Third and Fourth Quarter 2018 North American Housing News

Canada Housing News

The big chill: A five-year house price forecast for 33 Canadian cities


Michael Babad

Published October 3, 2018

New forecasts suggest it’s “time for slower price growth” in Canadian housing markets.

Indeed, Moody’s Analytics and RPS Real Property Solutions have cut their five-year projections for many of the 33 cities studied from earlier forecasts in May.

The predictions from Moody’s Analytics, the sister company of the credit rating agency, which are based on RPS data, indicate federal and provincial policy makers have pulled off what they set out to do when they brought in measures to tame bubbly markets such as those in Toronto and Vancouver.

They also come amid fresh numbers that show the Vancouver-area market still struggling after British Columbia imposed an additional tax on foreign buyers of local real estate in 2016 and new federal mortgage-qualification rules were introduced last January.

At the same time, interest rates are rising, and are expected to continue to do so, further pressuring demand in what had, until recently, been unstoppable housing markets.

“Two macroeconomic projections now dominate housing markets in Canada,” said Moody’s economist Andrew Carbacho-Burgos.

“The first is that the [Bank of Canada] will continue to tighten short-term interest rates through 2020 in order to head off inflation and main­tain the value of the Canadian dollar rela­tive to its U.S. counterpart,” he added in his report released today, titled “Canada housing market outlook: Time for slower price growth.”

“With some lag, monetary tightening will pull up mortgage rates. The five-year mortgage rate is now at about 4.4 per cent after bottoming out at 3.6 per cent in mid-2017; the Moody’s Analytics baseline projection is that it will continue to increase until it levels off at about 6 per cent by late 2020.”

Here’s what Moody’s expects over the course of five years:

avg home price increases

Source: RPS, Moody’s Analytics

There are other interesting tidbits in the report along with projections, these based on single-family homes:

1: Most Ontario cities “are still significantly overvalued, but this overvaluation has, on average, started to decrease.”

2: Toronto is overpriced to the tune of 51 per cent, compared to 53 per cent in May. Others that have come down even more sharply are the Ontario centres of Barrie, Guelph and Brantford.

3: The overpriced Vancouver market has also cooled off, but overvaluation still tops 40 per cent.

4: Montreal’s market is undervalued, but by less than 4 per cent.

5: Edmonton remains “the most undervalued metro area” in the country, by about 20 per cent, but it should see a faster pace of price growth after mortgage rate hikes end “thanks to a combination of reduced listings and increased opportunistic purchases.”

6: Saskatoon and most Atlantic cities are “moderately undervalued.”

“The national housing market still has a long way to go before it regains the level of affordability it had before 2015, when prices in Toronto and Vancouver took off, but has now taken the first steps to do so,” Mr. Carbacho-Burgos said.

“The important points are, first, that there is no serious projected house price correction,” he added.

“Second, median family income growth will have a good chance of keeping up with and even outpacing house prices in coming years, improving affordability. Third, the lack of a significant house price decline will prevent mortgage debt performance from deteriorating, especially after 2020, when mortgage rates level off.”

But along with that came a few notable warnings. Among them:

1: “Given that most of the house price increases took place in Toronto and Vancouver, there is still the downside risk that higher mortgage rates and the borrower stress tests could push down demand in the Atlantic and Prairie provinces, leading to a full house price correction and a perceptible drop in sales in these regions.”

2: “The main downside risk now is that the measures taken to stabilize housing affordability and mortgage credit quality may prove too strong and may precipitate not just a house price correction, but also an extended decline in sales and possibly a reduction in home ownership. However, the data for July and August indicate that home sales and house price growth have started to rally, so it is too soon to be pessimistic.”

3: While financing is showing little sign of stress, it is “starting to show the first looming danger signs.” Mortgage delinquency rates are at their best since the early 1990s, though those in Alberta, Saskatchewan and eastern Canada are notably above the national average.

“More important, the slow growth of income relative to house prices has led to a steady increase in the ratio of mortgage debt service to disposable income over the past 15 years, and this ratio is likely to keep increasing before the [Bank of Canada] finishes tightening interest rates,” Mr. Carbacho-Burgos said of that last part.

“Although it is possible to disagree over the merits of the new mortgage lending stress tests, the move to make mortgage lending more stringent is not surprising, given this 15-year trend.”

Vancouver, of course, is unique in Canada, with numbers released Tuesday showing a sales plunge of 43.5 per cent in September from a year earlier.

That’s “the steepest decline since the financial crisis and about 35 per cent below typical September activity seen over the past decade,” said Bank of Montreal senior economist Robert Kavcic.

“All the while, new listings jumped strongly in the month. To put it lightly, the market continues to struggle with past policy measures and higher interest rates. Indeed, prices continue to fade.”

The benchmark price is up, but just slightly above 2 per cent from a year earlier, while the cost of a detached home is down 4.5 per cent.

“We would not be holding our breath for a quick rebound in this market,” Mr. Kavcic said.

reater vancouver house prices

Greater Vancouver home sales

Sales volume in September for detached houses, condos and town homes

And, as The Globe and Mail’s Janet McFarland reports, Toronto’s housing market chalked up a modest sales gain in September after two much stronger months.

Sales climbed 1.9 per cent from a year earlier, as average prices gained 2.9 per cent in the same period, though dipped 0.5 per cent from August, according to Toronto Real Estate Board numbers released today.

“Looks like the whole market is balancing out about as well as policy makers could have hoped,” Mr. Kavcic said of the Toronto report.

“This could set us up for a period of price stability as solid demographic and job fundamentals are countered by rising interest rates.”

Separately, Mr. Kavcic’s colleague, BMO chief economist Douglas Porter, took a run through the latest Canadian credit numbers, noting they continue to show a slower pace of borrowing.

“The slowdown in credit – most notably, overall mortgages – syncs well with the broader cooling in housing market activity,” Mr. Porter said, citing the fact that the rise in total household borrowing eased in August to 3.7 per cent from a year earlier, while disposable income eclipsed that, at 3.9 per cent.

“The biggest chill has been in mortgage growth (not surprisingly), which has softened to a 3.6-per-cent year over-year clip from an average growth rate of about 6 per cent in the past two years,” he added.

“We are on the cusp of seeing the slowest growth in mortgage balances outstanding since the early 1980s.”

Read more

Janet McFarland: Toronto housing market’s hot rebound cools in September

Janet McFarland, Brent Jang: Vancouver housing prices slowly easing as sales tumble 43.5 per cent in September

Poltergeist II: The demons that still haunt Canada’s housing and credit markets

2018 has been unruly for housing markets: What’s ahead for your province

Rob Carrick: How the new NAFTA helps end a generational chance to score big in the housing market

Rob Carrick: It’s officially normal to have a big, fat balance on your line of credit

House price inflation in Canada suddenly trails that of 36 other countries

How $8-billion in added mortgage costs will squeeze Canadians and the economy

‘Cue the comeback’: The reawakening of many Canadian housing markets

Canada’s housing market scores first annual price gain in months

‘Good value for your money’: How downtown condo prices in Canadian cities compare globally

Carolyn Ireland: Sale by trial and error in Toronto’s housing market

Canadian index falls as 8 markets decline

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Canada’s home prices dropped 0.3 per cent in November from October, according to the latest numbers from the Teranet-National Bank House Price Index.

The retreat marks only the fourth time in the index’s 20-year history that the national market dipped in November, according to National Bank of Canada senior economist Marc Pinsonneault.

The decline was quite broad-based, Mr. Pinsonneault adds, with eight of the 11 major metropolitan markets in negative territory.

Compared with November of 2017, the composite index rose 3.1 per cent last month to stand at 224.74. The national index is down 0.66 per cent from its peak in September of 2018.

Mr. Pinsonneault says that demand has cooled significantly – particularly in the country’s most expensive real estate markets – because of more stringent mortgage qualification rules and the rise in interest rates.

But Mr. Pinsonneault adds that interest rates appear set to rise more slowly than most economists previously thought. Hopes for a soft landing of the Canadian resale market are therefore still warranted, in his opinion.— Carolyn Ireland

victoria house prices

Cost of owning a home in Vancouver, Victoria ‘off the charts’ — and likely to get worse, warns RBC

It now costs 88 per cent of a typical income to carry a home in Vancouver, and 65 per cent of an income in Victoria.

Bloomberg News

Updated: September 28, 2018

cost of owning home canada

The cost of owning a home in Canada is at the highest level in 28 years and likely to get only more onerous as interest rates continue to rise, according to a report from Royal Bank of Canada.

Carrying a home, including the cost of a mortgage, property taxes and utilities, took up 54 per cent of a typical household’s pre-tax income in the second quarter, the Toronto-based bank said in a report on Friday. That’s up from 43 per cent three years ago.

“From overheating to correction to the onset of recovery, we’ve seen pretty much everything in the past three years in Canada’s housing market,” economists at the Toronto-based bank said in the report. “Yet an eye-watering loss of affordability has been a constant.”

Lack of affordability is “off the charts” in Vancouver, Toronto and Victoria, with RBC’s index at 88 per cent, 76 per cent and 65 per cent respectively — the highest in records going back to the mid-1980s. The measure uses an aggregate of all housing categories, including single-family detached homes and condos.

house poor

While rising prices had been the culprit behind the loss of affordability between 2015 and 2017, mortgage-rate increases accounted for the entire rise in carrying costs over the past year, the bank said. The country’s central bank has risen interest rates four times since July, 2017.

“We expect the Bank of Canada to proceed with further rate hikes that will raise its overnight rate from 1.50 per cent currently to 2.25 per cent in the first half of 2019,” the report said. “This will keep mortgage rates under upward pressure and boost ownership costs even more across Canada in the period ahead.”

B.C. is in a “mild” housing market recession, with the Lower Mainland shifting from a seller’s market to a “mild” buyer’s market, according to a new housing forecast report.

A recession is usually used to describe a period of significant decline in the economy, but that term also applies to a B.C. housing market marked by a sharp decline in home sales, eroding prices, and a slowdown in housing starts, said Bryan Yu, deputy chief economist of Central 1 Credit Union, which released its B.C. housing forecast for 2018 to 2021 on Tuesday.

“When we look at it through these lens, it’s the first time we’ve seen these slowdowns, a cycle where there’s a decline in the number of transactions, erosion of home prices … and new home construction activity seeing a contraction,” said Yu.

Resales of residential properties dropped 17 per cent from 2017 to 2018, said the report, while housing starts slowed by 10 per cent, with another 18 per cent drop forecast for 2019.

Aggregate sales in the province’s urban centres — the Vancouver, Kelowna, Victoria and Abbotsford-Mission CMAs — fell 40 per cent from the end of 2017, but even medium and small markets were hit with a 10 to 20 per cent reduction in activity.

“When you add all these factors together, from a buyer’s standpoint, you have less access to credit and less confidence in the market as well,” said Yu, who expects these factors to be reflected in prices in the coming year.

western investor av house price

A sales slump has cooled B.C.’s red-hot housing market, with the Lower Mainland shifting from a seller’s market to a “mild” buyer’s market, said a new report by Central 1 Credit Union. JONATHAN HAYWARD / THE CANADIAN PRESS

While median resale prices recorded a six per cent increase in 2018 compared to the previous year, it’ll dip a modest two per cent in 2019 to $520,000, said the report.

The trend will be more pronounced in the Lower Mainland/southwest region of B.C., where prices are expected to drop 3.6 per cent next year to $651,000.

But because the downturn is driven by policy measures such as the federal government’s mortgage stress test, the province’s introduction of the speculation tax and school tax, and Vancouver’s empty homes tax, and not by a broader economic slump, economists don’t see a major crash in housing prices.

There’s room for buyers to negotiate, but on the flip side, “the economy is strong enough that there aren’t that many sellers who have to bring down their price,” said Yu. “For most sellers, they don’t have to sell … It puts a cushion under the market.”

The report also examined B.C.’s rental housing market.

It said “renters will continue to experience stressful conditions,” with the province’s low rental vacancy rate of 1.4 per cent expected to hold steady through 2021 as renters struggle rents and continuing strong demand.

“Options are very limited,” said Yu. “There’s not a lot of supply out there.”

to shift into home ownership given tighter mortgage qualification require

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United States Housing News

US Housing Starts Up, Permits Down: August 2018

September 26, 2018 Kéta Kosman

US Housing starts.jpg

U.S. housing starts rose 9.2% in August, driven by an outsize leap in apartment building that masked weakening across single- and multifamily construction.

Single-family housing starts in August rose 1.9% to a seasonally adjusted annual rate of 876,000 units, and multifamily starts soared 27.3% to an adjusted annual rate of 392,000 units, according to the U.S. Department of Commerce’s monthly estimates.

SOURCE: U.S. Department of Commerce via For Construction Pros

U.S. housing starts rose 9.2% in August, driven by an outsize leap in multifamily building that masked softening housing construction conditions.

Monthly housing starts numbers are notoriously volatile, said For Construction Pros September 20. From the first of 2018, multifamily starts had trended down slightly through July. Multifamily starts year to date as of August, however, were 8.5% higher than the first eight months of 2017. The much larger category of single-family starts has been a bit more consistent, and the year-to-date total remains 6.9% above the same period last year.

The number of building permits issued tends to be a more stable measure and can help predict future home construction volume. Total permits dropped 5.7% from July to August, with single-family permits down 6.1% and multifamily permits down 4.9% for the month. The year-to-date totals show single-family permits more-consistently 6.5% above the first eight months of 2017, and multifamily permits 1.8% above last year.

Weekly Softwood Lumber Blog

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Housing Fundamentals Still Supportive For Lumber & Panel Markets- Madison

Preferred Solid Wood Names Remain TSX:IFP and NYSE:LPX

The U.S. housing market has turned in several months of lackluster performance, from slower-than-expected housing starts to weaker existing-home sales to a drop in pending home sales. It’s not exactly clear what is driving the disappointing results, or if they will last beyond the current spell (housing permits remain positive!), but they are of concern for investors in lumber- and OSB-leveraged stocks.

In this report, we review various scenarios for housing and repair and remodeling activity, combined with capacity additions for both lumber and OSB. Our analysis indicates that supply and demand for both lumber and OSB should remain reasonably tight through 2020, even if growth in both new construction and repair & remodeling market activity slows. There will continue to be volatility driven by seasonal factors, transportation, capacity ramp-ups, etc., but over the forecast period we see persistently solid fundamentals.

We caution, however, that headline risk in these names is elevated, as the industry reference forecasters continue to have high annual housing-start forecasts (table below): these numbers will have to come down based on recent housing-market performance and given that home builders are short labour and cannot make up for lost time. Similarly, consensus estimates for OSB names (Norbord in particular) look stretched to us, and we expect they will come in over time. Despite these risks, we anticipate continued strong cash flow generation from the solid wood names. The names have shown good discipline in M&A and balance sheets are in excellent shape. Large capital programs are either winding down or fully funded, and dividends have begun to rise. While we believe near-term peaks in commodity pricing are in (and past!) we see good fundamentals in solid wood for long-term investors. Our preferred route to lumber exposure remains IFP, given the larger relative impact from its capital program and its geographic diversification. In OSB, we favor LPX, with growing diversification into siding in new homes and the R&R market.

as good as it gets

The latest data is not encouraging: The housing recovery has slowed from its prior modest pace, with potential for further slowing

Through the first half of 2018, single-family starts were up 8% y/y (not seasonally adjusted), in-line with market expectations. Multi-family starts have been more volatile, up 9% y/y in Q1, up 4% y/y in Q2 (up 7% through the first six months).

Through June and July, however, housing starts have disappointed, with June’s 1.158 (SAAR) falling 5% y/y. The decline was broad-based, with singles down 1% y/y and multis down 17%. In the South, home to about half of all U.S. housing activity, singles were flat y/y. It is worth noting that there were no big adverse weather events or major holidays to blame for the weaker-than-expected June stats.

The refrain we often heard following the June stats was “one month does not make a trend”. Fair enough. But July stats underwhelmed as well, coming in at 1.168MM (million) on a SAAR (Seasonally Adjusted Annual Rate) basis.  Singles were up just 3% y/y and multis were down another 12%. The timing of the July 4th holiday did deserve some of the blame for the weaker-than-hoped for result, but clearly there was no catch-up on whatever was holding back June numbers. The one silver lining has been strong permit numbers over the last few months. July permits totaled 1,311MM, up 15% from June, and 4% higher than July 2017. Year-to-date, permits are up 6%.

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As we head into the end of the year, there are several plausible paths forward for the U.S. housing market, and strong arguments for each. We summarize the alternatives below, with our housing-start forecast under each scenario and the attendant wood products demand summarized in the table above.

  • Low: The U.S. housing recovery has hit an inflection point, and will see slower growth in starts — including single family starts — going forward. This scenario models demand if total housing start improvement fell to 4% and 2% growth in 2019 and 2020. The silver lining in this scenario is that housing could continue to grow at the new, slower pace even if the current torrid pace of U.S. GDP slows or falters, as home builders continue to meter out supply to a chronically under supplied market.
  • Base case: June and July were just hiccups…just predictable bumps in the traditionally volatile housing market. Growth in single-family starts returns to its prior 5%–6% y/y growth rate.
  • High: The pace of growth in the housing market accelerates through the remainder of the year on pent-up demand. Growth remains above trend at 6%–7% though 2020, taking total housing starts to 1.45MM.

Given we are already seven months into 2018, this year’s wood product demand numbers look very similar in all scenarios. The differences between absolute demand levels are really only meaningful in 2020 (e.g., a 2 Bbf (Billion board feet) difference in lumber demand in High scenario vs. Low). That said, if we see housing activity slow to the pace in the “Low” scenario, the impact on equities (and not just solid wood producers) would be much more significant and immediate.

 Primary forecasters’ views are lagging the market; we expect downward revisions

Housing starts are the most watched, and variable, component of the various end uses for wood products. To start this year, consensus estimates for 2018 total housing starts were 1.27MM (table). Surprisingly, forecasts have actually nudged higher since the initial forecasts, with the current figures now just above 1.3MM starts. This comes in spite of lower-than-expected housing start numbers through the summer months. While home builder stocks have under performed and worries have begun to spread to other housing-related names, we have yet to see consensus housing forecasts come down. Likely downward revisions represent headline risks for solid wood stocks.

Factors that will determine the path forward for the housing market

 Housing Supply: The supply of new housing is constrained…or is it?

housing slump.jpg

The inventory of new homes for sale is often characterized as being low, but in fact inventories of both new and existing homes have returned to pre-housing crisis ranges (chart). After bottoming at less than 150k (1000) units in 2012, the inventory of new homes for sale has taken six years to return to more normal levels. Inventory of existing homes for sale has also fallen to about the same level as the glut of homes available after the crash has been absorbed. In terms of months’ supply (i.e., the supply measured against the pace of sales), new homes are actually running a little higher than pre-GFC (Global Financial Crisis) levels at ~5.5 months. Months of inventory is a more volatile, backward-looking metric, and we do not weight it heavily in our analysis.

Perhaps the better metric is the supply of lower-priced homes: it is clear that the supply of these homes has lagged the recovery of the more expensive categories. Sales of entry-level homes priced below ~$200k (and particularly below $150k) have seen more declines than increases since the recovery began in 2012.

