economic policies.

Read More: Why the global economy could be in trouble (again)

The Japanese Prime Minister admitted that it will be a “difficult election” but said he wanted the public to back his package of reforms.

“There are differing opinions on the structural reforms we have proposed and I have decided that I need to hear the voice of the Japanese public on whether or not we should go forward with these reforms,” Abe said.

The Nikkei closed up 2.18 percent in anticipation of Abe’s announcement, while the yen strengthened against the dollar hitting USD 116.49 by mid-morning following the news.

‘Monumental task’

Analysts said the delay in a consumption tax increase would do little to foster economic growth.

Read More: Dollar-yen rally stalls: What next?

“The reality is that PM Abe faces a monumental task to try to engineer a sustainable upturn in Japanese economic growth. The Japanese economic outlook remains bleak, faced with the highest government debt to GDP (gross domestic product) ratio in the OECD, ageing demographics and a declining population,” Rajiv Biswas, Asia-Pacific chief economist at IHS, told CNBC via email.

“While deferring the next sales tax hike will help to stabilize the economy, Japan faces a difficult fiscal outlook and will be unable to stabilize its government debt to GDP ratio without some further fiscal reforms.”

‘Clear the decks’

Abe’s Liberal Democratic Party (LDP) holds over 60 percent of the seats in the lower house of the Japanese Parliament, but has faced public opposition to the consumption tax.

Read More: Japan snap election: a sign Abenomics is crumbling?

The LDP is likely to come out on top in the next elections, according to analysts, since opposition parties remain divided – but his move remains a gamble.

“He will almost certainly win this election but hew question will be how many seats the LDP is likely to lose,” John Swenson-Wright, head of the Asia progam at Chatham House, told CNBC by phone.

“On balance they will probably do okay in the election and get enough seat to stay in power and that will then clear the decks for Abe to move forward with economic issues as well as other policies.”

– By CNBC’s Arjun Kharpal

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‘New Silk Road’ highlights China’s two-speed reform

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China`s dream to revive a 2,000-year old trade route is emblematic of the country`s two-speed reform process, according to Barclays.

The legendary Silk Road, named after the lucrative Chinese silk business, spanned three continents until the end of the 14th century. Now, China is spearheading an effort to recreate those trade networks in a project called The New Silk Road.

Comprised of a land-based Economic Belt that will snake through Central and West Asia and a Maritime Silk Road that will link South Asian ports, the initiative is one of many plans to open up China`s economy and exercise its influence on the global agenda. Other examples include the recently-launched Stock Connect program and the BRICS-focused New Development Bank.

“The fast progress in these regional initiatives compared with the relatively slow motion in domestic reforms highlights the contrasting economic circumstances facing China domestically and abroad,” said Jian Chang, chief China economist at Barclays, in a report.

As Beijing experiences its slowest pace of growth in five years, experts complain that officials aren`t doing enough to speed up structural reforms that are desperately needed to transition the economy away from exports. These include social measures such as boosting job creation to fiscal programs like tax relief for small and medium-sized enterprises (SMEs).

Chang calls the current stage of domestic reforms “a zero-sum game,” due to resistance from vested interests amid the anti-corruption drive and ideological divides.

A delicate balancing act

The New Silk Road is set offer a raft of business deals in the infrastructure and manufacturing sectors and the way officials deal between state and private sectors in this process will be crucial for reforms, according to Barclays.

“Unless carefully regulated, government-led global initiatives [such as the New Silk Road] could strengthen the role of the state sector, but we believe they should encourage a level playing field and support private enterprises,” the report said.

Indeed, state-owned enterprises (SOEs) are widely expected to receive the most opportunities, judging by the deals announced thus far. China National Petroleum Corporation (CNPC) is leading the construction of a Central Asian gas pipeline, while China Communications Construction Company (CCCC) is building various ports throughout the Indo-Pacific region.

The projects involve central planning so a large share of the pie will be awarded to SOEs with experience in building infrastructure, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

Global investors await a major overhaul of Chinese SOEs, widely regarded as the most critical reform area, after President Xi called for measures to improve their efficiency and profitability in 2013.

However, Kowalczyk says the New Silk Road is unlikely to impact SOE reform.

