EPSTEIN
page 2 / 469 . OCR, unverified
initiative, we find that aging is very difficult to reverse. Singapore is a case in
point. Faced with declining fertility and the prospect of rapid aging, the
authorities have introduced wide-ranging measures to encourage families to
have more children. These measures include longer leave for parents, tax
incentives, and a more generous social safety net. But so far, the track record
Deutsche Sank AG/London
Figure l: Deutsche Bank forecasts:
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momentum continues to be weak
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December 2015
World Outlook 2016: Managing with less liquidity
has been disappointing, with Singaporeans by and large choosing to keep
family size small. We think that the Chinese authorities will also find that once
set in practice, the culture and social attitude in keeping family size small is
very difficult to reverse. Opening up to more immigration could reduce the
headwind to aging, but that comes with its own set of political sensitivities and
social implications. We reckon that most aging societies in Asia will have to
accept the phenomenon and deal with recalibrating public finance, social
safety net, and the service sector to take this into account.
Not all economies in Asia are facing down the barrel of inexorable aging. India,
Indonesia, and the Philippines, with 1.5bn people among them, should have
favorable demographics dynamic for decades to come. This could create the
potential of redistribution of growth, with the aging economies passing on the
mantle of high growth to the relatively young ones. With the right investment
policies, the latter economies could become that hub of regional
manufacturing and demand. These economies also look set to maintain
comfortable growth and interest rate differential to keep debt sustainable. All
three are blessed with large populations and a favorable domestic demand
dynamic that could generate satisfactory growth.
Having a young population is no guarantee of high growth though. Not only do
the governments need to put in place the requisite infrastructure and
employment opportunities for the emerging workforce, they also need to
ensure social stability that can often be challenged if population grows too fast.
Trade stagnation
Asia's success as a region owes much to its dynamic export sector. Over the
past five decades, starting with Japan. followed by the Tiger economies, and
then by China, Asian producers have supplied the bulk of manufactured goods
consumed globally. A cost-competitive and educated workforce, business-
friendly policies, and efficient Infrastructure have combined to give global
leadership to Asia. But maintaining global market share and manufacturing
leadership is one thing, continuing to grow with trade is turning out to be an
altogether different challenge. Even as US growth has picked up, Europe has
bottomed, and consumers worldwide have been benefitting from low energy
prices (akin to a tax cut), Asia's exporters have had a torrid year.
So far this year, all key Asian emerging market economies have reported
negative exports growth. Whether they are commodity or electronics exporters,
large or small economies, those that rely on China versus those that rely on G2
demand, the underperformance is across-the-board. Given the sharp drop in
global commodity prices and the slowdown in China's investment cycle, it is
easy to understand why commodity exporters like Indonesia and Malaysia will
likely report such poor exports earnings. But the weakness among electronics
producers seems counterintuitive. Surveys of purchasing managers in the US
and EU show a much better environment presently for new orders than they
have been in the past, say in 2013. Still, Asian exports are substantially weaker.
Indeed, the tight historical relationship between Asian exports and lagged
values of US and EU PMI has broken down over the past few years. Indeed,
this breakdown in relationship can be seen not just with aggregate data, but
with country-by-county analysis. The G2 cycle should have been much more
supportive of Asian exports than has been the case.
Our conjecture is that the recent bout of poor trade data reflects structural