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The average cost of a home has also been rising more quickly than average wages (charts, below). In addition, rents have been rising nationally, making it more difficult for prospective buyers to save for a down payment. Coupled with higher levels of student debt relative to prior cohorts, this puts the Millennial generation into a tight spot when looking at buying a first home.

size of single family homes.jpg

On the home supply side, home builders are only building homes if they can make their 20% gross margin, which is more difficult to achieve on smaller, cheaper starter homes. Gross margins for the biggest home builders including DR Horton, Lennar, DR Horton and Toll Brothers have been remarkably flat right around 20% for the past five years (chart, left). Burned by the fires of the GFC, they now have an iron grip on costs, and no longer build ahead of demand. They have commented that they have not seen adverse impacts from cost escalation in “sticks and bricks” input costs, which likely reflects both their purchasing advantage given their size and their determination to pass costs on to buyers. Similarly, although lumber costs increased significantly in the past twelve months, they still represent just a fraction of overall building costs. A 50% increase in lumber prices, from $350 to $525, would have added roughly $2,625 to the cost of building a median single family home (requiring 15mfbm (Thousand Foot Board Measure) of lumber).

Rising lumber costs have not had an impact on builders’ margins (perhaps with the exception of entry level homes).

Home builders are also facing less competition in pricing from their peers, in part because they have fewer peers than they did in the last housing cycle peak. According to Census Bureau surveys, the total count of home builder businesses fell from just over 98,000 in 2007 to about 49,000 by 2012 (the 2017 survey numbers are not yet available). Industry concentration is greater in primary metro markets, while smaller builders operate in smaller regional markets.

Home builders have consistently indicated that their ability to supply homes (profitably) is constrained by labor and lot scarcity. Unfilled construction job openings hit at a peak of 263,000 in June according to the Bureau of Labor Statistics. This problem has been increasing for some time, and has been exacerbated by the crackdown on undocumented workers in the U.S. (no builder admits to using undocumented workers, but all suggest their competition does). The shortage of skilled builders is not easy to solve, and it will remain a restraint on housing supply for the foreseeable future.


Tight labor markets have also renewed interest in modular and off-site construction (chart). Roof, wall and floor truss manufacturing has expanded over the past few years even if full modular construction remains a tiny sliver of the total market. Increased use of trusses has alleviated some pressure on labor, but will not be sufficient to increase the total supply of housing units. We expect ventures like LPX’s $45MM investment in Entekra will help drive full modular home construction to ~20k units per year, concentrated in dense, costly U.S. metro markets like San Francisco, but will have limited application outside of these areas.


As for lots, big builders have slowly been improving their lot position, but primarily through options on land (large land positions were sold down through the GFC and builders have focused on options this time around). The improvement in access to lots is welcome, but we believe it is unlikely to spur a noticeable pick-up in home building over our forecast horizon.

Housing Demand: The need for housing is there, but the resources may not be, and desire could be flagging

 Millennials (born between 1981 and 1996) have been much maligned for not doing their part for rampant consumption, preferring sharing over owning, and apparently preferring to work gigs rather than full-time permanent jobs. But whatever they lack in individual commitment and current resources, they make up in sheer numbers: at 83MM, they are the largest demographic cohort in the US. They are also entering prime home buying years. Even if home ownership rates are lower for this cohort than for prior age groups, we will see increased numbers of potential buyers over the next five years.

Through the GFC, the home ownership rate fell and the “Renter Nation” became a thing. Home ownership rates have been improving since their trough in early 2016, but remain far below pre-recession levels. Vacancy rates have fallen, too, and sit far below pre-recession levels. Tightness in the rental market has allowed rents to rise, which in turn has limited renters’ ability to save for a down payment. In addition, debt burdens — including student debt — have been higher for the current generation of potential homebuyers than for previous generations. An offset to this has been an increase in high loan-to-value lending, which reduces down payment requirements.


Affordability measures remain good relative to long-term trends, but as we all know, interest rates have been heading up, with another two Federal Reserve hikes expected through the balance of 2018, bringing the Fed rate to between 2.25% and 2.50%. Rising interest rates, however, generally only have a fleeting short-term negative impact on home buying. In fact, if accompanied by economic expansion, they are historically correlated with strengthening housing markets. With GDP growth running at 3%–4% in 2018, the rate hikes alone should not be a lasting drag on housing activity.

What does appear to be a drag, however, are home prices. The University of Michigan Consumer Sentiment survey indicates consumers believe it is a “bad time to buy” a home based on current “high” prices. It is interesting to note that consumers do not cite rising interest rates as a disincentive to purchasing a home (although low rates are no longer an incentive to buy a home), and have an overwhelmingly positive economic outlook. It just seems to be sticker shock, which is understandable given that the U.S. Census Bureau data indicates new home prices are twice what they were back in 2000, while real median household income has finally recovered…back up to the same level it was in 2000.

 If housing starts do slow or stall out, where does that leave solid wood demand?

Continued steady growth in repair and remodel activity would bolster lumber markets, but the impact on OSB would be less significant. The outlook for R&R remains positive, despite uncertainty in the housing recovery. Harvard’s Leading Indicator of Remodeling Activity (LIRA) is used to project the rate of change in U.S. spending on home improvement and repair spending (R&R) for owner occupied homes.

Spending on R&R has been steadily increasing since Q1/10, climbing from an annualized $223B at that time, to $324B in Q2/18. According to the latest projections from Harvard, recent trends in homeowner spending on R&R will continue. The rate of growth may taper slightly in early 2019, but at 6.9% in Q1 and 7% in Q2, will remain at healthy levels. Annual spending on residential home improvements is expected to cross the $350B mark before the end of 2019, in part reflecting the increasing average age of US housing stock. The prognosis could be even better, but low transactions of existing homes for sale are currently hindering greater gains in remodeling activity, as significant R&R projects often occur around the time of a sale (particularly afterwards). With a slate of capacity expansion projects scheduled (or underway) for both lumber and OSB supply, growth in demand from R&R will play an increasingly significant role.

 Solid wood demand: Lumber demand is more is more dependent on Repair & Remodeling activity, while commodity OSB is more leveraged to the U.S. single family housing market


Total U.S. lumber demand has grown steadily since the housing crash crushed consumption. Operating rates are finally returning to levels that can produce price spikes like the epic price run we saw earlier in 2018, which in turn pushed lumber producer EBITDA margins above 20%. Total U.S. demand was 47.6Bbf in 2017, up 1% or 0.6Bbf from the prior year. Since the depths of the housing collapse in 2009, U.S. lumber demand has grown at a CAGR of 5% or about 2.0Bbf per year, although this growth has been far from steady.

The single-largest end market for lumber in the U.S. remains the repair & remodeling market. This end market has been larger than the residential construction market since 2007, and represented 37% of lumber end demand in 2017, while new residential construction represented 32% of end demand (chart below). Given the aging U.S. housing stock and the lower supply of new homes, we expect growth in R&R activity to continue at 6%–7% annually for the next couple of years.

Growth of demand from new residential construction, however, has outpaced R&R since the trough, with a compound annual growth rate (CAGR) of 10% since 2007 against 5% for R&R. Materials handling and non-residential construction end demand have represented 10%–15% of lumber end demand over the past decade, with “Other” markets representing a fairly steady 6%–8%. Demand in non-residential and material markets was flat to marginally down in 2017.

For OSB, the picture is somewhat different. In 2017, total U.S. demand for OSB was 20.3Bsf (Billion Square Feet), up 5% or almost 1.0Bsf from 2016. Demand bottomed in 2010 at 12.8Bsf, and has grown at a CAGR of 7% or about 1.0Bsf annually since then. Unlike lumber, the largest end market for OSB is, by far, residential construction at 55% of 2017 total demand. Repair & remodel demand was less than half of this at 21%, followed by the smaller industrial (15%) and non-residential construction (9%) markets .

Demand growth has been greatest in residential construction, with the same 10% CAGR since 2009 as lumber. Growth in R&R demand has been lower at 4% since 2009.

House size and the multi-family/single-family split are important for wood products usage

While the total volume of solid wood products going into new residential construction has increased over the past 10 years, the intensity of solid wood use per square foot of new floor space has been quite consistent. We have kept our estimates of usage unchanged over our forecast horizon.

Measures of home size as well as the proportion of single-family versus multi-family starts are therefore the key variables in determining total solid-wood consumption in new residential construction. Housing square footage has ebbed and flowed over time, with median single-family unit size falling to a low of 2,100 sqft in 2009 before returning to 2,435 sqft in Q1/18. At our reference lumber intensity of 6.2 bf per square foot, the 16% increase in median size since 2009 corresponds to 2m bf implied incremental wood demand per unit. The increase in median unit size has amplified the effect of the 91% increase in single-family starts between 445k in 2009 and 849k in 2017 (adding roughly 1.7Bbf of demand).

The gains in single-family unit size are not uniformly good news, however. The housing recovery has been most robust in the upper end of the housing market price categories, while the smaller, cheaper, entry-level gains have lagged. Potential new home buyers are more likely to be shut out of home ownership (or have to postpone purchases) if affordable housing stock is not more readily available. We note median single-family square footage has been trending down — albeit unevenly — since peaking at 2,490 sqft in Q3/15, suggesting that smaller, more affordable homes are finally gaining market share.

Multi-family units are about half the size of single-family units. Multi-family units have occasionally hit 1,200 sqft, but have mostly bounced around 1,100 sqft. There has been some concern that Millennials (and other demographic cohorts) would forgo the traditional shift to a single-family unit in the suburbs and instead chose to remain in urban multi-family units as they form households. We would have expected to see an increase in the median size in multi-family units if this were the case, but we see no evidence of it in the stats (charts below).

Solid wood supply: lumber additions will be smaller, slower and have some offsets, while more net OSB supply is coming

 Upcoming lumber projects will add 5Bbf lumber capacity (or about a 20% increase) in the U.S. South, but bottlenecks with contractors and equipment vendors, declining output from Western Canada, and continued growth in R&R demand means that new supply should be gradually added and easily absorbed.

We expect to see upward of 5Bbf of new lumber capacity in the U.S. South over the next three years — 1.1Bbf in 2018, a further 2.3Bbf in 2019, and 1.9Bbf in 2020 (which would represent 1.8%, 3.7% and 3.0% of total 2017 North American output, respectively). Nine proposed greenfield projects will account for just over 2.1Bbf of the incremental capacity, while the balance will be made up by a host of rebuilds and upgrades.

Taking our most conservative or “Low” scenario from the “Potential paths of U.S. housing” and comparing it to the total U.S. lumber demand from residential construction in 2017, lumber demand from residential housing and R&R would grow by roughly 4.5Bbf through 2020. With our “Base” housing outlook, 6.8Bbf of new demand would be created, and finally, under our “High” scenario for housing, an incremental 8.3Bbf of lumber demand would be created.

On the supply side, our “Low” scenario entails ~125% of announced new capacity making it to market (i.e., all recently announced projects, plus a few extra, are successfully completed), adding 7.8Bbf of new supply. Our “Base” case involves all of the projects announced to-date being completed by 2020, and would add 6.3Bbf of new capacity. Finally, the “High” case would see roughly 75% of announced capacity make it to market by 2020, adding 5Bbf of new supply.

Though there could be some short term loosening of markets or regional pricing weakness depending on the timing and location of capacity additions, as the table above shows, in all but the “low” scenario, new supply is absorbed by incremental demand, keeping lumber markets strong through at least 2020.

Tightly bunched OSB capacity additions are expected to overwhelm markets if the housing recovery doesn’t deliver

There are currently five new mills, representing ~2.7Bsf of capacity (almost 12% of North American production in 2017), in the process of ramping up. We expect to see between one and three further restarts in the next three years. A restart at Norbord’s 550MMsf Chambord, QC mill is more likely than not (we expect to see activity begin in earnest in H1/19 and meaningful production by H1/20), and start-ups at Louisiana Pacific’s Val D’Or, QC and Cook, MN mills could come the year after.

Our range of estimates for housing shows OSB demand from residential construction and R&R increasing by between 2.4Bsf and 3.9Bsf through 2020, with between 1.9Bsf and 3.2Bsf of additional supply set to ramp up over that time frame. Unlike lumber, supplemental demand from R&R growth won’t add massively to demand.

In our low scenario, new supply exceeds forecast demand growth, but not by much. We would expect incremental pressure on OSB prices, but no collapse. Our current benchmark NC OSB price forecast is $310 for 2019 and $307 for 2020, down from highs of $353 in 2017 and a forecast $379 average in 2018.

Investment recommendation: Opportunity for volatility will no doubt continue, but supply and demand look balanced

US Home builder workers.jpg


November 16, 2018  Kéta Kosman

CoreLogic® Thursday released the CoreLogic Home Price Index (HPI™) and HPI Forecast™ for September 2018, which shows US home prices rose both year over year and month over month. Home prices increased nationally by 5.6 percent year over year from September 2017. On a month-over-month basis, prices increased by 0.4 per cent in September 2018. (August 2018 data was revised. Revisions with public records data are standard, and to ensure accuracy, CoreLogic incorporates the newly released public data to provide updated results each month.)

Looking ahead, the CoreLogic HPI Forecast indicates home prices will increase by 4.7 per cent on a year-over-year basis from September 2018 to September 2019. On a month-over-month basis, home prices are expected to decrease by 0.6 per cent from September to October 2018. The CoreLogic HPI Forecast is a projection of home prices calculated using the CoreLogic HPI and other economic variables. Values are derived from state-level forecasts by weighting indices according to the number of owner-occupied households for each state.

The CoreLogic Year-over-Year increase has been in the 5 per cent to 7 per cent range for the last few years.  This is still near the middle of that range.  The year-over-year comparison has been positive for over six consecutive years since turning positive year-over-year in February 2012




Elsewhere, according to the US Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS) and National Association of Home Builders analysis, released November 6, the count of unfilled jobs in the US construction sector pulled back in September, off a upwardly revised August estimate that marked a post-recession high.

the number of open construction sector jobs decreased to 278,000 in September. The August estimate of open construction jobs was revised up to 317,000, the largest count since the Great Recession.

The open position rate (job openings as a percentage of total employment plus current job openings) fell back to 3.7 per cent in September. The rate was 2.5 per cent last September. On a smoothed, twelve-month moving average basis, the open position rate for the construction sector increased slightly to 3.3 per cent, a post-recession high. The peak (smoothed) rate during the building boom prior to the recession was just below 2.7 per cent. For the current cycle, the sector has been above that rate since November 2016.

construction labor trends.jpg

SOURCE: NAHB Eye on Housing


October 31, 2018  Kéta Kosman

Nationally, home price appreciation continued in August. Based on a seasonally adjusted annual growth rate, home prices in Seattle, New York and San Diego declined faster in August than in July. Home prices in New York has decreased for the fifth consecutive month.

The S&P CoreLogic Case-Shiller U.S. National Home Price Index, reported by S&P Dow Jones Indices, rose at a seasonally adjusted annual growth rate of 7.2% in August, following an unusual 0.5% annual rate in July. On a year-over-year basis, the S&P Case-Shiller U.S. National Home Price NSA Index rose by 5.8%, the lowest annual gain in the past twelve months. The Home Price Index, released by the Federal Housing Finance Agency (FHFA), rose at a seasonally adjusted annual rate of 3.1% in August, slower than the 4.4% increase in July.


Elsewhere, in October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Krainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS, said Bill McBride on Calculated Risk Wednesday.

Here is a similar graph using the Case-Shiller National and Composite 20 House Price Indexes.

This graph shows the price to rent ratio (January 2000 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to February 2004 levels, and the Composite 20 index is back to November 2003 levels.

In real terms, prices are back to mid 2004 levels, and the price-to-rent ratio is back to late 2003, early 2004.

Home Prices in 20 U.S. Cities Rise Least in Almost Two Years

US neighbourhood.jpg


Sho Chandra

November 27, 2018, 7:00 AM MST Updated on November 27, 2018, 7:39 AM MST

Home-price gains in 20 U.S. cities grew in September at the slowest pace in almost two years, adding to signs that buyer interest is waning amid higher mortgage rates and elevated property values.

The 20-city index of property values increased 5.1 percent from a year earlier, the least since November 2016, after rising 5.5 percent in the prior month, according to S&P CoreLogic Case-Shiller data released Tuesday. The median estimate in a Bloomberg survey of economists called for a gain of 5.2 percent. Nationally, home prices were up 5.5 percent from September 2017.

coolin prices

Key Insights

  • The report marks the sixth straight deceleration in price gains. It’s the latest in a spate of reports indicating housing is in a broad slowdown, with sales and home-building also showing signs of weakness.
  • While the 0.3 percent monthly increase in the seasonally adjusted 20-city index was slightly above projections for 0.2 percent, economists look at the year-over-year gauge for a better indication of trends.
  • The results also indicate more prospective buyers may be able to enter the market in coming months, though property values remain elevated, mortgage rates are near an eight-year high and the supply of affordable properties is still limited.
  • The respite on price appreciation may be especially attractive for younger buyers or those purchasing a house for the first time; on the flip side, softer price gains also mean smaller advances in equity for owners.
  • “Home prices plus data on house sales and construction confirm the slowdown in housing,” David Blitzer, chairman of the S&P index committee, said in a statement.

Get More

  • All 20 cities in the index showed year-over-year gains, led by a 13.5 percent increase in Las Vegas and 9.9 percent in San Francisco.
  • Prices in Seattle fell 0.3 percent from the prior month; annual gains have slowed to 8.4 percent from double digits earlier this year. San Diego was the only other city to record a monthly drop, at 0.1 percent.
  • New York, hit by new federal limits on mortgage and property-tax deductions, had the weakest annual price gain at 2.6 percent, while Washington was second-lowest at 2.9 percent.
  • Separate figures released Tuesday by the Federal Housing Finance Agency also showed prices climbing at a slower pace. The agency’s index rose 6.3 percent in the third quarter from a year earlier, compared with a 6.8 percent in the second quarter. For September, prices rose 0.2 percent from the prior month.

— With assistance by Jordan Yadoo, and Christine Maurus

(Updates with FHFA index in last bullet point.)


November 1, 2018  Kéta Kosman

A very good indicator of current construction activity, thus future lumber prices, is US construction spending. New data out this week from the US Commerce Department shows construction spending flat in September 2018 after a 0.8 per cent rise in August, said the New York Times Thursday. Spending on US construction projects was essentially unchanged in September, the weakest showing since June, as an increase in home construction was offset by a slide in spending on government projects.

The strength last month was driven by a 0.6 per cent increase in residential construction and a smaller 0.1 per cent increase in nonresidential activity, which pushed this category to an all-time high. However, these gains were offset by a 0.9 per cent drop in spending on government projects.

The increase in residential construction featured an 8.7 per cent jump in apartment construction, which offset a 0.8 per cent drop in single-family homes.

private res construction spending index

SOURCE: NAHB Eye on Housing

Drilling down to more detail, the National Association of Home Builders said it’s analysis of Census Construction Spending data shows that total private residential construction spending inched up 0.6 percent in September, after a dip of 0.4 percent in August. On a quarterly basis, private residential construction spending climbed 0.9 percent in the third quarter. Private residential construction spending increased in September, despite the decline of the total housing starts amidst the shortage of construction labor and land, rising mortgage rates, and ongoing building material price volatility.