On the bright side, he expects it to increase internationalization of the renminbi.

Most of the funding for business deals is expected to come from two financial mechanisms: A USD 40 billion New Silk Road fund and a USD 50 billion Asian Infrastructure Investment Bank (AIIB), both spearheaded by China this year.

It`s possible that loans from these facilities will be denominated in renminbi, Kowalczyk said. “Expanding credit to foreign-based projects should definitely boost general acceptance of the currency in those countries.”

Copyright 2011 cnbc.com

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Are things looking up for China’s property?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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China`s home prices posted a second consecutive annual drop in October, although monthly figures showed an improving sequential trend.

New home prices fell 2.6 percent in October from the year-ago period, after dropping an annual 1.3 percent in September, according to Reuters calculations of official data released by the National Bureau of Statistics Tuesday.

On-month, prices fell 0.8 percent, their sixth straight fall. But the extent of the declines appears to be easing: prices fell a monthly 1 percent in September after the 1.1 percent fall in August.

Shares of developers fell on the news, weighing on the Shanghai Composite, which traded 0.4 percent lower Tuesday.

Economists have cited a property bubble as the biggest risk to China`s economy. The sector contributes more than 15 percent to the world`s second-largest economy and impacts more than 40 other sectors from cement to furniture.

Chinese authorities have introduced a slew of measures in response, most recently loosening mortgage restrictions by easing the qualification criteria for first-time buyers and relaxing loan terms for existing homeowners.

Second-tier cities going strong

According to Alan Jin, property analyst at Mizuho Securities, the sector is still sluggish but there are bright spots.

“It`s a correction. It`s definitely not a crash. A lot of people feel it`s a difficult year for Chinese property but volumes are actually at the second highest, last year was the peak. In China, there are a lot of replacement demand for older buildings to new, modern demands. That demand has been very robust,” said Jin.

His view is backed by Singapore-based property developer Capitaland, which has about 40 percent exposure to the Chinese market.

Group CFO Arthur Lang told CNBC that while there`s evidence of a slowdown in first-tier cities like Beijing and Shanghai, the story is markedly different on the provincial level.

“When you go to other cities like the second-tier cities, there`s a very high supply of inventory that`s left unsold. So from the on-the-ground presence… we are seeing a lot of differentiation and so we have to position ourselves properly,” Lang said.

Lang also sees recovery in sight for the bigger cities, where “fundamental” demand remains.

“China is still urbanizing. Even within the [bigger] cities, you also have buildings that are very old and households are still upgrading themselves. This is the first-time buyer market and upgrader market,” he said.

Falling prices not that bad a thing

Analysts add that falling prices may not be a bad thing, especially if it helps to spur demand. While Michael Klibaner, regional director at Jones Lang Laselle, expects “the downturn in prices to remain in place for some time,” he says what matters more to the broader economy are transaction volumes which are improving.

“If discounts bring first time home buyers into the showroom, then it`s a good thing – price declines can improve affordability. [Since] firm action taken by policymakers end-September with respect to mortgage availability and policy, we have seen a significant increase in transaction volumes month-on-month and we see that as a crucial indicator of market health,” Klibaner said.

To be sure, it could be some time before China`s property market recovers fully and Mizuho`s Jin sees further developer defaults in the near term as the sector works through excess inventory and rising leverage.

“I think that`s a common concern. It`s a crowded market; there are too many developers. But with 80,000 developers in the country, if smaller developers go bankrupt, that`s totally reasonable,” Jin said.

Copyright 2011 cnbc.com

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Why the global economy could be in trouble, again!

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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It might be seven years since the first signs that the world was about to go into crisis mode, but we’re not home and dry yet. In fact, recent cheers at nascent signs of a global economic recovery now look somewhat premature, analysts and politicians warn.

Fears of a setback were heightened on Monday following some surprise news from Japan: the world’s third-largest economy fell into recession after gross domestic product (GDP) shrank in the third quarter.

It came as British Prime Minister David Cameron warned that the global economy was showing worrying signs of wobble. Meanwhile, at the G-20 summit over the weekend, OECD Chief Economist Catherine Mann told CNBC the global economy should be growing at a much faster pace.

