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Shipping containers and trucks at the Port of Los Angeles in San Pedro, California, on November 17. Port congestion has led to shortages and US inventories remain low and in need of replenishing. Photo: AFP
Opinion
Macroscope
by Wai Ho Leong
Macroscope
by Wai Ho Leong

How Asia can ride the return in US demand to more solid growth

  • US companies are expected to invest strongly in plant and equipment amid record low inventories as semiconductor demand and carmaking revs up
  • This will be a boost for exporters across Asia, allowing economies to move beyond pandemic relief and return to structural reforms
Much has been said about inflation becoming entrenched and persistent. But the intensity of our focus on inflation means we may be missing another important point: global growth is not weakening either – despite repeated waves of Covid-19 outbreaks – and may instead be on the verge of becoming self-sustaining.

Growing signs of a stronger US investment cycle can reinforce the robust consumer cycle that held up the global economy last year – and make growth more sustainable around the world.

Asian economies should reap the rewards that the boost will give to semiconductor manufacturers and carmakers in the region, as well as exporters more generally. Policymakers may also be able to move beyond pandemic relief measures and return to structural reforms.

It’s worth looking at recent data which suggests that US companies may be starting to invest in plant and equipment to replenish critically low inventories. Last December, the US Empire State manufacturing survey’s sub-index for capital expenditure intentions six months ahead surged to 38 points, its highest in years.

US economists also expect data to show that equipment spending turned positive in the fourth quarter of last year and that this spending will grow this year. For US firms, investing in equipment is also cheaper than mergers and acquisitions when equity valuations are at an all-time high.

01:39

Factory to shelf: How Covid-19 complicates the China-US journey of just one video game controller

Factory to shelf: How Covid-19 complicates the China-US journey of just one video game controller
But why are firms investing in the first place? Here are three reasons. The first has to do with the mid-cycle slowdown in the semiconductor industry that started in June, and which may have just ended.

Memory chip prices tell an interesting story: spot Dynamic Random Access Memory prices bottomed out at US$3.37 per 8GB DDR4 chip on November 24 – and have clawed halfway back towards contracted prices at US$3.73.

A resurgence in cryptocurrency mining along with the emergence of the metaverse economy are stoking demand for larger cloud servers and faster processors. This may also explain why Intel Corp is investing US$7 billion in a chip plant in Malaysia, marking its re-entry into chip production – as it braces for more intense competition with AMD Inc in the processor market.

A second driver is a revival of car production across Asia, which started in October but could move into higher gear as shortages of controller chips ease further. Toyota Motor Corporation expects to produce 800,000 cars globally, 8 per cent more than last year.

Vehicles for sale at a Toyota showroom in Fox Lake, US, on January 4. For the first time in over a century, General Motors has fallen from the top car sales spot, having sold 2.2 million vehicles last year, 114,000 less than Toyota. Photo: EPA-EFE

It will also unveil as many as 15 new electric vehicle models in the coming year. Car-related shipments from Japan, South Korea and Thailand are already showing signs of trending higher. This means another big chunk of Asia’s manufacturing economy may be coming back to life, syncing with the re-acceleration in the tech cycle.

A third catalyst is a persistent shortage of inventories in the United States. Business is good. Customer inventories, as measured by the Institute for Supply Management, fell back to 25.1 index points after Thanksgiving in November, among its lowest levels in years.

The persistence of low inventories is baffling, especially after months of record shipments from Asia at high freight rates. Even so, this bodes well for Asia’s exporters, who can expect more US orders for now.

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Indeed, this resurgence is especially important for export-oriented economies in Asia highly leveraged to the US capital expenditure cycle.

First, growth will hold up well, especially in South Korea, Taiwan, Malaysia, Singapore and even China. Second, exporters of commodities like metals, food and energy such as Malaysia and Indonesia stand to do particularly well as higher prices boost export value.

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As Hongkongers struggle with rising inflation, the city’s most vulnerable are the hardest hit

As Hongkongers struggle with rising inflation, the city’s most vulnerable are the hardest hit

Conversely, net commodity importers like India and the Philippines may continue to experience balance of payments pressure.

Third, stronger growth will allow Asia’s central banks more room to pre-emptively tighten monetary policy – with some moving ahead of the US Federal Reserve – as China starts to pass on its higher production costs.

This could widen the policy divergence across the region, with growth winners like Singapore, South Korea, Taiwan and Malaysia tightening ahead of the Philippines, Thailand and India, creating value opportunities in currencies and interest rates.

More importantly, if growth can become more self-sustaining this year, Asia’s fiscal policy can finally steer away from emergency social relief and refocus on pressing development needs in health care, housing, transport and the environment. This could cause steeper yield curves, especially among the growth winners – a prospect the market may not have fully priced in.

02:46

Asia-Pacific countries adopt varying approaches to dealing with Omicron coronavirus variant

Asia-Pacific countries adopt varying approaches to dealing with Omicron coronavirus variant
After two years of fighting the pandemic drag, rebuilding the blocks for growth and profitability is vital – especially amid higher inflation. This can make more profitable use of excess liquidity, and hopefully buy enough time for a return to more productive growth. Better quality growth should lead to cost efficiencies that would, in turn, ease inflation.

The revival of the US investment cycle can be a boon for Asian economies, then, allowing them to move beyond the pandemic era and return to structural reforms. Policymakers across the region should make the most of the opportunity.

Wai Ho Leong is the managing director (Research) at Modular Asset Management

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