The monthly gains are largely attributed to the strong growth of spending on multifamily.

Why Have Lumber Prices Fallen?

Posted by Pete Stewart on December 10, 2018


The US housing sector—a bellwether for economic health—has showed signs of stagnation (and even the prospect of reaching peak housing in this market cycle) in recent months. As I wrote last month, forecasts for housing starts are simply overblown, as there isn’t much room for an increase beyond the 2018 level of 1.266 million units.

As a commodity largely tied to housing starts and broader building and construction activity, lumber prices also reflect the general health of this market via supply and demand metrics. After steady increases beginning in 4Q2017, lumber prices skyrocketed to new record highs in 2Q2018 before dropping precipitously across the board over the last four months. Southern yellow pine (SYP) lumber prices recently hit their lowest point since August 2017; Forest2Market’s SYP composite index price for mid-November was $376/MBF—a 35% drop from the record high of $576/MBF achieved in May.

Despite the one–two hurricane punch that recently impacted the US South and the continued wildfires in the Pacific Northwest (PNW)—extreme weather events that have significantly impacted forest inventories, harvests and supply—the drop in lumber prices over the last six months is largely, though not entirely, demand driven. Fewer new-home builds = less lumber.

The sudden reversal begs a serious question: Did the lumber market simply over drive its headlights in the price run-up earlier this year, or are there more structural forces at work? Several dynamics are combining to impact housing starts and, by extension, the North American lumber market.

Supply Analysis

Housing starts kicked off 2018 with a bang, leading many to believe that there would be a gap in supply once the busy part of the building season hit. January starts were up 9.7 percent over December 2017 to a seasonally adjusted annual rate (SAAR) of 1.326 million units, and speculation began to drive lumber prices ever higher.

US new housin starts.jpg

But as the meat of the building season came and went and housing starts failed to live up to expectations (now on pace at a SAAR of 1.228 million units), lumber production numbers confirm that any supply concerns were exaggerated. Both US softwood lumber production and total softwood imports have increased year-over-year (YoY). Through August 2018, US production was 23.8 Bbf (+4.8%) and total imports were 10.3 Bbf (+1.3%). Despite the tariffs on Canadian product, imports from Canada were only off 1.4% YoY to 9.3 Bbf through August. Latin America (primarily Brazil) and European producers more than made up for the difference in Canadian volume; LatAm shipments to the US totaled 306 Mbf (+8.3%) while European shipments totaled 589 Mbf (+65%) through August.

We may see this trend reverse course when full 3Q and 4Q trade statistics are reported; however, those numbers will be immaterial to this analysis. The data show that domestic and import supply was ample through the price run-up that began in 1Q2018 and peaked in 2Q. Neither US production nor imports through August suggest any supply-side disruptions that would account for such a dramatic surge in price. 

 Decreasing Demand for Homes 

“Housing is no longer a tail wind for the economy, but [so far] the headwinds are blowing very gently,” wrote Michelle Meyer, a Bank of America Merrill Lynch economist, in October. One sign of a shifting housing market is slowing demand—including buyer traffic—for existing homes. Resales earlier this fall suffered the largest drop in 2½ years to the slowest pace since November 2015. Though still high, resale price appreciation has been decelerating (below +6% YoY for the first time in 12 months) and the supply of existing homes, while still low, is gradually expanding; there were 4.4 months of supply in September, up from the year-earlier 4.2 months.

Based on the behavior of the exchange-traded fund iShares US Home Construction (ITB), which tracks a basket of 47 US home builders and construction-related companies, investors apparently agree with Meyer’s sentiment. As of mid-November, ITB’s share price had fallen over 34% from its mid-January peak. Builders are in a tough spot, as they have been hit with a number of challenges this year including an increase in materials costs, land and labor shortages and a shrinking appetite of prospective buyers who are willing pay up.

Real private residential investment (PRI) declined for a third quarter in 2Q2018; as a percentage of total GDP, the decline has been in place since 1Q2017. Although both metrics have receded only modestly from their corresponding recent peaks, they nonetheless paint a potentially disconcerting picture for the sustainability of this market cycle.

 Increasing Inventory of Homes 

Interestingly, especially since there is a consensus that more new-home supply is needed, rising inventory is even more pronounced in newly-built homes. After meandering around an average of 5.3 months between July 2013 and December 2017, new-home inventory has trended higher in 2018 (to September’s 7.1 months of supply). In addition, the ratio between starts and new-home sales reached 1.5 in September, which is in the top 14% of monthly ratios since January 1995. The implication is that unless the pace of new-home sales picks up, starts will ultimately be forced lower.

With long-term Treasury yields helping to push mortgage rates upward, the median new-home prices less than 7% off November 2017’s record high, and resale appreciation only gradually slowing, it is entirely possible that housing demand could weaken further in coming months. Despite sustained high home prices (and surging prices in some markets) some regions are now drifting into the “buyer’s market” column.

 Interest Rates

With home appreciation and mortgage rates trending higher, the reality is that many potential borrowers simply can’t make the mortgage numbers work. One way to measure the impact of inflation, mortgage rates and home prices on affordability over time is to use CoreLogic’s “typical mortgage payment,” which is a mortgage-rate-adjusted monthly payment based on each month’s US median home sale price. The number is calculated using Freddie Mac’s average 30-year fixed-rate mortgage rate with a 20% down payment, and it doesn’t include taxes or insurance. As such, the typical mortgage payment is a good measure of affordability because it shows the monthly amount that a borrower needs to purchase a median-priced US home.

The US median home sale price in August 2018 ($226,155) was up 5.7% YoY, while the typical mortgage payment was up 14.5% YoY due to a nearly 0.7-percentage-point rise in mortgage rates over that period. Tight housing inventories coupled with rising home costs are a real barrier for potential homebuyers, but a typical mortgage payment that is rising at over twice that pace is a much more serious concern, and a number of forecasts call for even higher rates next year.

Moody’s Investors Service has observed the deteriorating quality in mortgage loans noting that “The broad conditions under which loans are being granted have grown less favorable for future mortgage performance. For instance, home prices are no longer very affordable and rising interest rates are reducing refinancing incentives and prepayments.” Hence, “mortgages being originated today appear more likely to face a stressed environment within only a few years, [compared to] loans originated earlier during this long period of economic growth.”

And that’s just mortgage rates, which function independently of the federal funds rate instituted by the Federal Reserve (Fed). Though speculative at this point, the Fed is expected to raise interest rates once more this year and, potentially, three to four times next year, which will impact short-term and variable (adjustable) interest rates. Strategists warn that if the Fed tightens too much, economic growth could slump and trade wars could intensify, destroy demand and negatively impact earnings.

The potential scenarios in the wake of these rate hikes are many. However, the impacts of continued increases would most certainly discourage any expansion in new home ownership that would drive an increase in housing starts and additional demand for lumber. 

 Home Size

Not only have housing starts been decelerating since 2013, but home size has also been shrinking. Median floor area of new single-family completions peaked at 2,647 square feet (SF) in 2015 and has subsequently been declining on trend (to 2,426 SF in 2017). The median new home cost a record $133/SF in 2017, +30% relative to 2010. Apartments, by contrast, have been gradually expanding (2017 median: 1,096 SF) from 2013’s 1,059 SF. If these trends continue, net changes in demand for lumber and other building materials could well be negative. While the trend of slightly-shrinking single-family home sizes may seem minimal, the cumulative impact of fewer builds using less lumber is resulting in diminished demand.

Analysis of Economic Health: Forecasting Gross Domestic Product

Posted by Forest2Market on November 26, 2018

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Every month, Forest2Market publishes updated forecasting products designed specifically for participants in the forest value chain. The Economic Outlook is a macroeconomic indicator forecast that supplies critical information, context and insight about general economic trends and direction, and the 4Cast supports regional operational decision making for those who buy and sell timber. With an understanding of economic indicators, future stumpage prices and insight into buying and selling windows (periods in which buyers or sellers hold relative market advantage), subscribers are better able to time sales or purchases, negotiate prices, manage workloads and control inventory levels. The following commentary is just a sampling from the most recent Economic Outlook for November, 2018.

The robust economic momentum we’ve seen over the last several months may be slowing against the backdrop of a strong dollar and cooling global growth, which is restraining exports. There are few signs so far that US-China trade tensions are disrupting factory production, but manufacturers argue future output could be hurt as tariffs disrupt supply chains. Further, more than 70% of US firms operating in China and polled by the American Chamber of Commerce in South China are considering delaying further investment there and moving some or all of their manufacturing to other countries as a way to avoid the tariffs.

Trends in GDP

In its first estimate of 3Q2018 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the US economy at a seasonally adjusted and annualized rate (SAAR) of +3.50% (3.3% expected), down 0.65 percentage point (PP) from 2Q2018’s +4.15%. Three groupings of GDP components—personal consumption expenditures (PCE), private domestic investment (PDI), and government consumption expenditures (GCE)—contributed to 3Q growth. Net exports (NetX) detracted from growth.

trends US GDP.jpg

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 3Q2018 was 3.04% higher than 2Q2017; that growth rate was slightly faster (+0.17PP) than 2Q2018’s +2.87% relative to 2Q2017.

Despite moderating from 2Q’s torrid pace, 3Q growth appeared quite solid—at least at the headline level; taken together, the 2&3Q GDP results also represent the strongest back-to-back quarterly growth rates since 2&3Q2014. Glancing below the headline of the latest report revealed some less appealing details, however. In contrast to relatively steady contributions from PCE (growth in goods and services spending: +0.11PP from 2Q) and GCE (+0.13PP from 2Q), commercial fixed investment was shown to be contracting at a 0.04% annualized rate (-1.14PP from 2Q); exports: -0.45% (-1.57PP from 2Q), and imports: -1.34% (-1.44PP from 2Q).

Inventories propped up 3Q’s result by contributing nearly 60% of the 3Q headline GDP number (+3.24PP from 2Q). Reflecting that influence, the BEA’s real final sales of domestic product, which excludes the effect of inventories, tumbled to +1.42% (-3.91PP from 2Q).

“The economy has reverted back to the ‘same old’ model of consumers accounting for most of the growth,” commented Bloomberg’s Carl Riccadonna, referring to the 2.7% PCE number. “Supply-siders will be disappointed to see business fixed investment essentially stalling out after a robust first half.

The implication is that the surge in growth is not the onset of the economy evolving toward a new speed limit,” concluded Riccadonna, looking forward; “rather, the frothiness in 2&3Q really does appear to be largely due to a sugar high from tax cuts. Unfortunately this is not sustainable barring tax cuts 2.0.”

“When we got the 2Q number,” concurred economic consultant Joel Naroff, “I suggested it could be the high water mark for this expansion. It is looking more and more like it will be. Household incomes are just not expanding fast enough to sustain the rapid spending paces posted in 2&3Q… [Also,] most business leaders have become somewhat cautious about the future and are holding off… major investment plans.”

“The fate of the consumer rests with the willingness and ability of businesses to keep hiring,” echoed former Federal Reserve researcher Julia Coronado. The slowdown in business spending “came earlier and was more than we expected, given where the [tax-cut] stimulus is,” Coronado said. “That suggests some of this stimulus won’t last, it’s not going to turn into higher-trend growth through the channel of investment and greater capacity and greater potential growth.”

“Don’t expect 4Q growth to be anywhere near what we have seen over the past two quarters,” Naroff concluded. “The economy is not faltering, it’s just that we are moving back toward more sustainable growth.”

The impacts on GDP of inventories and imports will bear watching as tariffs on $250 billion of Chinese products percolate through the economy. US companies appear to have “front-loaded” orders from China to beat the September 24 tariff deadline. Hence, it is possible the contributions to 4Q’s GDP headline from inventories and imports may flip relative to 3Q.




Fourth Quarter 2018 Economic and Wood Product News

supply chain disruption.jpg

October 17th 2018

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EIU global forecast – Trade war will disrupt supply chains

The Economist Intelligence Unit expects the global system to be characterized by competition between the major powers in the next five years. Of most importance to the global economy is the relationship between the world’s two largest economies, China and the US. The bilateral trade war between these countries will drag down global economic growth in 2019, as well as disrupt global supply chains. However, the trade dispute is increasingly spilling into areas of political and security concern. On October 4th the US vice-president, Mike Pence, signaled a significant hardening of US strategy towards China. The most explosive allegation from Mr. Pence’s speech was that China was meddling in US politics ahead of the mid-term elections in November. However, the speech also addressed several larger issues, including the controversy over the “Made in China 2025” initiative, the debt issues surrounding China’s Belt and Road Initiative and the campaign against Taiwan. In a clear signal of US intent, the revised North American Free-Trade Agreement, officially re-branded as the United States Mexico Canada Agreement (USMCA), contains an anti-China provision aimed at increasing the trade pressure on the country. The USMCA casts a spectre over potential future trade deals between China, Canada and Mexico by stipulating that any party would have grounds to withdraw from the deal if another party were to enter into a free-trade agreement with a non-market economy (a term used by the US to describe China).

Signs of renewed tensions over Taiwan are of concern, given the island’s key strategic significance for China. On September 25th Geng Shuang, a spokesman for China’s Ministry of Foreign Affairs, told a press briefing that China had lodged a complaint against the US regarding the approval of a US$330 million arms sale to Taiwan, announced the previous day. This followed a statement on September 7th by the US Department of State that it had recalled its ambassadors to El Salvador, Panama and the Dominican Republic following the decision by those countries to no longer formally recognise Taiwan. All three countries switched diplomatic recognition from Taiwan to China in 2018. We expect that nationalist sentiment is also likely to increase in Asia, given our view that the trade war is likely to endure until at least 2020. For China, reunification has long been designated a core national issue, and Xi Jinping, China’s president, may also view Taiwan as a legacy issue for his presidency. Moreover, if Mr Xi has concerns about China’s medium-term growth prospects, owing to issues such as an ageing population and unsustainable debt, he may be tempted to address these sooner rather than later. Consequently, risks are developing around the question of Taiwan, suggesting that the likelihood of conflict erupting at some point in the next five years is higher than it has been in decades.

The world’s other major power, Russia, is also expanding its global presence, presenting a challenge to the US’s dominance of global security. During a recent visit to India by the Russian president, Vladimir Putin, Russia signed a US$5.4  billion deal for the sale of S‑400 Russian air defense missile systems to India. The deal is in line with our view that Russia will strive to be on the same level as the US in terms of its economic and security relationships, a process that risks increasing tensions in the region. Other flash points also present a significant risk to the global economy, and, with the lack of co‑operation between the US, China and Russia, diplomatic options to resolve tensions look remote. North Korea continues to be a threat to global stability, despite the country’s current rapprochement with the US. A breakdown in talks is possible, as differences remain over the terms of denuclearization, and, with US‑China relations deteriorating, China is unlikely to give full support to the US’s engagement with North Korea. A return to heated rhetoric between the US and North Korea is possible, which would be of particular concern since the room for diplomatic maneuver is limited. In the Middle East, a conflict between Iran and Israel is a medium-term risk. The two countries are involved in a proxy conflict in Syria, but a direct confrontation would further destabilize the region. The source of this risk is Iran’s decision to consider restarting its nuclear program in the coming years, owing to the collapse of the Iran nuclear deal with the US. If the program were to be restarted, a direct attack on Iran by Israel would be a possibility.

Set against this backdrop of geopolitical shifts are the trends of declining democracy and authoritarian regimes. According to our 2017 Democracy Index, 89 out of 167 countries saw a decline in their democracy scores, and about one‑third of the world’s population lives under authoritarian rule. Following the decision by Mr. Xi to abolish presidential term limits, authoritarian rule is set to endure in China. Russia is also an authoritarian regime under Mr. Putin’s rule. Examples of authoritarian-leaning, strongman leadership also exist in Hungary, the Philippines, Turkey and Saudi Arabia. Brazil could join this group if Jair Bolsonaro wins the second-round presidential election against his opponent, Fernando Haddad. Given this picture, we expect a growing number of economic and diplomatic disputes, and although we do not expect a major power conflict to occur, businesses should be cautious of bilateral tensions escalating to a breakdown of relations between countries.

The US-China trade war will escalate and endure

The US president, Donald Trump, has moved ahead with tariff increases on a further US$200 billion-worth of Chinese imports. China responded with additional tariffs on US$60 billion-worth of US imports. The trade dispute is likely to escalate further, and we now expect the Trump administration to move ahead with tariffs on most of the remaining Chinese imports that have yet to be covered in the dispute. At the heart of the dispute between China and the US is a disagreement over intellectual property and China’s technology transfer practices, although the US trade team is divided on this issue, with Mr. Trump also focusing on the US’s trade deficit with China. Given this, discussions thus far between the two countries have failed to resolve the dispute, and a resolution looks unlikely in the short term. By 2019 this will dampen growth in both economies and act as a drag on growth in the wider global economy. We expect that, combined with softening economic growth in key emerging markets, especially those in Latin America, global growth will slow to 2.7% at market exchange rates in 2019, from 3% in 2018.

Growth in the US and China will slow more than expected in 2019

The trade war comes at a challenging time for the Chinese economy. Concerns over the strength of domestic demand have returned as momentum in both private consumption and investment has weakened. The effects of tighter monetary policy, corporate deleveraging efforts and a crackdown on shadow financing have become more apparent in the economy this year, having raised the cost and availability of capital for both firms and consumers. The trade war will lessen the focus on deleveraging, with authorities needing to take measures to support growth in the short term. We are likely to see a moderate easing in fiscal policy, such as cuts to taxes and fees, together with an easing of reserve requirements from the People’s Bank of China (the central bank). There is recognition from policymakers, however, that capacity to support the economy will be limited by China’s debt profile. On the back of these assumptions, in July we revised down China’s growth forecast for 2019 to 6.2%, from 6.4%. Although we expect growth to be maintained to reach the government’s target of doubling real GDP this decade, the trade war has again raised the spectre of China’s financial vulnerabilities, which will cloud the economy’s outlook for the foreseeable future.

The trade war will also affect the US economy, which has so far had a stellar year in 2018. We have revised up our forecast for real GDP growth in 2018 to 2.9% (from 2.8%), to reflect faster than anticipated growth in the second quarter, of 4.1% in annualized terms, and heightened expectations of a similar rate of growth in the third quarter. The economy continues to receive support from the Trump administration’s fiscal policies, as well as from the ongoing strength in the labor market. However, the escalating trade dispute with China will start to weigh on growth later in 2018 and into 2019—we expect growth to slow in 2019 to 2.2%. The US manufacturing and agricultural sectors will be hit by the trade dispute, and rising interest rates will cause private consumption to slow. Growth will continue to slow in 2020, to a low of 1.3%, as the lingering effects of the trade dispute, higher interest rates and softening corporate balance sheets result in a business-cycle slowdown. A mild recovery will take place in 2021‑23 as these effects unwind, with growth averaging 1.9%.