Read More UK PM warns on second global crash

Here, CNBC takes a look at some of the biggest economic pressure points:

Japan woes

Data published on Monday revealed that Japan’s economy contracted an annualized 1.6 percent in the July-September quarter, way below a Reuters forecast of a 2.1 percent gain.
The figures mean Japan is now back in a technical recession, after contracting a revised 7.3 percent in the second quarter following a hike in a controversial sales tax.

Read More Japan shocks as economy slips into recession

As a result, analysts now expect Japan’s Prime Minister Shinzo Abe to delay another planned rise in the levy – an austerity measure – until 2017, and maybe even call a snap election.

But it’s not all bad news for Japan, with Takuji Aida, chief economist at Societe Generale, saying that as delay to the sales tax hike would be bullish for the economy’s outlook.

“With the second consumption tax delayed, uncertainty over the economy will decrease and growth and inflation expectations will rise, leading to stronger corporate activity,” Aida said in a note.

Oil at lows

The news from Japan – which is the world’s fourth-biggest crude importer – put yet more pressure on oil prices, which have fallen dramatically in recent months. On Monday, Brent crude fell close to USD 78 a barrel.

Read More Cracks widen at OPEC as oil prices tumble

The fall below USD 80 has rattled nerves within the Organization of the Petroleum Exporting Countries (OPEC), amid calls for concrete action from the group, with both Kuwait and Iran raising concerns about the lows. This after the International Energy Agency (IEA), warned last week that weak demand, a strong dollar and booming US oil production meant “we have begun a new chapter in the history of the oil markets.”

“Investors are becoming reluctant to try and pick the bottom now, as are consumers, many of whom are holding off to see what OPEC does,” Investec Capital Markets analysts said in a note.

Low oil prices are something of a double-edged sword for the global economy: On the one hand helping to boost GDP, but on the other putting downward pressure on inflation. Price growth remains worryingly low in Europe and the UK and there are some concerns in the US, where long-term inflation expectations fell to financial crisis levels, according to the University of Michigan consumer sentiment survey on Friday.

Euro zone stagnation

Growth-sapping low inflation is particularly concerning in the euro zone, where prices grew by just 0.4 percent in October. The region is also battling high unemployment, which remained stuck at 11.5 percent in September.

There might have been some good news over recent days – with figures on Friday showing the euro zone’s economy grew more than expected, and data on Monday revealing that the trade surplus jumped to a record 17.7 billion euros (USD 22.1 billion) in September – but serious concerns about the region remain.

Despite beating forecasts, the 18-country bloc that uses the euro grew by just 0.2 percent on the previous quarter – a pretty flat figure.

“Overall, the Q3 picture was a touch better than feared,” Daiwa Capital Markets analysts said in a not. “But there seems little reason to expect the euro area recovery to progress much further in the near term unless the ECB (European Central Bank) and governments do more for growth.”

Read More ECB’s Draghi: Buying sovereign bonds is an option

Pressure remains on ECB President Mario Draghi to do more. The central bank has already launched a slew of stimulus measures to reverse disinflation – and a number of experts are now calling for a US Federal Reserve-style bond-buying program.

On Monday, Draghi reiterated that he was willing to do more to stimulate the euro zone economy if necessary, adding that such additional measures could include the purchase of sovereign bonds.

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Why a Santa rally might not be on the cards

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Many traders expect stocks to rally into the year-end, but the current complacency may be signaling that a late year Santa rally is not in the cards.

If the S&P 500 closes higher Tuesday, it will be the 43rd record high of the year. Stocks traded quietly on low volume Monday, with the Dow up just 13 points at 17,647 and the S&P 500 up 1 point at a record 2,041. The Nasdaq fell 17 points to 4,671, and the Russell 2000 was the worst performer—own 0.8 percent to 1,164.

“We’re a little concerned by the fact that investors’ memories have become so short that volatility has just completely collapsed to multiyear lows a month away from an incredibly frightening roller-coaster ride. The bearish readings have slipped,” said Julian Emanuel, equity strategist at UBS. “A lot of people expect the year to end on a high note.”

Emanuel said he had expected a rally into year-end but the market’s recent behavior is making him more cautious. “I personally have never seen volatility get crunched like this so early before Thanksgiving. It usually happens at the end of December or in August,” he said.