Financial market volatility will remain high in 2019-20

The US-China trade war and growing geopolitical tensions will add to the risks facing emerging markets. Volatility in emerging-market currencies in recent months has fueled fears of a full-blown crisis. Capital flight has so far led to genuine currency crises in Turkey and Argentina, and we expect recessions in both. The Argentinian and Turkish crises have intensified the sell-off in emerging-market assets, which began in April because of the strengthening US dollar. Further periods of market volatility are likely as several key trends—tightening monetary conditions, the global trade dispute, heightened geopolitical risk and, in many emerging markets, a significant increase in debt levels in recent years—interact in challenging ways. Turkey and Argentina have experienced a perfect storm of external imbalances, namely weak monetary policy credibility and political risk, which few other economies currently share. As a result, we expect future exchange-rate crises to remain confined to the most vulnerable countries, with non-Organization for Economic Cooperation and Development (OECD) economic growth remaining steady in 2019‑20. However, there is a moderate risk (21‑30% probability) that a souring of market sentiment towards emerging markets as an asset class could lead to a noticeable slowdown in emerging-market growth in 2019‑20.

Our forecasts crucially assume that US monetary tightening will remain controlled and relatively gradual in 2019‑20, with inflation picking up only modestly. However, there remains a risk that US inflation and interest rates could rise faster than the rate that is currently built into financial market pricing, leading to falls in a wide range of asset prices that have been supported by years of extraordinary monetary policy support. Financial markets could also prove more sensitive to rises in interest rates than we currently assume. By keeping long-term interest rates extremely low through quantitative easing programs, major central banks have forced investors to look elsewhere for attractive returns, pushing up the prices of bonds, stocks and property. The effects on financial markets of withdrawing huge amounts of monetary stimulus are not well understood. The sharp sell-off in global share markets in October, amid rising US bond yields, shows the fragility of financial market sentiment. We have raised from low to moderate the likelihood of a sharp global slowdown brought about by a faster than expected increase in US interest rates.

World economic Growth forecast

World economic Growth forecast 2

Global GDP forecasts OCED

Nov 27, 2018 | 13:49 GMT


The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come. Read the Synopsis

Paddy fields

(Thoyod Pisanu/

Table of Contents



Key Trends for 2019

China Weathers the Trade Storm

Beijing will try to keep its lines of communication with Washington open on trade by offering to buy more U.S. goods and selectively lower barriers to investment, but its concessions won’t meet U.S. demands for structural economic reform. Still, China will only respond in kind to U.S. measures targeting Chinese firms and entities and not take any blanket punitive action against U.S. businesses. Beijing will also deepen public-sector reforms by soliciting foreign investment for its financial, auto and energy sectors. Furthermore, it will ease restrictions in sectors that align with China’s prime interests, such as medical services and education.

China’s refusal to concede to U.S. demands will prolong the ongoing trade dispute.


The United States will maintain its demand that China ease state support for its tech sector, but that will only compel Beijing to accelerate its efforts to ease China’s dependence on foreign technology and diversify its supply chain — thereby necessitating increased state support for the sector. China’s refusal to bow to U.S. pressure on tech will prolong their trade dispute. At the same time, China will strive to acquire technology and cooperate on sector-specific activities with advanced tech powers like Japan, Israel, Taiwan and the European Union, but such activities will face increased scrutiny over concerns about Chinese investment and industrial espionage. Read more on China’s efforts to reform its state sector.

Chinas Domestic market Share percents

Beijing Battens Down the Hatches

Because the extended trade war threatens the economy in China’s coastal regions (and, thus, social stability), Beijing will ease its tight regulations designed to contain debt and protect the environment while upgrading infrastructure, generating credit and offering direct subsidies to boost growth. China will also carefully manage the yuan’s value to mitigate the damage to exports, allowing it to cope with reduced growth. But an accumulation of debt and the fragility of the housing market will limit Beijing’s ability to use massive credit flows and sharp currency devaluations as a means of economic stimulus.

China will have to rely more on fiscal stimulus — including reducing taxes — to encourage consumption and private sector activity.

It will also encourage the increased use of the yuan in currency swaps and in trade with countries participating in the Belt and Road Initiative to mitigate currency volatility. And to keep hedging against U.S. trade pressure, Beijing will pursue bilateral and regional free trade agreements, such as the Regional Comprehensive Economic Partnership in the Indo-Pacific region and trilateral negotiations with Japan and South Korea, all while forging ties with new export markets along the Belt and Road and in Africa. Southeast Asia’s emerging economies, meanwhile, will be ready to lure any factories that relocate from China amid the trade war. Threats to the overall regional supply chain and external financial volatility could also present challenges to countries with higher debt or current account deficits, such as Malaysia, Indonesia and the Philippines. Learn more about why state-owned enterprises are so important to China.

China Local Govt debt risk

Chinese Household debt

Great Power Competition in the Asia-Pacific

As it tries to chip away at the U.S. regional alliance structure, China will continue its conciliatory outreach to Japan, India and the member states of the Association of Southeast Asian Nations (ASEAN) by privileging dispute resolution efforts and economic partnerships while also making overtures to Australia, whose April elections could foster some rapprochement. At the same time, Washington will bolster its naval presence in the South China Sea and the Taiwan Strait and further challenge the One China principle by elevating Taipei’s status at international associations and regularizing arms sales, naval patrols and high-level visits.

The U.S. Navy will be more prevalent in the South China Sea and the Taiwan Strait, which will provoke China to adopt a more robust military posture.

In response, China will adopt tougher naval and aerial postures to assert its territorial claims, increasing the chances of accidents involving the U.S. military. The United States is considering making a naval port call in Taiwan — an event that would trigger a more direct Chinese military response. Japan, India and Australia will increase security cooperation with Washington, but they will refrain from joining U.S. freedom of navigation operations in the South China Sea or patrols in the Taiwan Strait. Elsewhere in the region, U.S.-ASEAN military exercises and U.S.-Vietnamese defense cooperation will complicate Chinese efforts to limit the further regional expansion of U.S. influence. Find out more about Taiwan’s role in U.S.-China competition.

A Fraying Consensus on North Korea

The United States is intent on extracting tangible concessions from North Korea in 2019. But this is also the year that Pyongyang hopes to squeeze the most out of the Trump presidency before the United States becomes distracted by its election cycle. Given the obviously high stakes of open warfare, neither will deliberately scuttle the dialogue. North Korea will carefully offer tangible pledges but will also expect concrete progress on sanctions relief or toward a peace deal; throughout the process, it will obfuscate and delay where it can. Pyongyang will also insist on assurances that any bilateral deal will have staying power beyond the current administration.

The United States will hesitate to extend an economic lifeline to North Korea by lifting sanctions, but time is on Pyongyang’s side as the international consensus on maintaining sanctions unravels.

For the moment, Washington’s veto power on the U.N. Security Council will allow it to block any effort to repeal the multilateral measures, even as China and Russia push for the international community to reward North Korea for its cooperation. At the same time, the United States will pressure others to fall into line on sanctions by shaming transgressors and threatening secondary sanctions against those who deal with Pyongyang. Complicating matters, inter-Korean detente is reaching the point where it cannot proceed much further without sanctions exceptions — something the United States will only approve after careful consideration. The growing discrepancy between the pace of the inter-Korean dialogue and the pace of the U.S.-North Korean discussions will leave room for China to extend its influence on the Korean Peninsula. Overall, while swings towards breakthroughs and breakdowns will occur throughout the year, North Korea will still maintain possession of many elements of its hard-won nuclear program at the end of 2019.

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Moving the Belt and Road Forward

With its access to U.S. markets under strain, Beijing will redouble its efforts to find new export markets and partners through the Belt and Road Initiative. Washington will work principally with Japan and Australia to offer alternative infrastructure investments to counter China’s ambitions in the Indo-Pacific, but Beijing will temper potential partners’ concerns regarding financial sustainability, political influence and national security threats by attracting third-party investors. It will also work to undermine Washington’s regional initiatives by pursuing joint projects with middle powers, including Japan, the European Union and India. Take a more in-depth look at the resistance to the Belt and Road Initiative.

China Port Investments.jpg

A Japanese Awakening

Secure in his position through 2021, Japanese Prime Minister Shinzo Abe will aim to pass constitutional reforms before the end of 2019 while offsetting the economic impacts of a consumption tax hike through public works spending, incentives for private sector investment and tax exemptions for certain products. And though Russia and Japan will continue to negotiate over the disputed Kuril Islands, a larger standoff between Moscow and the West will scuttle any hopes of a deal.

When it comes to trade, the United States and Japan have an arrangement for now, but much will depend on how far Washington pushes Tokyo.

Meanwhile, Tokyo will grant concessions that will partly placate U.S. trade concerns — so long as the U.S. push for agricultural access does not exceed the limits outlined in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and EU-Japan trade deals. If Washington pushes further, Tokyo will experience a backlash from its powerful farming lobby — although it will weigh whether to sacrifice its agricultural sector to avoid U.S. tariffs on its critical auto sector. Beyond that, Tokyo will also resist U.S. attempts to limit any future Japanese trade deal with China. Read more on Japan’s calculations on automotive and agricultural trade in the face of U.S. pressure

japan Agriculture Imports

Related Forecasts

These Stratfor analyses provide additional insights for the year ahead

Key Dates to Watch

  • Early 2019: Release of a World Trade Organization panel report on China’s challenge of the European Union’s refusal to grant China market economy status.
  • Early 2019: Next Trump-Kim summit may occur.
  • Jan. 1: Date that the United States could possibly raise the tariff rate on $200 billion worth of Chinese imports to 25 percent.
  • Jan. 14: First day the United States can hold formal trade deal talks with Japan.
  • January: First round of CPTPP’s tariff cuts will take effect.
  • March: Joint U.S.-South Korean military exercises Foal Eagle, Double Dragon and Key Resolve normally held.
  • May 18: Australia’s Senate elections must be held before this date, with House of Representative elections due by November.
  • June 28-29: A G-20 summit is scheduled to be held in Osaka, Japan.

August: U.S.-South Korean Ulchi Freedom Guardian military exercise normally held.

emerging middle class

Emerging middle class promises bumper payday for asset managers Growth will come from harnessing demand for financial products as demographics shift

Chris Flood DECEMBER 2, 2018

Many asset managers describe their businesses as global because they invest in financial markets across the world. Yet not one has succeeded in building a truly global client base that can rival those of leading technology companies such as Google and Amazon. Building a client base in emerging markets requires international investment managers to confront myriad legal and regulatory obstacles that can pose a threat to expansion plans. Yet the prize for doing so is potentially huge.

The growing size and prosperity of the middle classes across many emerging markets offers a tantalizing reward to those managers that can address the needs of institutional clients and retail investors in these countries. “The investment industry is a natural beneficiary of the growth in wealth and savings among the middle classes in emerging markets,” says Kunal Desai, a portfolio manager with Mobius Capital, a London-based specialist emerging market boutique. “But it tends to get overlooked in favour of sectors that are seen as more obvious winners, such as consumer goods.” Investor assets managed in the Asia-Pacific, Latin America, Middle East and Africa regions will increase from about $16.1 trillion at the end of 2016 to $38.5 trillion by 2025, according to PricewaterhouseCoopers (PwC), a professional services provider.

Olwyn Alexander, a partner at PwC, says profiting from this rise requires cultural change. “Historically, there has been a lack of an investment culture in many emerging markets,” she says. “But even a small shift can present significant opportunities given the magnitude of the populations in some of these countries.” $420 billion New money expected to flow into the fund industry in India over the next decade Asset managers need to ensure they can cater to younger investors, Ms. Alexander says. “Asset managers will need technology capabilities to process large numbers of small dollar value transactions from mobile devices,” she adds. Among the fastest-growing managers in Asia, local and international, two common traits stand out. All are making big bets on China and have invested in new digital services to attract the growing middle class’s rising wealth.

A successful marriage between technology and asset management is exemplified by Yu’E Bao, a fund created as a repository for leftover cash from consumers’ online spending accounts by the Chinese company Ant Financial in 2013. Yu’E Bao has grown into the world’s largest money market fund with more than 400 million users. “The big fin techs are aiding China’s shift to a cashless society,” says Jacob Dahl, a senior partner at McKinsey, based in Hong Kong. “How asset managers position themselves to serve these digital platforms will be critical, not only in China but also in other Asian markets where fin techs are gaining ground.” China, which is on course to replace Europe as the world’s second-largest fund market behind the US, provides the single largest growth opportunity for global asset managers over the next decade. The country’s mutual fund assets could multiply five-fold to reach $7.5 trillion by 2025, creating a fee pool worth $42 billion a year, according to UBS. “But it all depends on the progression of reform and deregulation,” says Kelvin Chu, an analyst with UBS.

In India, a decade of consistently strong economic growth has helped to accelerate the rise of the middle class. The National Council of Applied Economic Research, a Delhi-based think-tank, has forecast that this group will number 547 million people by 2026, from 267 million in 2016.

Indias middle class.jpg

India’s middle class is expected to double to 550 million by 2026 © Alamy

India’s government has implemented a series of reforms that have significantly boosted inflows into fund management. “We estimate that around $420 billion in new money from domestic investors will flow into the fund industry in India over the next decade,” Mr. Desai says. “This compared with around $180 billion from both domestic and international sources over the past 10 years.”

Managers should be careful not to overlook Indonesia, Malaysia and Thailand, Mr. Dahl says. “We expect assets under management in these markets to nearly double over the next five years from a collective $600 billion today,” he says.

Across Asia as a whole, close to 90 per cent of financial assets sit outside the control of asset managers, with the industry overseeing a far lower share than in Europe or the US, according to McKinsey.

However, rising numbers of billionaires in Asian countries, the further growth of large government-sponsored sovereign wealth funds and the development of private pension systems to meet the needs of rising numbers of savers should all provide new sources of growth. “The Asia asset management revenue [fee] pool stands at around $66 billion today and we expect this to [reach] $112 billion by 2022,” says Mr. Dahl.

88% emering middle class.jpg

China Economic Update

eric wong

By Eric Wong
Managing Director, Canada Wood China

October 31, 2018

China to Reduce Wood Import Tariffs November 1

2018 Q3 highlights:

  • China’s GDP hit the lowest growth in September (6.5%) since the first quarter of 2009 during the global financial crisis and missed market consensus of 6.6%.i
  • China Economic growth slowed down in the third quarter due to:
    • to a decrease in infrastructure investment
    • a negative spillover from financial deleveraging
    • the impact of previous economic reforms
    • a cooling housing market.
  • However, export growth continued to grow strongly in Q3 in spite of trade tension with the U.S.ii
  • A recent government announcement effective November 1st, 2018 states that China will cut import tariffs on more than 1,500 products to lower the average import tariff to around 7.8%. Import tariffs on wood and paper products will be decreased to 5.4% from 6.6% which will help wood-based panels and other related imports to grow in China.iii

PMI (Caixin) index in September (50.0) dropped to a 16-month low and missed market consensus of 50.5 which was also the lowest point of the continuously descending trend started from May (51.1).iv China Exports achieved a 14.5% gain year-on-year to USD 226.7 million in September which was the fastest growth in outbound shipments since this February and also beat market consensus of 8.9%.v

china economy exports and manufacturing.jpg

China Consumer Price Index (CPI) started to go up from May (101.8) to September (102.5) which achieved the second highest month only after February (102.9).vi Similar to Q2, USD/CNY had also been on the rise in Q3, increased from 6.62 (July 1st) to 6.81 (August 1st) to 6.83 on September 1st;vii CAD/CNY kept the similar upward trend, went from 5.04 (July 1st) to 5.23 (August 1st) and hit 5.24 on September 1st.viii


Building material prices

Cement price increased slightly from RMB 435.67 to RMB 456.00 per metric ton (up 4.67%) over September 2018.ix Rebar steel price also went up slightly by 2.63% from RMB 4,415.38 per metric ton on September 1st 2018 to RMB 4,531.54 per metric ton on September 30th 2018.x The log price index in September 2018 was 1,096.96 points which decreased 0.26% less than August 2019 and reduced 0.84% compared to the same period year-on-year; the lumber price index in September 2018 was 771.05 points which went up slightly by 0.02% month-on-month and increased 0.36% year-on-year.xi

China-US Trade Dispute Update xii

The trade war between China and United States continues to impact markets.
During the first half of 2018 U.S. wood products made up:

  • 13% of China’s softwood log imports; was 54% in 2017
  • 2% of China’s softwood lumber imports; was 38% in 2017
  • 7% of China’s hardwood log imports;
  • 21% of China’s hardwood lumber imports.

China Wood Imports xiii

Russian softwood lumber imports have been rising steadily since this February when imports hit the highest in May (1,590,000 m3) and maintained at the level of 1,500,000 m3 in August; Canadian softwood lumber imports on the other hand maintained 350,000 m3 each month from June to August but decreased 29% in August to (327,000 m3) compared to the same month last year.

Logs and lumber inventory at Taicang, Wanfang and Meijing ports hit a new low in August (802,000 m3) which decreased consistently since this March, but winter and Chinese

New Year inventory volume at all ports will be on the rise based on previous trends. Import volumes of total logs and lumber fluctuated at reasonable curves and achieved 8,814,000 m3 in August, the second highest month so far in 2018.

China softwood lumber

china softwood lumber imports.jpg

china demand for wood total imports

Trading Economics (October 20th, 2018). China GDP Annual Growth Rate
ii Focus Economics (October 16th, 2018). China Economic Outlook
iii Wood Markets/FEA (October 2018). China Bulletin
iv Trading Economics (October 20th, 2018). China Caixin Manufacturing PMI
Trading Economics (October 20th, 2018). China Exports
vi Trading Economics (October 20th, 2018). China Consumer Price Index (CPI)
vii XE Currency Charts: USD to CNY
viii XE Currency Charts: CAD to CNY
ix Sunsirs (October 2018). Spot Price for Cement
Sunsirs (October 2018). Spot Price for Rebar Steel
xi BOABC (October 2018). China Wood and Its Products Market Monthly Report
xii Wood Markets/FEA (October 2018). China Bulletin
xiii Wood Markets/FEA (October 2018). China Bulletin

Who will benefit from the American timber tariff?

dora Xue

By Dora Xue

October 31, 2018

China announced a 25% tariff on U.S. imports, on a value of $16 billion from August 23rd. The taxed products include $1.83 billion of wood products and logs.

A large range of wood products are listed in the tariff list, including oak logs, birch logs, OSB, spruce, larch, teak, wooden window frames, shelves, furniture etc.

China is the biggest importer for American wood products. The United States exported 6.14 million m3 logs to China, accounting for 53.9% of U.S. logs, and 3.27 m3 lumber, accounting for 38% of U.S. sawn timber exports, according to the U.S Bureau of Statistics. The China market represents half of total U.S. log exports, and one third of its sawn timber exports.

The U.S. tariffs will increase the cost of U.S. wood imports, which will make America timber gradually lose its competitiveness and market position in China.
As forecasted by China Timber Website, Chinese buyers may turn to other countries such as Russia and Europe as the properties of timber from those countries are very similar to that of the U.S.

china US trade war.jpg

Korean Technical Mission Ends in Success

Tai Jeong.jpg

By Tai Jeong

Technical Director, Canada Wood Korea

October 31, 2018

Posted in: Korea

Canada Wood Korea has successfully completed its annual Technical Mission, visiting Canada and Japan from September 26 to October 7 with participation of 13 WFC industry leaders including renowned architects, structural engineers and prefab manufacturers and 1 media reporter.
Mission participants attended technical seminars both at FPInnovations and Canada Wood Japan office to learn about technical aspects and commercialization of the Midply Shearwall system, industrialization plants and various buildings sites both in Canada (British Columbia and Alberta provinces) and Japan to learn about innovative industrialized WFC systems including pre-fabrication, modular homes and tall wood mass timber construction.
All participants said It was a wonderful opportunity to experience actual applications of wood along with technical seminars. Especially, Mr. Je Yu Park, President-elect of the Korean Institute of Architects (KIA) who participated in the mission, agreed to sign an MOU with Canada Wood for technical cooperation and jointly hold the WFC Seismic Workshop for member architects in conjunction with the Forest Sector Mission to Korea led by the Minister Doug Donaldson this coming December 2018. Mr. Park also promised to establish a Wood Structure Design Advisory Committee Division at KIA after his inauguration next year.

Korean tour 1Korean tour 2

Korean tour 3

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Korean tour 5

Canada Wood Korea signs agreement with Korean Institute of Architects

JOC News Service December 17, 2018

korean institute MOU.jpg

VANCOUVER — Canada Wood Korea and the Korean Institute of Architects have signed a memorandum of understanding (MOU) to help Korean architects work better with Canadian wood.

The technical co-operation agreement was signed on Dec. 7 by senior forest industry representatives on the Forestry Asia Trade Mission, which consisted of a group of more than 40 delegates including industry, research, labour, First Nations and government.

The group also visited the Gapyeong Canada Village Project on Dec. 8., which uses wood products from B.C. and other parts of Canada. The village is the result of a 2013 MOU signed by Canada Wood Korea, the Gyeonggi Urban Innovation Corporation and Dreamsite Korea.

Gapyeong Canada Village Project



“South Koreans’ interest in wood construction is growing because they recognize that wood construction fares better than other materials in the event of earthquakes. By promoting the benefits of wood and sharing technical expertise, we can open up new opportunities in Korea for our province’s high-quality wood products. This, in turn, supports forestry jobs in B.C.,” said B.C. Minister of Forests, Lands, Natural Resource Operations and Rural Development Doug Donaldson in a statement.

The MOU is intended to raise the skill and knowledge levels of Korean architects and designers so they are better equipped to work with wood. The Institute will benchmark Canadian best practices for wood-frame residential housing, wood interior walls and Super-E/Net-Zero housing design, a standard designed by Natural Resources Canada where a home produces all needed energy from renewable sources and releases no carbon from the burning of fossil fuels.

South Korea is B.C.’s fifth-largest market for wood products, with softwood lumber exports totaling over $73 million in 2017.

Korea – Economic forecast summary (November 2018)

READ full country note (PDF)

Economic growth is projected to remain close to 3% through 2020, as fiscal stimulus offsets sluggish employment growth, which reflects double-digit hikes in the minimum wage in 2018-19 and restructuring in the manufacturing sector. Measures to stabilize the housing market have led to a decline in construction orders for residential property. Inflation is expected to edge up from 1½ per cent toward the 2% target, while the current account surplus will remain above 5% of GDP.

Hikes in the minimum wage should be moderated to avoid negative effects on employment. The “income-led growth” strategy, driven by minimum wage increases and higher public employment and social spending, needs to be supported by reforms to narrow productivity gaps between manufacturing and services, and between large and small firms. Short-term fiscal stimulus should be accompanied by a long-term framework to cope with population ageing, which will be the fastest in the OECD. With inflation below target, the withdrawal of monetary accommodation should be gradual.


korean economic stats.jpg 

Korea Demand Output.jpg

Supportive macroeconomic policies should be accompanied by structural reforms The government is responding to weaker domestic demand with fiscal stimulus. Spending is to increase by 9.7% in 2019, the highest since 2009 in the wake of the global recession. Social welfare spending is the priority, along with outlays for job creation, which are set to rise by 22%. In addition, the government aims to boost public employment by 34% over 2017-22. Despite increased spending, the general government budget will remain in surplus at around 2% of GDP in 2019, while government debt is low at just under 45% of GDP. The policy interest rate has remained at 1.5% since late 2017. With consumer price inflation below 2%, the normalization of monetary policy should be gradual. Monetary policy also needs to consider potential risks to financial stability, including capital flows and household debt, which rose at an 8% pace in the first half of 2018. At 186% of net disposable household income in 2017, household debt remains a headwind to private consumption. Raising labour productivity, which is 46% below that in the top half of OECD countries, is increasingly important for growth as the working-age population peaked in 2017. The priority is regulatory reform, focusing on services, where labour productivity is less than half of that in Korean manufacturing. Policies to promote entrepreneurship and raise productivity in SMEs are also needed to promote inclusive growth. Increasing female employment and reducing the gender wage gap, which is the highest in the OECD at 37%, is another priority. Growth is projected to be stable Output growth is projected to remain close to 3%, despite sluggish employment growth in 2019, partly as a result of a hike in the minimum wage by a further 10.9%. Further large increases, as part of the government’s commitment to a sharp increase in the minimum wage, would damp employment and output growth. The improved relationship with North Korea is a landmark event that may also have positive economic implications. Moreover, progress with structural reforms to raise productivity in lagging sectors would boost output growth. However, trade protectionism remains a concern: with intermediate goods accounting for four-fifths of Korea’s exports to China, its largest trading partner, Korea is vulnerable to higher import barriers on Chinese exports to the United States.

Taiwan exports end 24-month rise

U.S.-China trade war played part in sudden drop: MOF

By Matthew Strong,Taiwan News, Staff Writer

2018/12/07 17:29

taiwan exports.jpg

Taiwan’s exports end 24 consecutive monthly increases. (By Central News Agency)

TAIPEI (Taiwan News) – Taiwan’s exports ended 24 consecutive months of increases by recording a drop of 3.4 percent for November, the government announced Friday.

The Ministry of Finance (MOF) identified lower-than-expected sales of high-end smartphones, a weakening of overseas investment needs, and the impact of the trade war between the United States and China as the three reasons why exports fell in November compared to the same period last year, the Apple Daily reported.

The value of exports for November totaled US$27.81 billion (NT$858.78 billion), a drop of 3.4 percent compared to November 2017 and of 5.9 percent compared to October 2018, according to MOF data.

However, for the period from January to November 2018, exports still rose from the same period last year to reach a total of US$307.46 billion (NT$9.49 trillion), the MOF stated Friday.

100 days under Pakatan

Economy faces mounting risksPrime Minister Mahathir Mohamad.jpg

Prime Minister Mahathir Mohamad said his government had realized over a third of its 60 election promises “to unshackle Malaysia from the issue of corruption and ensure good governance” .PHOTO: EPA-EFE


AUG 18, 2018, 5:00 AM SGT

KUALA LUMPUR • Malaysian Prime Minister Mahathir Mohamad marked his 100 days in office yesterday with risks mounting against the economy.

Gross domestic product in the second quarter grew at 4.5 per cent, its slowest pace in over a year, the current-account surplus narrowed sharply and the currency is facing pressure as an emerging-market rout worsens.

After a shock election win in May, Tun Dr Mahathir has moved quickly to deliver on promises to  a speech broadcast nationwide yesterday, Dr Mahathir said his government had realized over a third of its 60 election promises “to unshackle Malaysia from the issue of corruption and ensure good governance”. These measures included policies on declaring assets, bolstering anti-corruption institutions and protecting media freedom.

The political transition had an impact on the economy last quarter, with public sector investment contracting 9.8 per cent from last year.

Noting in his speech that the national debt was RM 1 trillion (S$334 billion), Dr Mahathir listed infrastructure projects that have been put on hold, including the Singapore-Kuala Lumpur High-Speed Rail, the third phase of the Mass Rapid Transit and the China-backed East Coast Rail Link.

Domestic demand remained strong and was buoyed by the scrapping of a 6 per cent goods and services tax in June, another election pledge.

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Related Story

100 days under Pakatan: Mahathir, the strongman reformist?

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100 days under Pakatan: Malay, Islamic issues still dominate politics

Private consumption climbed 8 per cent last quarter from a year ago, while investment surged 6.1 per cent.

“The bigger picture we see going forward, private consumption will be modest as many Malaysians probably front-loaded their purchases ahead of the sales tax coming in September, so it’s hard to see how that’s sustained,” said Mr. Brian Tan, an economist at Nomura Holdings in Singapore.

Central bank governor Nor Shamsiah Mohd Yunus said the economy will probably expand about 5 per cent this year, lower than the previous government’s projection of 5.5 per cent to 6 per cent.


A version of this article appeared in the print edition of The Straits Times on August 18, 2018, with the headline ‘Economy faces mounting risks’. Print Edition | Subscribe

Destitute dotage

Vietnam is getting old before it gets rich

That makes caring for the elderly hard to afford

vietnamese wpmen.jpg

Print edition | Asia

Nov 8th 2018| HANOI

As dawn breaks in Hanoi the botanical gardens start to fill up. Hundreds of old people come every morning to exercise before the tropical heat makes sport unbearable. Groups of fitness enthusiasts proliferate. Elderly ladies in floral silks do tai chi in a courtyard. In the shade of a tall tree, dozens of ballroom dancers sway to samba music. Others work up a sweat on an outdoor exercise-machine. Tho, an 83-year-old with a neat white moustache, says he comes to walk round the lake every day, rain or shine.

In the next few decades the gardens will become busier still. Vietnam has a median age of only 26. But it is greying fast. Over-60s make up 12% of the population, a share that is forecast to jump to 21% by 2040, one of the quickest increases in the world (see chart). That is partly because life expectancy has increased from 60 years in 1970 to 76 today, thanks to rising incomes. Growing prosperity has also helped bring down the fertility rate in the same period from about seven children per woman to less than two. In the 1980s the ruling Communist Party started to enforce a one-child policy. Though less strict than China’s, it has hastened the decline.

Demography is changing in similar ways in many Asian countries. But in Vietnam it is happening while the country is still poor. When the share of the population of working age climbed to its highest in South Korea and Japan, annual GDP per person (in real terms, adjusted for purchasing power) stood at $32,585 and $31,718 respectively. Even China managed to reach $9,526. In Vietnam, which hit the same peak in 2013, incomes averaged a mere $5,024. Indonesia and the Philippines are expected to reach the turning-point in the next few decades, with an income level several times higher than Vietnam’s.

old before its time

This shift brings headaches. First, will the government be able to support millions more Vietnamese in old age? Only the extremely poor and people over 80 (together around 30% of the elderly) get a state pension, which can be as little as a few dollars a week. The most recent survey of the old, in 2011, found that 90% of them had no savings worth the name. Debt was common. Supporting them will become ever more expensive. The IMF predicts that pension costs, at the present rate, could raise government spending as a share of GDP by eight percentage points by 2050. That is faster than in any of the other 12 Asian countries it examined.

The problem is worse in the countryside, where most old folk live. Previously the young cared for their parents in old age. Today they tend to abandon village life to seek their fortune in the city. Surveys suggest that the share of old people living alone is rising, especially in villages. Many work until they die. Around 40% of rural men are still toiling at 75, twice the rate of city-dwellers. In Britain that figure is 3%. Often they do gruelling manual jobs, such as rice farming or fishing.

Providing health care for millions more old people is another worry. Alzheimer’s, heart disease and age-related disability are growing. In the botanical garden Toau, a 78-year-old in a white sports t-shirt, says he is there on doctor’s orders, before taking a pill for his bad heart and joining an exercise group. About a third of over-60s do not have health insurance, which is costly. Many provinces still have no proper geriatric departments in hospitals. Informal health-insurance groups have popped up to fill the gaps. For a fee, members get exercise classes and free check-ups. But few doctors are trained or equipped to treat more serious conditions.

The government is starting to implement policies to reduce the fiscal burden and improve the lot of the elderly. Last year it relaxed the one-child policy. In May it said it would increase the retirement age from 55 to 60 for men and 60 to 62 for women, and reform the pension scheme to provide wider coverage. Next year it plans to begin revamping the health-insurance and social-assistance systems.

But none of that will change the structure of the economy. Usually as countries climb the income ladder, they shift from farming to more productive sectors, like services. By this yardstick, Vietnam is lagging its neighbors. When the working-age population peaked in 2013, agriculture accounted for 18% of the economy. At the same juncture in China, agriculture was just 10% of GDP. Worse, farmers’ output tends to decline with age, unlike, say, that of managers. This over-reliance on agriculture partly explains why three-quarters of Vietnam’s workers are in jobs where they become less productive as they get older. In Malaysia that is the case for only about half the labour force.

Boosting productivity will be tricky. The government is still wedded to “statism”. State-owned enterprises dominate many industries. Most university students, meanwhile, waste at least a year learning Marxist and Leninist theory. Many countries in Asia are ageing fast. But growing old before it becomes rich makes Vietnam’s problems all the greater.

Economists fret over trade tensions, shave forecast for Singapore growth in 2019

WED, DEC 12, 2018 – 12:00 PM


singapore growth

For 2018, Singapore’s economy is expected to grow by 3.3 per cent, a tad up from September’s forecast of 3.2 per cent.

PRIVATE economists unanimously fingered higher US-China trade tensions as a downside risk to Singapore’s growth, as they dialed down their forecast for 2019 in a recent industry poll.

Economists expect Singapore’s gross domestic product (GDP) growth to ease to 2.6 per cent in 2019, from an estimated 3.3 per cent in 2018, according to results out on Wednesday from a quarterly survey by the Monetary Authority of Singapore (MAS).

They had previously projected in September’s poll that the national GDP would notch 3.2 per cent growth in 2018 and 2.7 per cent in 2019.

The subdued showing is expected to come on the back of a marked slowdown in manufacturing growth – from an estimated 7.4 per cent in 2018, to just 3 per cent in 2019 – and cooling growth in the finance and insurance sector, from 6.9 per cent in 2018 to 5.4 per cent in 2019.

The weakness is expected to extend to the accommodation and food services sector, where growth could ease from 3.4 per cent in 2018 to 2.8 per cent in 2019.

SEE ALSO: Singapore retail sales inch up by 0.1% in October as growth tapers off

Such declines would offset the anticipated improvement in wholesale and retail trade – with growth expected to pick up from 1.3 per cent in 2018 to 1.7 per cent in 2019 – and a turnaround in the construction sector, which could go from a year-on-year contraction of 3.5 per cent in 2018 to an expansion of 1.5 per cent in 2019.

Growth in non-oil domestic exports is expected to fall by more than half, from 6.2 per cent in 2018 to 2.9 per cent in 2019.

Headline inflation was predicted to come in at 0.5 per cent for 2018, in line with official estimates, as private economists moved their forecast down from September’s 0.7 per cent.

They also trimmed their expectations for 2019’s headline inflation numbers, to a forecast of 1.3 per cent, from the 1.5 per cent that was anticipated in September.

The downgrade came on the back of an expected moderation in private consumption, from 3.4 per cent growth in 2018 to 3.1 per cent in 2019.

Estimates for core inflation – an MAS indicator that strips out private transport and housing costs – were kept intact at 1.7 per cent for 2018 and 1.8 per cent for 2019.

Meanwhile, trade protectionism was seen as the top risk to the economy by far – picked by all of the survey’s respondents, against 89 per cent of them in September – even as the share of watchers concerned by rising interest rates and a slowdown in China also edged up to 41 per cent of respondents, from 37 per cent in the previous survey.

“A growing number of respondents flagged slower growth in China as a downside risk, on the back of tightening credit conditions,” said the MAS in its summary of the survey results.

“Faster than expected US interest rate hikes, which could trigger financial market turbulence, also continue to be a downside risk for a number of respondents.”

But, on the bright side, cooling trade tensions could lift the growth outlook, said 47 per cent of respondents, up from 37 per cent in September.

Slower-than-expected monetary tightening in the US, as well as potential benefits from the diversion of trade and investment out of China and into the region, also appeared on the list of top three upside possibilities – both cited by 29 per cent of respondents.

The central bank’s December survey, which was sent out on Nov 22, netted replies from 23 economists who track the Singapore economy. It does not represent the MAS’s views or forecasts.

Philippines Q3 GDP growth slows, misses forecast

THU, NOV 08, 2018 – 11:00


[MANILA] The Philippines’ economic growth slowed in the third quarter due to weaker household consumption and exports, the statistics agency said on Thursday.

Gross domestic product grew 6.1 per cent in the third quarter from a year earlier, below the 6.3 per cent median forecast in a Reuters poll and slower than the previous quarter’s upwardly revised 6.2 per cent growth.

Details on quarterly growth are due to be released later.


Thailand Needs More Skilled Foreign Workers

Thailand needs to attract skilled foreign workers, especially in the industrial technology sector

The minimum monthly income for highly-skilled experts Smart Visa has been changed to 100,000 baht and to 50,000 baht for experts in startups and retired experts

By Olivier Languepin On Dec 5, 2018

Thai skilled labor.jpg

Samut Sakhon One Stop Service

A Thai academic says the nation needs to attract skilled foreign workers to work in the country, especially in the industrial technology sector, to overcome a shortage of skilled-workers.

In a seminar held by the Institute for Population and Social Research of Mahidol University, a university researcher, Ms. Sureeporn Phanpueng , revealed that Thailand needs around 2.3 million more skilled employees to work in innovative and technological industries, robotics, and the health and food industries.

The event was attended by academics and those from related fields. Ms. Sureeporn proposed that the government solve the problem by offering work visas to skilled foreign workers who take up positions in Thailand and by creating an attractive living environment for them.

She also wants the government to promote the transfer of technological know-how between foreign experts and Thai workers, as well as international education in Thailand.


Southeast Asia Internet economy to be worth $240bn by 2025

Nov 23, 2018

Thailand’s Smart Visa Requirements Made Easier

Nov 20, 2018

The government is now accepting four-year visa-free grants and free work permits under the “Smart Visa” programme which is targeting industry experts and foreign technology investors.

Thailand’s Smart Visa Requirements Made Easier

The Thai government has improved requirements and conditions for the Smart Visa in order to provide greater convenience for foreign investors and experts

For example, the government has changed the income condition for highly-skilled experts and senior executives from a monthly salary of no less than 200,000 baht to a monthly income that also covers bonuses and other incomes.

The minimum monthly income for highly-skilled experts has also been changed to 100,000 baht and to 50,000 baht for experts in startups and retired experts. The adjustments are aimed at increasing the country’s competitiveness and ability to attract more specialists.

Similarly, the government has improved various conditions in increasing access to capital for startups and strengthening venture capitalists. For example, investments can now be made through venture capital companies.

For the Thailand 4.0 policy to effectively push for digital transformation, Thai manufacturers will need to first improve the skills of their workforce,” said Karel Eloot, senior partner of McKinsey & Company, during an exclusive interview with The Nation.

The Thailand 4.0 policy is intended to modernize the Thai economy by promoting technologically driven industries. The development of the EEC region is a materialization of the Thailand 4.0 policy where the government aims to turn the three provinces of Chon Buri, Chachoengsao and Rayong into special economic zones.

“Re-skilling will be needed for the existing workers. We have identified up to 7 million employees in Thailand who will need to be reskilled for companies to digitally transform,” he said.

The re-skilling is needed because digital transformation will mean new roles and jobs will be created while old ones will be made obsolete, Eloot explained.