Emanuel said he watches the 10-day realized volatility for the S&P 500, a reading of the close to close changes in the S&P over a 10-day period. It was at 3.38 Monday. “It’s extraordinary. The 200-day moving average is 10.8,” he said. “The range over the last two weeks have been the lowest they’ve been in aggregate in over five years.”

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According to Emanuel, the reading may not be signaling a selloff but rather just limited gains.

“The market to us just feels like upside, rather than a setback. It feels like the upside is capped because you have this combination of low volatility and very complacent sentiment, and Japan tells you the problems are still out there,” he said.

Stocks were boosted by big merger deals Monday but also held in check by the surprise news that Japan has fallen into recession, he said. Allergan is being acquired by Actavis for USD 66 billion, and Baker Hughes reached a USD 35 billion merger deal with Halliburton.

“If you look at the M&A announcements, it’s very healthy. If you look at the activity in the healthcare sector, that sector has the most cash along with technology and they are going to be spending it,” he said.

Read More ‘Major correction’ in 3 to 5 years, Icahn says

More energy deals are also expected as oil prices continue to weaken. West Texas Intermediate crude closed at USD 75.64 per barrel Monday, off 18 cents. Natural gas, meanwhile, jumped 8 percent on cold weather to USD 4.34 per million BTUs.

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Euro zone growth momentum has weakened: Draghi

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The euro zone’s economic growth has weakened over the summer months, European Central Bank (ECB) President Mario Draghi told European lawmakers Monday, but stressed that he was willing to do more to stimulate the economy if required.

Speaking at the European Union’s Parliament, Draghi also said there were early indications that efforts to ease credit conditions were working.

“We see early indications that our credit-easing package is delivering tangible benefits. Since the beginning of June forward money market rates have shown steep declines across the security spectrum,” he said.

Read More Why the global economy could be in trouble (again)

The bank’s governing council remained “unanimous in its commitment to using additional unconventional instruments if needed”, Draghi added.

His comments come after official figures showed the euro zone’s economy grew more than expected in the third quarter, giving investors cause to breathe a sigh of relief after a string of disappointing data points for the region. The 18-country bloc that uses the euro grew by just 0.2 percent on the previous quarter, data published Friday showed.

Euro zone GDP beats, Greece emerges from recession

But concerns about the health of the region’s economy remain. The region is battling high unemployment and growth-sapping low inflation is particularly worrying, with price growth of just 0.4 percent in October.

“We need to remain alert to possible downside risks to our outlook for inflation,” Draghi added on Monday.

The central bank has already launched a slew of stimulus measures in an effort to boost the economy by easing credit conditions. These include cutting interest rates to record lows and announcing plans to purchase covered bonds and asset-backed securities (ABS) – and there are calls for the ECB to do more.

Read More UK PM warns on second global crash

Draghi on Monday said that more measures, “could include changes to the size and composition to the Eurosystem balance sheet, if warranted, to achieve price stability over the medium term.”

Structural reform needed

The central bank president went on to push governments to commit to “concrete short-term commitments for structural reforms” and that monetary policy alone is not enough to encourage growth.

Draghi said next year, governments and European institutions had to work together to strengthen the region’s economy.

“This is why there is an urgent need to agree on concrete short-term commitments for structural reforms in the member states… and to launch work on a long-term vision to further share sovereignty ensuring the sustainable and smooth functioning of the European Union,” he said.

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Fed is looking at sharply rising labour costs

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In the first three quarters of this year, hourly compensations in the US nonfarm business sector rose at a rate of 3.1 percent, about three times the pace of advance observed in 2013. Over the same period, unit labor costs accelerated to an annual rate of 2.1 percent from 0.25 percent. [Unit labour costs are a difference between wages and labor productivity. They are usually thought of as a floor below the country’s inflation rate.]

This sharply rising price of labour since the beginning of the year is caused by an increasing demand for labour services, as the jobless rate declined by nearly a full percentage point and the number of unemployed fell by 1.2 million.

Will this evidence move the Fed to begin its process of “normalizing” interest rates?

It should. But if that is not enough, here are a few more issues to show that the U.S. monetary policy may soon have to begin its long journey toward a neutral position.