Australia’s economy is still booming, but politics is a cause for concern

Political infighting could harm the economy, says Edward McBride


Print edition | Special report

Oct 27th 2018

The last time Australia suffered a recession, the Soviet Union still existed and the world wide web did not. An American-led force had just liberated Kuwait, and almost half the world’s current population had not yet been born. Unlike most of its region, Australia was left unscathed by the Asian crash of 1997. Unlike most of the developed world, it shrugged off the global financial crisis, and unlike most commodity-exporting countries, it weathered the resources bust, too. No other rich country has ever managed to grow so steadily for so long (see chart 1). By that measure, at least, Australia boasts the world’s most successful economy.

inRead invented by Teads

Admittedly, as Guy Debelle of the Reserve Bank of Australia (RBA, the central bank) points out, this title rests on the statistical definition of a recession as two consecutive quarters of decline. Had the 0.5% shrinkage of the fourth quarter of 2008 been spread across half a year, he notes, there would be no record. Yet by other measures, Australia’s economic performance is more remarkable still. Whereas many other rich countries have seen wages stagnate for decades, Australia’s have grown strongly, albeit less steadily in recent years (see chart 2). In other words, a problem that has agitated policymakers—and voters—around the world, and has been blamed for all manner of political upheaval, from European populism to the election of Donald Trump, scarcely exists in Australia.

And that is not the only way in which Australia stands out from its peers. At a time when governments around the world are souring on immigration, and even seeking to send some foreigners home, Australia has been admitting as many as 190,000 newcomers a year—nearly three times as many, relative to population, as America. Over 28% of the population was born in another country, far more than in other rich countries. Half of all living Australians were born abroad or are the child of someone who was.

In part, this tolerance for outsiders may be a reflection of another remarkable feature of Australian society: the solvency of its welfare state. Complaints about foreign spongers are rare. Public debt amounts to just 41% of GDP (see chart 3)—one of the lowest levels in the rich world. That, in turn, is a function not just of Australia’s enviable record in terms of growth, but also of a history of shrewd policy making. Nearly 30 years ago, the government of the day overhauled the pension system. Since then workers have been obliged to save for their retirement through private investment funds. The modest public pension covers only those without adequate savings.


Australia’s health-care system is also a public-private hybrid. The government provides coverage for all, by paying clinics and hospitals a set fee for every procedure they perform. Those who want more than the most basic service must pay a premium. The government encourages people to take out insurance to cover the gap between the reimbursement it provides practitioners and the rates most of them charge the public. As with pensions, everyone gets looked after, but the government bears only a relatively small proportion of the cost—an arrangement that remains a distant dream in most rich countries.

Not all is perfect, of course. A common concern is that the economy relies too heavily on China, which is the biggest buyer of Australian minerals, the biggest source of tourists and foreign students, even the biggest consumer of Australian wine. People worry that if the Chinese economy falters, it will drag Australia’s down with it. Another fear, somewhat at odds with the first, is that China might try to use its economic power to blackmail Australia into weakening its alliance with America.

australia pop growth by state

There are glaring domestic problems, too. The appalling circumstances of many Aboriginals are a national embarrassment, and the failure to answer their political grievances compounds the rancor. Even more alarmingly, global warming is making an already grueling climate harsher. Rainfall, never reliable, is scarcer and more erratic in many farming regions. Over the past two years unusually hot water has killed a third of the coral on the Great Barrier Reef, one of the country’s greatest natural treasures.

In theory both the governing Liberal-National coalition (which is right-of-centre) and the main opposition, the left-leaning Labor Party, are committed to cutting emissions of greenhouse gases. But in practice climate change has been the subject of a never-ending political knife-fight, in which any government that attempts to enact meaningful curbs is so pilloried that it either loses the next election or is toppled by a rebellion among its own Members of Parliament (mps).

Some see the failure to settle on a coherent climate policy as a symptom of a deeper political malaise. Australia used to have long-lived governments. Between 1983 and 2007, just three prime ministers (pm) held office (Bob Hawke and Paul Keating of Labor, and John Howard of the Liberals). Yet, since then, the job has changed hands six times. A full term is only three years, but the last time a prime minister survived in office for a whole one was 2004-07. The assassins are usually not voters, but fellow mps who dispatch their leader in hope of a boost in the polls. As part of the research for this special report, your correspondent interviewed Malcolm Turnbull, the prime minister at the time, who insisted his position was secure. He had been sacked by his fellow Liberals before the interview could be written up.

The changes of pm have come so often that Madame Tussauds, a wax museum, has officially given up trying to make statues of the incumbent, who will inevitably have left office before a likeness is ready. The constant revolution is not just fodder for comedians; it also makes consistent policy making much harder. For those who consider Australia’s unequaled economic performance the result, at least in part, of far-sighted decisions made 30 years ago, the current choppy politics seem like a harbinger of decline.

This special report will try to explain Australia’s enviable record, and ask how long its good fortune can last. Is it adopting the reforms needed to keep the economy bounding ahead? Will it have to choose between China and America? Is the current generation of politicians up to the job? Is Australia, in short, as lucky a country as its nickname suggests, or is its current streak coming to an end?




Third Quarter 2018 Economic and Wood Product News


Economist Intelligence Unit global forecast – Global growth braced for impact

Since the start of 2018 trade policy has become the biggest risk to The Economist Intelligence Unit’s central forecast for global economic growth. The US president, Donald Trump, is shifting his country’s previous qualified support for free trade in a protectionist direction. Trade tensions escalated when the US government threatened China with tariffs on imports worth about US$50 billion a year in April. China responded with its own equivalent list. Discussions between the two countries have thus far failed to solve the dispute. The third round of negotiations on June 2nd‑3rd revealed the divisions in the US trade team, with conflicting messages on the team’s priority—China’s approach to intellectual property and technology transfer or the reduction of the US’s trade deficit with China. On June 15th the US confirmed that US$34 billion‑worth of China’s goods would be subject to additional tariffs of 25%, with the possibility that another US$16 billion‑worth of goods would also be targeted after an extended period of public comment. China responded in kind. On their own, these tariffs are unlikely to be sufficient to trigger a major slowdown in growth. However, we note the risk of neither the US nor China achieving their aims through this round of tariffs and the possibility of the dispute escalating to further rounds of non-tariff barriers of the sort that harm business confidence, investment decisions, diplomatic ties and, ultimately, the performance of the global economy.

Furthermore, on trade, the Trump administration continues to challenge the multilateral system. Initially, when the US announced import tariffs on steel and aluminium in March, Canada, Mexico and the EU were given temporary exemptions. The exemptions were removed by the Trump administration on June 1st, sparking a round of retaliatory tariffs from these traditional US allies. Reaffirming his intentions, Mr Trump deepened divisions in the G7 on June 8th‑9th when he failed to agree to the joint communique in support of a rules-based trading system. Following the withdrawals from the Paris climate accord, the Iran nuclear deal and the Trans-Pacific Partnership, the outcome of the G7 meeting and related trade tensions with key US allies again demonstrate that Mr Trump’s “America First” policies do not align with a multilateral system of global governance.

Some emerging markets are susceptible to higher US interest rates

Emerging markets will also come under some pressure from higher US interest rates and the strength that these provide to the dollar. For example, since April Turkey, Brazil and Argentina have experienced sharp currency depreciation. As global interest rates gradually rise from ultra-low levels, investors are becoming less forgiving of countries with financial, macroeconomic or political vulnerabilities. Turkey is illustrative here, given its structural current-account deficit, necessitating large external financing needs, and the high levels of foreign-currency denominated debt held by the private sector—steep policy rate increases by the central bank were required to stem capital outflows. For its part, the Federal Reserve (Fed, the US central bank) has helped to minimize the disruption by outlining how it will reduce the value of its balance sheet and over what time period. Despite this, we expect further short-lived periods of volatility as global markets adjust to the gradual shift away from easy money. In this environment, we expect the number of countries seeing their currencies come under pressure to rise over the next two years.

Geopolitical risks foreshadow greater volatility

We also note the economic risks posed by the complex and deepening tensions in the Middle East. Various proxy conflicts between Iran and Saudi Arabia have the potential to further destabilize the region. Mr. Trump’s decision to withdraw the country from the Iran nuclear deal is another signal that the US is inclined to offer stronger support to its traditional allies in the region, Israel and Saudi Arabia, in the coming years. We expect regional security in the Middle East to deteriorate following the US withdrawal. The move gives hardliners in Iran the upper hand over their moderate counterparts, which is likely to lead to a more confrontational foreign policy. Most worryingly, a proxy conflict between Israel and Iran in southern Syria has a significant chance of escalating.

Heightened geopolitical risk in the Middle East increases the likelihood of volatility in global energy markets. The re-balancing of the oil market pursued by OPEC over the past 18 months means that geopolitical developments now have a more pronounced effect on prices. News of the US’s withdrawal from the Iran deal sent prices above US$75/barrel for the first time since 2014. We expect prices to settle at around US$74/b, on the assumption that Iran’s oil exports fall by around 400,000 barrels/day (b/d), relative to its average sales of about 2.5m b/d in the period when the US remained within the nuclear deal. We expect oil prices to become more volatile over the next two years as geopolitical tensions rise.

The global economy will remain healthy, although vulnerable to shocks

Although the global economy is more vulnerable to shocks, our central forecast is that the underlying fundamentals are strong enough to maintain a healthy growth rate for 2018‑19. Global growth accelerated markedly in 2017 to 3%, its fastest rate since 2011, and we expect the same rate of growth in 2018‑19. The global economy will continue to follow the trends in the world’s two largest economies, China and the US. We expect the Chinese economy to start to slow at a steady rate. The government has a long-held target of doubling real GDP between 2010 and 2020. To achieve this, it requires annual average GDP growth of 6.3% in 2018‑20. We expect it to continue to stimulate the economy to reach this rate. After that, the leadership will have greater latitude to move away from GDP targeting. This is ideologically consistent with the call by the president, Xi Jinping, at the Chinese Communist Party’s national congress in late 2017, for more inclusive growth. It is likely, therefore, that the economy will be allowed to slow more quickly in the second half of the forecast period, with growth standing at 5.3% in 2022.

We continue to expect a business-cycle downturn in the US in 2020. Capacity constraints will emerge in the economy in the second half of 2019, pushing up inflation and forcing the Fed to signal a faster pace of interest-rate increases. This acceleration will be sufficient to trigger a short-lived decline in private consumption and investment in early 2020. Our core forecast is that the dip will be shallow and the rebound relatively rapid, owing to the Fed cutting interest rates aggressively in response. These movements in the world’s two largest economies mean that global growth will moderate to 2.3% in that year. As the US recovers, the global economy will receive some support in 2021‑22, enabling an acceleration to annual average growth of 2.8%.

Global monetary conditions will tighten

Among developed markets we expect falling unemployment and slowly building inflation to push central banks towards monetary tightening. In the US, the Fed, having first raised rates in December 2015 following the global financial crisis, will increase rates three times this year and four times in 2019. The European Central Bank, responding to the entrenched economic growth in the EU, is set to end the tapering of its quantitative easing (QE) programme in 2018. The Bank of Japan (the central bank) will also begin to wean itself off QE in 2019. By the second half of that year the shift to tighter monetary policy will begin to dampen private consumption growth in many developed markets, as borrowing will become more expensive. Consequently, the period between mid‑2017 and mid‑2018—where growth has been strong, inflation benign and monetary policy still loose—may feel like the sweetest spot for the global economy in the current business cycle.

As the global economy picks up, inflation is oddly quiescent –But central banks are beginning to raise interest rates anyway

inflating world

Print edition | Finance and economics

Oct 4th 2018

A FEW years ago, the news about the euro-zone economy was uniformly bad to the point of tedium. These days, it is the humdrum diet of benign data that prompts a yawn. Figures this week show that GDP rose by 0.6% in the three months to the end of September (an annualized rate of 2.4%). The European Commission’s economic-sentiment index rose to its highest level in almost 17 years. Yet when the European Central Bank’s (ECB) governing council gathered on October 26th, it decided to keep interest rates unchanged, at close to zero, and to extend its bond-buying program (known as quantitative easing, or Quantitative Easing “QE”) for a further nine months.

The central bank said it would slow down the pace of bond purchases each month, to €30 billion ($35 billion) from January. But Mario Draghi, the bank’s boss, declined to set an end-date for QE. A hefty dose of easy money will be necessary, he argued, until inflation durably converges on the ECB’s target of just below 2%. It shows few signs of doing so, despite the economy’s strength. Underlying, or core, inflation, which excludes the volatile prices of food and energy, fell from 1.1% to 0.9% in October, according to data published a few days after the ECB meeting. The euro zone’s miseries of 2010-12 were unique. But in its present, happier state of vigorous activity, low inflation and easy monetary policy, it is like many other big economies (see chart).

After a decade of interest rates at record lows, those central banks that are inclined to tighten policy naturally attract attention. The Bank of England’s monetary-policy committee raised its benchmark interest rate from 0.25% to 0.5% on November 2nd, the first increase since 2007. On the same day, the Czech National Bank raised interest rates for the second time this year. The Federal Reserve kept interest rates unchanged this week, having raised them in March and June, but a further increase is expected in December.

In Turkey, perhaps the only big economy that is obviously overheating, the central bank—which has been browbeaten by the president, Recep Tayyip Erdogan, who believes high interest rates cause inflation—opted on October 26th to keep interest rates on hold. Yet in most biggish economies, underlying inflation is below target (see chart) and monetary policy is being relaxed. Brazil’s central bank cut interest rates on October 25th from 8.25% to 7.5%. Two days later, Russia’s central bank trimmed its main interest rate, to 8.25%. This week the Bank of Japan voted to keep rates unchanged and to continue buying assets at a pace of around ¥80 trillion ($700 billion) a year. These economies are gathering strength. It is a puzzle that, in such circumstances, global inflation is stubbornly low.

Core Values

To figure out why, consider the model that modern central banks use to explain inflation. It has three elements: the price of imports; the public’s expectations; and capacity pressures (or “slack”) in the domestic economy. Start with imported inflation, which is determined by the balance of supply and demand in globally traded goods, such as commodities, as well as shifts in exchange rates. Commodity prices have picked up smartly from their nadir in early 2016. The oil price, which fell below $30 a barrel then, has risen above $60.

This has put upward pressure on headline inflation: in the euro zone it is 1.4%, half a percentage point higher than the core rate. Where inflation is noticeably high, it is generally in countries, such as Argentina (where it is 24%) or Egypt (32%), that have withdrawn costly price subsidies and whose currencies have fallen sharply in value, making imported goods dearer. In Britain, rising import prices linked to a weaker pound have added around 0.75 percentage points to inflation, which is 3%.

A second influence on inflation is the public’s expectations. Businesses will be more inclined to push up their prices and employees to bid for fatter pay packets if they believe inflation will rise. How these expectations are formed is not well understood. The measures that are available are broadly consistent with the central bank’s inflation target in most rich economies. Japan is something of an outlier. It has struggled to meet its 2% inflation target in large part because firms and employees have become conditioned to expect a lower rate of inflation. Japan’s prime minister, Shinzo Abe, recently called for companies to raise wages by 3% in next spring’s wage round to kick-start inflation.

Leave aside the transient effects of import prices, and inflation becomes a tug-of-war between expectations and a third big influence, the amount of slack in the economy. The unemployment rate, a measure of labour-market slack, is the most-used gauge. As the economy approaches full employment, the scarcity of workers ought to put upward pressure on wages, which companies then pass on in higher prices. On some measures, Japan’s labour market is as tight as it has been since the 1970s. America’s jobless rate, at 4.2%, is the lowest for over 16 years. Inflation has nevertheless been surprisingly weak.

In other words, the trade-off between unemployment and inflation, known as the Phillips curve, has become less steep. A paper last year by Olivier Blanchard, of the Peterson Institute for International Economics, found that a drop in the unemployment rate in America has less than a third as much power to raise inflation as it did in the mid-1970s.

The central banks that see a need for tighter monetary policy are worried about diminishing slack. There are tentative signs of stronger pay pressures in Britain and America, and firm evidence of them in the Czech Republic, where wage growth is above 7%. Even so, with inflation expectations so steady, the flatter Phillips curve suggests that the cost for central banks in higher inflation of delaying interest-rate rises is rather low. The ECB is quite a way from such considerations. The unemployment rate is falling quickly, but remains high, at 8.9%. There is still room for the euro-zone economy to grow quickly without stoking inflation. The dull routine of good news is likely to continue.

US China trade war

US-China spat could affect fast-growing trade in Asia, but it’s also an opportunity for some economies

  • Trade within Asia has gone up. The region had the fastest trade volume growth in the world in 2017 for both exports and imports — 6.7 percent and 9.6 percent, respectively, the World Trade Organization said.
  • However, the ongoing trade spat between the U.S. and China may soon have an impact on Asia, especially emerging markets, experts say.
  • But it could also be a good thing for certain markets in Asia, as companies look for alternative supply sources beyond the U.S.

Weizhen Tan | @weizent

Published 12:35 AM ET Mon, 2 July 2018


Belt and Road Initiative Quarterly: Q3 2018

In this edition of the Belt and Road Initiative (BRI) Quarterly, we highlight a number of projects, both planned and under construction, which are facing delay, suspension, cancellation or other challenges in BRI countries. Although Chinese policymakers will continue to promote economic and trade links under the BRI, against the backdrop of the US-China trade war, the initiative will continue to face international pressures—potentially feeding domestic push back, too.

In our previous BRI quarterly we noted that overseas direct investment (ODI) and merchandise trade links between China and the 65 countries we define as belonging to the BRI were stable in the first quarter of 2018. In the period since April 2018, however, several BRI projects have encountered challenges, ranging from delay and suspension to outright cancellation, due to skepticism and push back against the project, as well as changes of government in some countries. These developments have in turn raised questions within China over the economic and diplomatic feasibility of the BRI, which has been the subject of criticism in the past for its international largess at a time when China still faces developmental challenges of its own.

Trade, investment and lending

Merchandise trade along the BRI remained strong in the second quarter of 2018, growing by 17.3% year on year to US$319 billion, according to the Ministry of Commerce. However, this was down slightly from the 19.4% growth recorded in January-March. Within that figure, exports rose by 11.7% to US$183.3 billion, while imports rose by 25.9% to US$135.6 billion. China’s trade surplus with BRI countries increased to US$47.7 billion in April-June, accounting for 52.7% of China’s global trade surplus in that period.

Chinas merchantile trade with BRI

China’s top ten BRI trade partners accounted for 66.7% and 53.4% of total two-way exports and imports respectively in the second quarter of the year. This illustrates the degree to which China’s trade connections remain underdeveloped under the initiative. In addition, exports to Malaysia and Turkey, two of China’s largest BRI trade partners, shrank in the second quarter in year-on-year terms, due to a significant slowdown in shipments of machinery exports and textile products, which may be tied to a stalling of BRI projects in Malaysia and the deteriorating economy of Turkey.

In addition, imports from Vietnam—another major Chinese trade partner within the BRI—deteriorated in the second quarter, owing to a slowdown in shipments of electrical equipment and components. Regional shipments of these types of intermediate goods will continue to face headwinds, due to supply chain disruptions caused by China’s trade conflict with the US.