Read More Fed’s Dudley: Still too early to raise rates

The first thing to note is that a sustained increase in hourly compensations is signaling rising demand-supply imbalances in US labour markets. Since last August, for example, the recorded unemployment rate has been steadily moving below its structural level of 6.1 percent, reaching 5.8 percent in October.

That structural unemployment rate is based on the long-term trend growth of the economy (aka “potential growth rate”). Its more complicated technical names are “non-accelerating inflation rate of unemployment (NAIRU)” and a “full employment unemployment rate.”

Hitting the speed limits?

Put more simply, October’s 5.8 percent unemployment rate implies that the U.S. economy is operating above its non-inflationary potential, and that it is beginning to hit its physical limits (in terms of labor and capital) to growth.

It certainly looks that way. America’s 2.3 percent economic growth in the first three quarters of this year is 0.4 percentage point above the potential growth rate of 1.9 percent estimated during the post-crisis period from 2009 to (and including) 2013.

Capacity strains in the US economy look much stronger if the growth potential is approximated as a sum of growth rates of labor supply and labor productivity over the same five-year period. That gives a potential growth rate of 1.56 percent and indicates that the US economy is now running 0.74 percentage point (2.3-1.56) above its non-inflationary growth capacity.

Now, one can quibble – and many people do – about the various estimates of the potential growth rate of the US economy. It is, however, difficult to argue with the fact that a steady increase in the US labour demand has been pushing up wage costs in the first nine months of this year. The numbers for that period show that the labor productivity growth doubled from the same interval of 2013, but that still could not prevent accelerating unit labor costs.

What lies ahead?

Riding on growing jobs and incomes, and easy credit conditions, the US economy is poised to maintain its forward momentum in the coming months. Under these circumstances, businesses will have little difficulty in passing their rising labor costs on to consumers to protect their profit margins.

Read More Fed’s Kocherlakota repeats 2015 rate hike would be inappropriate

I am sure the Fed is well aware of these risks to price stability.

The problem, as always, is to act in time to prevent rising inflation expectations when – as is the case now — the headline inflation indicators still look relatively well behaved.

Fed’s speed: How fast from 0.08% to 4%?

But the Fed cannot stay put until signs of gathering price pressures can no longer be ignored. If it did that, the Fed would quickly find itself well behind the curve and unable to avoid the next round of the inflation-recession cycle.

The reason is simple: Fed’s actions are subject to long and variable lags, because it can take anywhere from three to five quarters for interest rate changes to begin affecting the real economy.

And here is the first stretch of the distance the Fed’s policy change will have to travel.
At the close of trading last Friday, the effective federal funds rate was at 0.08 percent, roughly what it was a year ago, and well below the official target of 0.25 percent. Making a heroic assumption that the US inflation will remain at about 2 percent for the foreseeable future, the Fed would have to bring the federal funds rate close to 4 percent – just to keep its policy stance neutral, i.e., neither tight nor loose.

So, how soon will the Fed begin to move in that direction?

I believe the first steps could come much sooner than the middle or latter half of next year the markets currently expect.

Read More Economics no longer make Keystone pipeline viable

As I wrote in an earlier column, last August marked a turning point in the Fed’s money supply decisions. Since then, the monetary base shrank by $203.9 billion (that is 25 percent of the Fed’s pre-crisis balance sheet), and its current annual growth has been cut to 5 percent from 19 percent during the third quarter.

That was a quick piece of work.

Investment thoughts

Accelerating unit labor costs is a signal the Fed is unlikely to ignore. Rapid and large withdrawals of excess liquidity are also a sign that the Fed is acting more decisively than aficionados of the “forward guidance” seem to be expecting.

Fixed-income assets remain crossed out in my book. At this point, a careful review of equity portfolios would be a good idea. Prospects of a tightening monetary policy always suggest defensive investment postures.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

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Why oil is more likely to test $50 than $100 again next yr

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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When oil and gasoline prices are soaring, oil analysts like myself try to assuage the fears of consumers with the old saw: There is no better cure for high prices than high prices.

The succinct analysis of commodity market dynamics likely makes motorists irate, as they pay USD 100 or more to fill up the family SUV. They fail to appreciate how efficient market forces can be, even at that particular moment of pain.

However, that is precisely why oil prices are falling now—and will likely continue to fall in the coming months to as low as USD 50 per barrel!

On Thursday, in its weekly inventory report, the US Department of Energy reported that oil production in the United States rose to its highest level in 29 years to just over 9 million barrels per day. To put that in perspective, the US is now nipping at Saudi Arabia’s heels, with that country currently producing about 9.6 million barrels per day.

The surge in US oil production is due to the immense success of a reborn technology: hydraulic fracturing (better known as fracking), which has liberated millions of barrels of oil and millions of cubic feet of natural gas from fields that were thought to be bereft of fossil fuels.

Opponents of the practice have their work cut for them given the tremendous impact the drilling is having on oil and natural gas prices.

Read More: Saudi America? Close…but no cigar: Analysts

The second part of the low oil price story involves several key pipeline upgrades that actually changed the flow of oil, bringing it from the middle of the country to the Gulf Coast, where it is needed to supply the majority of the country’s refineries.

The changes have been so impactful that, at times, Gulf Coast storage facilities have been nearly filled to capacity. The U.S. has virtually ended imports of crude oil from West African countries, such as Nigeria, which used to be a key source of supply.

Read More: US oil output booms—now refiners have to catch up

OPEC members are now scrambling to prop up oil prices, and find buyers for their oil. During the past several months, tankers of oil have sat idling, waiting to sail to port to unload their cargo. Saudi Arabia, Kuwait and Iran are in a battle to secure sales to China and other Asian buyers at the expense of other countries in the cartel.

It is not helping their cause that Alaska North Slope crude oil is now being exported to South Korea on a regular basis now. That started in September.

Adding to the supply glut has been the return of Libya’s oil production, despite a raging civil war with two competing governments asserting governance over the country. Also, even as ISIS forces roll through Iraq, exports continue to rise to record post-Iraq war levels.

Read More: Oil prices collapse as OPEC stands back, while US booms

The Kurds were finally able to strike a deal with Baghdad that will allow exports from Northern Iraq to surge, as well, in the coming months. If that’s not enough, North Sea production is set to rise over 11 percent in December, due to upgrades to the system there.

In other words, increasing amounts of crude oil are hitting the global market, left, right, and center.

Several OPEC members are now calling for a production cut to be announced at their upcoming meeting, but they are looking for Saudi Arabia to carry the load, which is not going to happen. Based upon bewildering statements by the Saudi oil minister this week, the Saudis do not appear inclined to cut.

Read More: Saudi minister: It’s all ‘misunderstanding,’ no ‘price war’ talk

Market share is more important to them because they want to maintain their relevance. With their low cost of production, they believe they can sweat out the higher-cost competition, including U.S. frackers.

So, the OPEC meeting on Thanksgiving Day will likely end in discord and cause another leg lower for oil prices.

By next March, US oil production will be nearing the 9.5 million barrel per day level, and possibly higher. With the winter coming to an end then, the global market enters a slack demand period, which will increase the downward pressure on prices.

Oil producers of all stripes will be staring down prices near the USD 50 level. Russia’s President Putin is already preparing for a “catastrophic” oil price drop.

Something will have to give. Saudi Arabia and other OPEC members will be forced to curtail production or US oil producers will have to throw in the towel as they await a price rebound. The US needs to be careful what it wishes for, in terms of setting back the march toward energy independence.

The surging production trends will have consequences, in addition to the huge benefit to consumers. After all, as the saying goes, there is no better cure for low prices than low prices.

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Can Asia’s pricey consumer plays keep rising?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Asia consumer stocks appear expensive, but some analysts think they can rise further, getting a boost from falling commodity prices.

“Food prices have fallen very sharply over the last couple of months. The market may have actually ignored this because people are focusing on oil prices,” Nirgunan Tiruchelvam, director for Southeast Asia consumer research at Standard Chartered, told CNBC.

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For example, corn and soybean prices are down around 26-30 percent from their peaks this year, with many agricultural commodities priced at five-year lows, with the declines far outstripping the US dollar’s recent strength against regional currencies, he noted.

“This has a very important impact on the operating margins of the F&B (food and beverage) companies in Southeast Asia because their principal products are priced as consumer products but their raw materials are priced as commodities,” he said. “There could be a very high chance of an earnings surprise for a number of these companies.”