Other indicators point to slowing Chinese business activity in BRI countries. Non-financial ODI flows to BRI countries grew by only 5.6% year on year to US$3.8 billion in April-June, slowing from 20% growth in January-March. This represented only 12% of China’s total non-financial ODI flows in the second quarter. Meanwhile, the value of newly signed construction contracts by Chinese firms in BRI countries contracted by 44.7% year on year in April-June, following a 7.3% decline in the first quarter.

China’s lending to BRI countries is not transparent, but balance-of-payments (BoP) data can shed some light. The most recent detailed figures show that China-resident entities provided overseas loans (defined in the BoP capital and financial account data as assets) worth US$54 billion in January-March 2018, marking the strongest quarterly disbursement on record. However, this came after a period of restrained overseas lending in 2017. The BoP measure is not restricted to BRI countries and covers a variety of commercial lending, including to overseas Chinese entities, but it can be seen as indicative of trend.

overseas loans

Policy updates

In the second quarter of 2018 the Chinese government released a number of policies to strengthen the regulatory framework around the BRI. In April 2018 several central-government agencies released guiding opinions aimed at standardizing funding sources, enhancing general risk-management and better guiding financing channels for Chinese overseas projects. In July China established two international courts to specifically handle disputes under the BRI framework, based in Shenzhen (for disputes on the BRI’s maritime “road”) and Xi’an (for disputes within the BRI’s overland “belt”).

Chinese policy banks that are backing the BRI, including the China Development Bank (CDB) and the Export-Import Bank of China (China EXIM), have become more active in co‑operating with international lenders. In July the policy banks announced plans to work with international financing institutions to improve financial governance and to manage debt and investment risk. A UK-based newspaper, the Financial Times, has reported that both CDB and China EXIM are in discussions with the European Bank for Reconstruction and Development regarding co-financing projects under international lending standards, while CDB is in discussion with the French Development Agency on a joint project.

In July the US, Japan and Australia announced a joint investment fund to support infrastructure investment in the Indo-Pacific, in a move seen as a response to the BRI. The announcement was coupled with a commitment by the US to provide US$113 million in funding for regional development projects.

Project updates

The focus on enhancing international co‑operation in the financing and management of BRI projects has coincided with a number of reports regarding challenges facing BRI projects, both planned and under way.

A BRI flagship project, the China-Pakistan Economic Corridor (CPEC), has come under increasing economic pressure as Pakistan navigates a potential BoP crisis, which was brought on partially as a result of Chinese financing of CPEC projects (thereby depleting Pakistan’s foreign-exchange reserves, due to debt-repayment obligations). In May the Chinese government approved the extension of an existing bilateral currency swap with Pakistan to three years, doubling the total amount covered to Rmb 20 billion (US$3 billion).

In July China authorized a fresh US$1bn loan to Pakistan—upgraded to US$2 billion in August—to boost its foreign-exchange reserves, on top of an existing US$4 billion in Chinese loans delivered to Pakistan in the year to June 2018. While we expect China to remain the major international financier for the country, there is a chance that Pakistani authorities could appeal to the IMF for a bail-out. However, the US government has opposed this idea, worried that these funds would be used to repay Chinese creditors without precipitating economic reform.

Despite these financial troubles, the newly elected government in Pakistan has indicated that economic ties with China, including CPEC, will remain important. In July China announced that it would host 1,000 Pakistani students on a Chinese government-backed scholarship as part of a training programme covering solar power, hydro power engineering, space and high-speed railways. In the same month a Chinese telecommunications giant, Huawei, began the operation of a US$ 4 million fibre-optic cable within CPEC, which is planned to extend to Gwadar Port (another CPEC project).

Not all projects have proceeded smoothly, however. In August Myanmar announced that it would scale down the scope of the Chinese-backed Kyaukpyu port project to US$1.3 billion, from US$7.3 billion initially. The project is meant to support existing energy pipelines stretching from Myanmar’s Rakhine state to China’s south-western Yunnan province.

Meanwhile, the freshly elected prime minister of Malaysia, Mahathir Mohamad, announced in May that the country would re-assess a number of BRI projects to determine their feasibility. In July Malaysia suspended work on US$23 billion worth of Chinese projects, including the East Coast Rail Link (ECRL), over financing concerns. Following a state visit to China in August, Dr Mahathir confirmed that these projects—including the ECRL and a natural gas pipeline—would be cancelled until further notice.

Pushback in BRI nations has not been uniform, however. Although Sri Lanka has struggled under its debt burden to China, handing over its Hambantota port to China for 99 years in December 2017, as part of a US$1.1 billion debt repayment, the country has shown little sign of resisting future investment. In May China lent Sri Lanka another US$1bn to repay other loans that had matured earlier, and approved another US$1bn loan from CDB to finance a road project in that country. In July China issued another Rmb 2 billion in flexible loans to Sri Lanka. Loans to other fragile states—including a US$5 billion loan to Venezuela for oil development, as well as US$20 billion in loans for oil and gas development in Syria and Yemen—indicate that China’s risk-management and debt-scrutiny mechanisms remain underdeveloped, or at least secondary to political or strategic objectives.

China’s Exports Are Homeward Bound

Mainland businesses hit by Trump’s tariffs hope domestic consumers will pick up the slack.

By Daniela Wei and Bruce Einhorn

August 9, 2018, 2:00 PM MDT

chinese millenials

Chinese millennials are eating more seafood.


On July 11, Zhuo Peihui learned the profit margins on the wooden furniture he’s been selling to the U.S. for 13 years were about to evaporate. That’s because the dresser drawers and dining tables made by the more than 100 workers at his factory in the Chinese province of Guangdong had landed on Donald Trump’s latest tariff hit list.

Trump is betting that punishing penalties on Chinese industry will force Beijing to end trade practices his administration says are unfair. But China has at least one powerful strategy for limiting the fallout of the levies: getting the nation’s 1.4 billion people, especially its swelling ranks of middle-class shoppers, to spend more like Americans.

China furniture exporters sold $29.2 billion in goods to the U.S. last year. The $200 billion round of tariff proposals will have the biggest impact on their industry, according to Deutsche Bank AG. They face levies of 10 percent or even 25 percent. That’s spurred Zhuo and other furniture makers to seek sales closer to home. “Although the domestic market is new to us and competition is very fierce, at least the demand is here,” he says. “The market is huge, and customers are paying more for good products.”

With trade tensions between the U.S. and China seeming to worsen by the day, mainland companies selling everything from handbags to fresh food to Christmas lights are boosting their attempts to cultivate local demand. Take Taizhou Tianhe Aquatic Products Co. From its base in Zhejiang province in eastern China, more than 1,000 workers process 10,000 tons a year of freshwater crayfish, frozen squid, dory fillets, and other seafood for sale to the U.S., Europe, and Australia.

share of china GDP

Many of those products are facing new levies in the U.S.; the almost 200-page list of targeted items includes dozens of varieties of seafood, with the penalties due to take effect after public consultations end on Sept. 6. Luckily for Tianhe Aquatic, Chinese millennials are having a crustacean fixation. Demand from urbanites in their 20s and 30s helped the economic value of the crayfish industry climb 83 percent last year even as U.S. exports dropped, according to a June government report.

“Consumers in China care more about the quality of food and consider eating food that is popular in the U.S. and Europe to be fashionable,” says sales representative Doris Chen. Tianhe can’t keep up with local demand, even though it’s charging more and boosting profit margins, she says. “We can drop the U.S. market if we want.”

At the more than 3,000 supermarkets run by state-backed China Resources Holdings Co., shoppers have pushed up sales of jumbo Argentine red shrimp 20 percent in the first six months of this year. That’s because local demand is rising and Chinese middlemen who imported the shrimp with plans to sell them to the U.S. are selling them to the local grocery chain instead, according to the company.

Even before the escalation of trade tensions, the growing spending power of Chinese consumers was attracting greater interest from local producers who’d traditionally sold their goods overseas. Household consumption accounted for more than 39 percent of China’s gross domestic product in 2016 and 2017. That was the highest since 2005. “The trade war will highlight the change,” says Iris Pang, an economist with ING Bank NV in Hong Kong.

Chinese shoppers are still vastly under performing as engines of growth compared with their counterparts in the U.S., where personal consumption accounted for about 70 percent of GDP last year. Addressing that imbalance is an important part of President Xi Jinping’s plan to restructure the world’s second-biggest economy.

It’s not always easy to get mainland customers to mimic America’s consumerist habits. SDIC Zhonglu Fruit Juice Co. accounted for about 20 percent of China’s 654,000 tons of apple juice concentrate exports last year. Customers include Coca-ColaNestlé, and Kraft Heinz, and most of its output is exported to the U.S. and other developed markets. The Trump administration’s latest tariff list includes all types of juice.

So SDIC Zhonglu is trying to win over Chinese parents, who traditionally haven’t given the drink to kids. “We are studying and launching new products to create more juice demand among Chinese consumers,” the company said in a statement. “The China-U.S. trade war is speeding up our shift in market structure and product structure.”

Another big challenge for mainland manufacturers: Many Chinese associate local brands with poor quality. But businesses that have traditionally sold their wares to the U.S. have an advantage, says Fielding Chen, China economist for Bloomberg. “If you can export to the U.S., that means your quality is good,” he says. “This will be very good for them in developing the domestic market.”

Zhuo, the furniture maker, says he hopes that’s the case. While he already sells domestically through an online storefront and is building a physical store, local sales account for only 20 percent of his business so far. “This market gives hope and opportunity for manufacturers to gain big profits.” —With Dong Lyu

BOTTOM LINE – The trade war is forcing Chinese businesses that had focused on exporting to the U.S. to court consumers at home. That could remake the mainland economy in the long term.

Strafor Worldview Situation Report

Oct. 8 2018

What Happened: China’s central bank has announced a cut in reserve requirement ratios that is expected to free up as much as $105 billion worth of liquidity, Caixin reported Oct. 7.

Why It Matters: The central bank’s decision is Beijing’s latest step toward a pro-growth fiscal and monetary policy designed to mitigate the effects of a slowing economy and the ongoing trade war with the United States.

Background: Beijing has now moved to cut reserve requirement ratios three times in the past six months to weather the trade war. President Donald Trump has announced tariffs on nearly all Chinese imports into the United States; China has responded with similar tariffs on U.S. goods.

Read More:

Pei Xin

Pei Xin | Xinhua | Getty Images

Trade volume and activities have been going up within Asia, but that could soon change depending on which way trade tensions between the U.S. and China swing.

In the past year, growth in Asian trade corridors has increased, according to data derived from Citi’s support of clients’ trading activities.

The bank’s client business between South Korea and India went up by 55 percent between April 2017 and March 2018. Between China and the ASEAN (Association of Southeast Asian Nations) region, it shot up by 66 percent in the same period. Overall, its growth in Asia has gone up by 26 percent year on year, the bank said.

Increasingly, Asia “is relying more on Asia” as consumption goes up, Munir Nanji, Citi Global Subsidiaries Group’s head for Asia Pacific, told CNBC.

According to statistics from the World Trade Organization, world trade volume for goods went up by 4.7 percent in 2017, the highest since 2011 and a leap from the 1.8 percent growth in 2016. The 2017 increase was driven by rising import demand from Asia, as well as increased investment and consumption expenditure. In fact, Asia had the fastest trade volume growth of any region in 2017 for both exports and imports — 6.7 percent and 9.6 percent, respectively, the WTO said.

However, the ongoing trade spat between the U.S. and China may soon start to have an impact on Asia, especially emerging markets, experts say.

The WTO acknowledged that risk in its outlook for 2018 and 2019: “Balanced against these broadly positive signs is a rising tide of anti-trade sentiment and the increased willingness of governments to employ restrictive trade measures.”

But it could also be a good thing for certain markets in Asia, as companies look for alternative supply sources beyond the U.S.

What’s driving trade flows within Asia?

Trade-related growth between China and the ASEAN region is fueled mainly by infrastructure needs, while between South Korea and India, automotive and electronic goods are flourishing, according to Nanji.

A common theme is technology: Firms in China and South Korea are increasingly bringing their investments and tech into other parts of Asia.

“Generally, Asians are buying more from Asian companies. Both demand and supply is coming from Asia,” said Nanji, who noted that it used to be American and European companies providing the supply.

For instance, the components of most smartphones are mostly manufactured in Asia, he said.

Various countries’ initiatives are also helping to drive growth. That includes the Make in India initiative, which encourages companies to manufacture their goods in India, and the Shanghai Free-Trade Zone.

Trade spat could shift the movements of goods

In recent weeks, both China and the U.S. have threatened to impose tariffs on each other’s products.

J.P. Morgan analysts wrote in a note that there would be knock-on effects for the rest of Asia if the various tariffs suggested by U.S. President Donald Trump were to come into effect and result in a fall in Chinese exports to the U.S.

Indirect links propagate shocks into the region, and could impact trade and growth … the product categories encompass mainly high-tech products, which would include electronics,” the note said.

“By its very nature, such products are highly reliant on tightly integrated supply chains. To that extent, this would propagate any trade shock into the region.”

The impact would be felt most in countries such as South Korea and Taiwan, the analysts said.

But it might spell good news for some markets. India, for example, would likely benefit from the spat — in the area of cotton exports.

The U.S., the world’s biggest exporter of the fiber, had cornered the bulk of Chinese demand. But China’s move to impose a 25 percent import tax on American farm commodities, including cotton, in retaliation for tariffs enacted by the U.S., may allow India to grab a bigger share of the Chinese market, according to a Reuters report.

In fact, India has already signed contracts to ship 500,000 bales (85,000 tonnes) of its new season harvest to China, in rare advance deals, officials said.

“If China decides not to buy agricultural products from the U.S., that could move to different parts of Asia to buy, to source it. The U.S., on the other hand, needs to export that somewhere else, so it would find another corridor,” Citi’s Nanji said.

“So when you have a trade war, the countries involved would have to go somewhere else. So other countries would benefit. Some of them could be in Asia, or Latin America. There will be shifts in trade corridors … the question is, where it shifts.”

— Reuters contributed to this report.

weizan Weizhen Tan Markets Editor, CNBC Asia markets



China Set for Record Defaults, and Downgrades Tip More Pain

Bloomberg News

‎July‎ ‎2nd , ‎2018‎ ‎3‎:‎00‎ ‎PM

  • Total so far this year is approaching full tally for 2016
  • Regulators still seen intervening in case of systemic risk

Bloomberg’s Lianting Tu reports on China’s corporate bond defaults.

China is zooming to a record year of corporate-bond defaults.

Chinese companies have reneged on about 16.5 billion yuan ($2.5 billion) of public bond payments so far this year, compared with the high of 20.7 billion yuan seen 2016, according to data compiled by Bloomberg. Strains are set to get worse if the downgrading trends of credit-rating companies are anything to go by . Dagong Global Rating Co. have been downgrading firms by an unprecedented margin.

Drastic Turn for The Worse

Chinese local bond issuers face the worst rating trend this year

Source: Dagong Global Credit Rating

downgrade uprade ratio

“Corporate profits have deteriorated this year and are unlikely to improve against the backdrop of an economic slowdown,” Li Shi, general manager of the rating and bond-research department at China Chengxin International Credit Rating Co. “Refinancing will continue to be tough as long as the crackdown on shadow banking continues.”

The domestic corporate-debt market is almost exclusively a domestic issue. Foreign investors normally gravitate to government-linked securities as China has boosted access to government bonds in recent years. The worsening in credit quality offers little incentive to dip in now, though in time analysts see a more disciplined credit market offering diversification opportunities.

In the meantime, rising yields are set to make the refinancing of maturing debt all the tougher for private companies that lack the access to the state-dominated banking system that national behemoths enjoy. With the People’s Bank of China making only limited steps to support credit to private companies, borrowing costs show no sign of dropping.

unlucky seven

Borrowers have missed payments on at least 20 domestic bonds so far this year, according to data compiled by Bloomberg. There was about 66.3 billion yuan of defaulted notes outstanding at the end of May, or 0.39 percent of corporate bonds outstanding, PBOC data show. While still small, that share may be poised to rise.

Dagong has reported 13 credit-rating downgrades compared with 10 upgrades so far this year, the highest such ratio on record, according to Bloomberg-compiled data. Results from Dagong peers such as China Chengxin International Credit Rating Co. and China Lianhe Credit Rating Co. show similar trends.

The silver lining is that the defaults show Chinese regulators are increasingly comfortable with allowing struggling companies to fend for themselves without official rescues. Bond defaults are good for the long-term development of Chinese markets, Pan Gongsheng, director for State Administration of Foreign Exchange, said in Hong Kong Tuesday.

‘Necessary’ Defaults“They are necessary for better credit-risk pricing and will create a healthier bond market in the long term,” Christopher Lee, managing director of corporate ratings at S&P Global ratings in Hong Kong said of defaults. “It is unlikely there will be a wave of large-scale defaults or concentration of defaults — any such developments will be quickly contained to prevent systemic risks from emerging.”

With rising trade tensions with the U.S. threatening to hurt corporate cash flows, the temptation to shore up credit provision may rise. Data over the weekend showed that a gauge of export orders tumbled into contraction in June.

An escalation of the trade conflict could add to defaults in China’s financial system, said Jing Ulrich, JPMorgan Chase & Co.’s vice chairman for Asia Pacific. Consumer demand and the wider economy are likely to weaken and that “may translate into worse credit quality down the road,” she said in a Friday interview in Hong Kong.

“The volume of bond defaults will most likely surpass 2016 and hit a record this year,” said Lv Pin, an analyst in Beijing at CITIC Securities. While most failures in 2016 were from state-owned firms in industries with excess capacity, the majority of defaulters this year have been private-sector firms. With a variety of industries represented, the data show the breadth of the deterioration, he said.

Read more on China’s credit markets:

— With assistance by Lianting Tu, Jing Zhao, Yuling Yang, Ling Zeng, and Alfred Liu

China’s housing market marks policy anniversary in doldrums

Financial Times October 30, 2018

FTCR China Real Estate index

Two years ago this month, the Chinese government called time on a burst of housing market speculation unleashed by its recourse to stimulus in the wake of the economic turmoil of 2015. Local governments were compelled to bring red hot housing markets under control as part of a policy drive hinged on the official line that “houses are for living in, not for speculation”.

house price expectations cool

Since then, the market has speculated on just when the central authorities would once again relax their stance and allow local governments en mass to ease restrictions on home purchases.

The speculation has recently intensified on signs that broader economic growth is suffering from the government’s deleveraging campaign — the historical record shows how effective pumping up the housing market can be in boosting economic growth. Although our consumer surveys show that nearly a third of urban households already own two or more properties, a traditional belief in the sanctity of bricks-and-mortar, combined with an absence of reliable investment alternatives, mean underlying demand for property remains strong.


The latest FTCR China Real Estate Index shows the impact that two years of tight policy have had on the housing market. The headline index, based on a survey of 300 developer sales offices around the country, fell to 41.5 in October, its lowest level since the start of 2017. Sales across all city tiers fell for a fourth straight month as nearly 60 per cent of developers said even first-time buyers were having to pay above benchmark rates to secure a mortgage — up from just 6.6 per cent in October 2016.