Many analysts have recently given regional consumer stocks the cold shoulder recently, citing high valuations and doubts about whether the rising middle class will step up spending quite as quickly as expected.

EGShares Emerging Markets Consumer (ECON), for example, is trading at more than 22 times earnings, while trading essentially flat with its level two years ago.

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Others are also bullish on Asia’s consumers.

“The Asian consumer growth story is far from over,” Capital Economics said in a note Wednesday, noting emerging Asia’s consumer spending has grown by an average of just over 7 percent every year since 2000.

But it doesn’t believe all Asian consumer markets will be created equal.

“Prospects are best in the Philippines and India, where strong income growth should continue to support rapid consumer spending growth. Consumers in Vietnam and China should also do well,” it said. “By comparison, consumer spending growth will be more sluggish in economies with high household debt, like Thailand, and those where income growth is likely to be sluggish, such as Taiwan and Korea.”

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Tiruchelvam, however, expects Thailand’s consumers could continue increasing their spending, at least on food and especially meat, with increased refrigerator penetration. Around 73 percent of Thai households with electricity have a refrigerator, according to Standard Chartered data. Within Southeast Asia, fridge penetration may grow by 50 percent over the next five years, Standard Chartered forecast in a July report.

To be sure, some expect Asia’s consumption growth will be sluggish.

“The continued headwinds from deleveraging in the developed world have meant that domestic demand growth in developed markets has been relatively weak since the crisis, which in turn has weighed on the region’s export growth trend,” Morgan Stanley said in a note last week.

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That’s weighed on corporate sales and investment, slowing wage growth, Morgan Stanley said.

“There are risks of a formation of a loop of slower domestic demand growth, weaker inflation, higher real interest rates and debt servicing burden, downward pressures on asset prices, continued rise in nonperforming loans formation and further slowdown in aggregate demand,” it said.

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China industrial production up 7.7%, below view

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

Listen to the Article (6 Minutes)

A slew of data out of China on Thursday suggested continued slack in the world`s second largest economy, which looks on track to undershoot the government`s annual 7.5 percent growth target, say economists.

Chinese industrial production and retail sales data missed expectations in October, extending a trend of below-view indicators amid a backdrop of slowing growth.

Industrial production rose 7.7 percent on year in October, below expectations for an 8 percent increase in a Reuters poll. Meanwhile, retail sales rose 11.5 percent on year, slightly below expectations for an 11.6 percent rise.

Fixed asset investment for the January-October period increased 15.9 percent, in line with expectations.

“The data confirm the domestic side of the economy is quite weak,” Alaistair Chan, economist at Moody`s Analytics told CNBC, noting that most of the downturn continues to be driven by the housing sector.

A breakdown of the industrial production data shows that businesses linked to the housing market, including cement, iron and glass, are doing poorly, Chan said.

“We were looking for a small bounce in growth in the fourth quarter but that may not happen anymore, considering the government seems willing to see the slowdown play out without much stimulus,” he said.

China`s economy slowed to 7.3 percent in the third quarter, its weakest rate since the first quarter of 2009.

Shen Jian Guang, Greater China Chief Economist at Mizuho Securities Asia agrees the property sector remains the main drag on the economy.

“[It`s] the main source of weakening in the economy. That`s why the PBoC (People`s Bank of China) has injected the money and asked the banks to reduce mortgage rate and support first-time home buyers. I think the strategy is to make the housing market recover and [let it] compensate for the decline in manufacturing and infrastructure investments.”

Blame APEC

Other economists say the Asia-Pacific Economic Cooperation (APEC) summit in Beijing, held from November 5-11, is primarily to blame for the softer economic data.

“The APEC summit [had] a negative impact on China`s activities as the government took aggressive measures before and during the summit to achieve a blue sky,” said Ting Lu, chief China economist at Bank of America Merrill Lynch.

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“These measures involve suspending many industrial and construction activities in and around Beijing,” he said.

November will be affected by the APEC summit as well, said Lu, but there will be a rebound in December.

“We expect more easing measures in coming weeks partially in response to the weak data in November, but Beijing won`t over-react,” he said.

Copyright 2011 cnbc.com

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