Developers indicated that prices rose again in October — marking the fourth straight year that they have done so — even if at their weakest pace since February 2015. Our separate survey of urban consumers showed that price expectations weakened further in October, though the fact that more than 60 per cent of respondents still expect gains in the coming six months suggests the government’s tough policy line is only slowly getting through to buyers.


Officials are easing credit policy in response to signs of financial strains caused by the deleveraging campaign, and by the hit to sentiment from US president Donald Trump’s trade war. However, property policy remains off limits because the government in large part blames housing market speculation for China’s debt problems.

At least some of the extra funding added to the system this year is likely to wind up in the property market, if only because it usually does. For now, however, the central government looks likely to continue trying to use targeted relief measures, aimed predominantly at small, private companies, to shore up growth. If the government were to relax its housing market restrictions in the coming months, this would be a sign that the leadership has again put vigilance on debt to one side and upgraded its economic threat level.

FTCR China Home sals Index by City Tier

Housing sales fell across all city tiers under coverage for a fourth straight month, with the weakest activity again seen in third-tier cities. Our Home Sales Index fell 3.2 points to 39.1.

FTCR Home Sales Index

First-time buyers were once again the biggest source of demand (43.9 per cent of total buyers) while upgraders accounted for 39.3 per cent. Additional homebuyers made up 16.8 per cent of purchasers.

FTCR China Home Price Index

House price inflation cooled for a fifth straight month, with our price index falling 0.4 points to 52.5. Among respondents to our survey, 70.7 per cent said that prices were unchanged relative to September. The index has been above 50, pointing to rising prices overall, since September 2014.

Among developers, 52.1 per cent said they offered discounts last month. Nearly 80 per cent were offering discounts just over two years ago, when purchase restrictions were loosened to prop up economic growth.

FTCR New Home

The supply of new units to the market fell across all city tiers for a fourth straight month. Our New Home Supply Index fell 2.5 points to an eight-month low of 45.

Our Home Sales Outlook Index fell another 6 points to 44.6, its lowest reading in almost two years. Price expectations were less bullish for a sixth straight month, with our Home Price Outlook Index down 3.8 points at 52.6, the lowest reading since February 2015.


The proportion of developers reporting that first-time buyers were having to pay above the benchmark mortgage rate rose to 56.4 per cent from 55.7 per cent in September. In May, a record 63.6 per cent of first-time buyers were paying above the benchmark.

Our Home Sales Index for first-tier cities fell 4.7 points to 40.9; in second-tier cities it fell 5.3 points to 40.2, while in third-tier cities it rose 1.5 points to 36.4. Our first-tier city house price sub-index fell 2.1 points to 52.3, while the second-tier city sub-index fell 1.7 points to 54.8. The third-tier city index rose 2.7 points to 48.4. The FTCR China Real Estate survey is based on interviews with 300 developers in 40 cities. For further details click here. This report contains the headline figures from the latest Real Estate survey; the full results are available from FT  Database.

flatter from both sides

For all the ink spilled about a U.S.-China trade war — with the Federal Reserve eyeing the economic fallout and the like — the move suggests that the conflict is not at all conducive to a bull steepener. (That’s where the yield gap widens as two-year rates fall by more than their 10-year counterparts, as traders reduce Fed hike expectations.) Also backing that idea are the central bank’s dot plot and its  assessment of the economic outlook. Put simply, the Fed’s concern about the ramifications of an onslaught of tariffs is dwarfed by its optimism on the U.S expansion.

The minutes from the July meeting showed that four officials saw the risks to growth as tilted to the upside (up from two in March), while a lone wolf continued to see things the opposite way. None viewed the risks to core inflation as biased to the downside. Add it all up, and it looks like Larry Kudlow’s wish might not come true.

But Brian Reynolds at Canaccord Genuity sees another way in which trade tensions have had an impact. “Banks were buying more Treasuries as they put on the ‘carry trade,’ buying longer-term bonds utilizing shorter-term funding,” he writes about the second quarter — suggesting the activity was driven by “trade-war worries.”

US commercial bank Assets

Meantime, nobody told break evens that trade wars were inflationary, or would foster a steepening in the inflation-risk premium. It’s possible that break evens could be distorted by a flight to safe and liquid assets thanks to deteriorating ties between the world’s two largest economies. But since these concerns about trade ratcheted higher in mid-June, market-based measures of inflation compensation actually drifted marginally lower — until Wednesday, at least.

inflation back on menu

Breakevens did perk up materially that day, particularly the two-year tenor, which extended their advance after the Fed minutes referenced “supply constraints” on three occasions. As Bespoke Investment Group macro strategist George Pearkes observes, that’s the first time the phrase has appeared more than once in this communique in at least a decade. The Fed is bullish on growth and shifting to inflation-prevention mode under the presumption it’s the best way to sustain the expansion for as long as possible. Others might see continued Fed tightening as bringing the end of the cycle all the nearer.

Which in turn leads to an astute quip from Family Management Corp. CIO David Schawel on Twitter: “If you believe the yield curve flattening, and think we eventually go back into a recession with the Fed cutting, then the 5-10y part of the curve isn’t as unattractive as many think.

A Reprieve from IGnominy

It’s just three sessions into the third quarter (if you’re in the U.S.). But after blue-chip corporate debt was the worst-performing U.S. asset in the first half, it’ll take any stretch of out performance it can get:

top grade for IG

A recent Citigroup survey shows just how unloved investment grade U.S. debt is: hedge funds have pared their holdings in the most aggressive fashion since early 2016, with allocations at the lowest level since 2008. Bloomberg’s Sid Verma notes that this may actually be a contrarian bullish signal, because it means funds have more room to add to the asset class going forward.

But any time in the sun may prove fleeting should long-term yields trend back to their 2018 highs.

“IG has become more of a duration product as well in the past few years, so if intermediate rates stay range-bound in Q3 (as we expect) and issuance remains subdued (given the summer low-issuance period ahead), then this might be the one quarter of 2018 where IG catches a bid,” writes George Goncalves, head of Americas fixed-income strategy at Nomura, who warned that the soft-supply dynamic wouldn’t last forever.

“We would use any tightening of spreads to lighten up on IG, as duration-based products are likely to suffer in the coming quarters and we anticipate that the higher-rates theme will eventually become a credit story, where HY and IG are both hit,” Goncalves says.

To his point on rate sensitivity, mid-April saw bond managers’ allocation to corporate debt as a share of assets deteriorate as the 10-year Treasury yield made its push through 3 percent for the first time since 2014. It’s a picture of what happens when duration risk and the competition for capital collide.

less need to reach for yield

Buyout activity could change the supply picture materially for IG, to boot. Bloomberg Intelligence estimates more than $1 trillion in pending deals, and strategists warn of a flood companies coming to tap the market, raising questions about whether that’s already priced in. That’s the major wild card for high grade — and to a certain extent for the Russell 2000 Index as well, as many potential acquisition targets in the health care space have gone on tears this year.

The Chinese Road More Traveled

 “Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

-Robert Frost, The Road Not Taken

Chinese policy makers either haven’t read Robert Frost, or they don’t agree with him when it comes to economic policy. Their tendencies have been clear, and repeated. When Beijing senses that any trade-off between growth and deleveraging poses a significant threat to the former, its policy stance shifts to prioritize current activity. No wonder Chinese debt topped the second-quarter leader board for Asian EM local-currency performance. in anticipation of an accommodative response by the People’s Bank of China to the  brewing battles over commerce.

bond scorecard.jpg

The pseudo-monetary stimulus that’s ensued also has one Chinese hedge fund calling for a bottom in the nation’s embattled equities.

Meanwhile, PBOC adviser Ma Jun hinted that the deleveraging campaign won’t take a “one-size-fits-all” approach. Unsurprisingly, more than a whiff of moral hazard (along with the smog) lingers in the air. The head of financing at state-owned Qinghai Provincial told Bloomberg he doesn’t expect the government to let the issuer, considered to be a local government financing vehicle in some quarters, default on its obligations. Drawbacks aside, the China model of targeted curbs may be preferable to the West’s reliance on the blunt tool of interest-rate adjustments as a moderating force for the modulations of the business cycle.

The big question is: how is China going to keep its currency stable and run broadly accommodative monetary policy while shrinking leverage in the midst of a Fed tightening cycle? Possible ways to square this circle include further targeted cuts to banks’ required-reserve ratios, additional lending to policy banks and capital controls.

Chinas offical debt.jpg

Plan to Dismount

You have to feel sorry for the Fed. The pressure on its policy target isn’t the Fed’s making, but it’s the only entity that might be willing and able to offer a solution. Massive debt issuance by the Treasury is propelling short-term bill rates higher, and demand hasn’t been that hot recently, either. This deluge, which has pressured a variety of short-term rates higher, is prompting would-be lenders in the federal funds market to engage in more profitable opportunities elsewhere.

As a result, there’s a dearth of liquidity in that corner of the market, and that has helped push the effective fed funds rate up towards the top of policy makers’ target range.

testing feds control.jpg

U.S. fiscal policy is therefore the prime culprit for why the Fed is encountering problems with plumbing of monetary policy. Regulatory confusion is somewhat to blame for banks’ hoarding of reserves, too.

At the same time, the Fed is destroying reserves via its unwinding of asset purchases, potentially exacerbating the issue. Since that’s the primary lever the Fed can use to alleviate upward pressure as it proceeds with hiking rates, analysts are beginning to suspect Chairman Jerome Powell and his team will pull it. That entails pausing, slowing or ending the shrinkage of the Fed’s bond portfolio.

In the minutes, a few participants suggested that “before too long, the Committee might want to further discuss how it can implement monetary policy most effectively and efficiently when the quantity of reserve balances reaches a level appreciably below that seen recently.”

Some might find it peculiar that balance-sheet normalization has been on an explicit preset course despite the Fed having taken care to stress that its trajectory for rates wasn’t on any such divined trajectory through the tightening cycle. So perhaps this ahead-of-schedule incident may have a silver lining: it’s a reminder that the balance sheet is, and likely will be, an active tool for major central banks for the foreseeable future — regardless of any protestations otherwise.

Meanwhile, here is a central bank whose control over the market is something to marvel at.

bond snoozefest.jpg

‘Bout That Basis

It’s been a while since the ISDA basis graced these pages. This is an oversight. As a refresher, this refers to the difference in pricing for credit-default swaps that include currency re-denomination as an event of default versus ones that do not. Even as Italian sovereign yields have retraced a sizable portion of their rise, the ISDA basis has blown out and remained near record highs.

Italeave risk

The ECB certainly doesn’t seem shaken by Italian politics. Instead, some policy makers are said to be concerned that markets don’t see a rate hike until the end of 2019, because the lift-off could come sooner. That revelation weighed on sovereign debt in the currency bloc on Wednesday. Perhaps there’s some merit to downplaying the effect of the political drama on economic activity — particularly since Italian officials are far from dead-set on withdrawing from the currency union.

“Nobody wants to leave the euro, but if we don’t fix it, things risk getting worse,” said Italian Finance Minister Giovanni Tria. But in a show of defiance to financial markets, the new government is putting tax cuts and a universal basic income in its first budget. At the same time, it’s asking the European Commission to extend a state loan-guarantee program that’s helped bad bank assets find good homes.

Contrast Italy’s situation with the early whispers out of Andres Manuel Lopez Obrador’s purportedly leftist, populist government in Mexico. His chief of staff said AMLO wouldn’t use his legislative might to roll back the oil reform of 2013, stressing the need to avoid “hurting private investment.” To adapt Obi-Wan Kenobi, these are not the populists you’re looking for. For the time being, at least. Accordingly, the peso is stronger and two-year yields are lower since his victory.

no market discipline

In fact, it’s the best performing currency among the expanded majors tracked by Bloomberg. It seems the election was a case of “buy the rumor, sell the news” for dollar-peso.

China Economic Update

By Eric Wong

Managing Director, Canada Wood China

July 26, 2018

Posted in: China

2018 Q2 highlights:

  • China has posted its Q2 GDP growth of 6.7%, slightly lower than 6.8 percent in Q1 of 2018. Tighter financial conditions (such as authorities continue to demolish on shadow banking and back up financial deleveraging) led to a moderated economic growth in first half of 2018, while manufacturing output moved slower but high-tech related activities remained solid growth; resilient domestic demand helped China maintain strong growth this year even though recent data show its economy is making slower paces. Focus Economics experts forecasted a 6.5% economy growth nationwide in 2018 and 6.3% in 2019.i
  • Property sales went down for the first time in six months due to continued speculation restrictions and rising mortgage rates both led by the government. However, new starts of real-estate construction in Q2 grew 11.3% compared 2017Q2 to 1.46 billion m2.

PMI (Caixin) indexes remained steady in Q2, both hit 51.1 in April and May and slightly decreased to 51.0 in June.ii Followed by a 12.6% year-on-year growth in May, China Exports achieved a 11.3% gain compared with the same period of last year to USD 216.7 million in June which surpassed the 10% growth forecast previously.iii

China exports and manufacturing

China Consumer Price Index (CPI) kept unchanged in April and May (101.8) and slightly raised to 101.9 in June.iv USD/CNY had been on the rise in Q2, increased from 6.34 (May 1st) to 6.42 (June 1st) and hit 6.62 on July 1st;v CAD/CNY kept the similar upward trend, went from 4.93 (May 1st) to 4.95 (June 1st) and hit 5.04 on July

Wood import data ceased to renew since March 2018

A notification was distributed from China Customs that all wood import data ceased to renew since March 2018 for now. BOABC, our regular data vendor informed Canada Wood China that all data renewal work will be back on track soon, China Economic Update will analyze data starting from April in detail at the end of Q3 2018.

Building material prices

Cement price dropped slightly from RMB 447.50 to RMB 441.67 per metric ton (down 1.30%) over June 2018.vii On the other hand rebar steel price went up lightly by 0.35% from RMB 4,007.86 per metric ton on June 1st 2018 to RMB 4,022.00 per metric ton on June 30th 2018.viii The log price index in March 2018 was 1,115.91 points which decreased 0.48% less than February 2019 and grew 2.22% compared to the same period year-on-year; the lumber price index in March 2018 was 1,123.99 which went down slightly of 0.33% month-on-month and decreased 0.56% year-on-year.ix

Wood import of Chinax

China softwood lumber imports reached 2.05 million m3, dropped 1.43% year-on-year and increased 63.43% month-on-month which fits the trend each year that the import volume always rises after Chinese New Year. From January to March 2018 the total volume of softwood lumber imports hit 5.37 million m3 with 0.28% growth year-on-year; of which the imports of Fir & Spruce and Radiata pine was 2.12 million m3 (down 0.1% year-on-year, accounts for 39.5% of total softwood lumber imports) and 0.27 million m3 (up 2.2% year-on-year, constitutes 5% of total softwood lumber imports) respectively.

In March China softwood lumber imports from Russia, Canada and Finland achieved 1.16 million, 0.34 million and 0.13 million m3 respectively. From January to March 2018 the above-mentioned three countries represented 57.36% (up 5.38% year-on-year), 16.56% (down 21.71% year-on-year) and 7.21% (up 4.68% year-on-year) of total softwood lumber imports.

demand for wooddemand for wood total imports

Focus Economics (June 19th, 2018). China Economic Outlook
ii Trading Economics (July 15th, 2018). China Caixin Manufacturing PMI
iii Trading Economics (July 15th, 2018). China Exports
iv Trading Economics (July 15th, 2018). China Consumer Price Index (CPI)
v XE Currency Charts: USD to CNY
vi XE Currency Charts: CAD to CNY
vii Sunsirs (July 2018). Spot Price for Cement
viii Sunsirs (July 2018). Spot Price for Rebar Steel
ix BOABC (June 2018). China Wood and Its Products Market Monthly Report
x BOABC (January to June 2018). China Wood and Its Products Market Monthly Report

Canada Wood China inks MOU with China Railway Real Estate Group

kahlia Deng

By Kajia Deng

July 4, 2018

Posted in: China

Canada Wood China (CW China) signed a Memorandum of Understanding (MOU) with China Railway Real Estate Group on June 20 in Beijing.

The two sides agreed to develop a long term strategic partnership, which will focus on development of wood construction in Xiong’an, a new economic zone founded in April 2017. China wants Xiong’an to be a low-carbon, smart, livable and globally influential city.

The MOU sets the goal and principle for the cooperation between the two parties and allows CW China to introduce wood construction into the development of Xiong’an through an extensive range of activities including researches, technical transfer and promotion programs, etc.

Canada Wood China is dedicated to promoting the use of legal timbers and wood trade between the two countries, as well as consolidating Canada’s position as the world’s largest wood products exporter and a world leader in modern wood structure technology.

China Railway Real Estate Group was founded in 2007 with a registered capital of 6.5 billion yuan. It is a wholly owned subsidiary of China Railway Group Limited and its only company involved in the real estate sector.

The group develops real estate projects and offers a range of property services.

As the U.S.-China trade war threatens supply chain disruptions and China amplifies cross-strait tensions while growing more technologically competitive, Taiwan has urgently emphasized the development of economic relations beyond the mainland.

Taiwan Continers

PATRICK LIN/AFP/ Getty Images A container truck drives along a pier at Taiwan busy northern Keelung harbor.


  • Taiwanese electronic firms are still more advanced than mainland China’s in developing most cutting-edge technologies, but they are increasingly linked to mainland supply chains.
  • This integration could help Beijing move up the production value chains, compromising Taiwan’s competitive advantage.
  • U.S.-China trade tensions will likely increase production costs and push Taiwanese-owned, low-end manufacturing companies to move away from China and into Southeast Asian states.
  • Though Taiwan will continue to struggle to form regional, multilateral free trade agreements, it could see more success pursuing bilateral deals with the mainland’s biggest rivals.

Taiwan is caught in the middle of the escalating trade war and larger strategic competition between mainland China and the United States. And the clash is threatening the self-governing island’s export- and tech-oriented economy, which relies heavily on the mainland’s supply chains for assembly, export opportunities and market access. (This is particularly true for its electronic and semiconductor industries, which together account for about 25 percent of the island’s gross domestic product.)

The Big Picture

The trade tensions between China and the United States are unsettling global supply chains. This disruption will have an impact on Taiwanese businesses, many of which are closely linked with the mainland. Combined with Beijing’s increasing use of coercive tactics against Taipei since Taiwanese President Tsai Ing-wen took office, these issues are driving Taiwan to diversify its economy away from mainland China.

See 2018 Fourth-Quarter Forecast

See Asia-Pacific section of the 2018 Fourth-Quarter Forecast

See China in Transition

See Supply Chains

Adding to Taiwan’s economic troubles is Beijing’s two-pronged campaign to diplomatically isolate the island and poach its businesses and talent, all in the hopes of eventual reunification. Together, these threats are increasing Taipei’s desire to rely less on the mainland’s economy, to diversify its trade and investment relationships with its neighbors, particularly India and those in Southeast Asia, and to establish more free trade agreements. In the past, these efforts have had mixed results, but the current economic and strategic pressure will likely harden Taipei’s resolve in the coming months.

Deepening Connections

Over the past two decades, disputes over sovereignty have contributed to a volatile political relationship between Taiwan and mainland China. But at the same time, trade and investment links between the two have grown. Taiwanese investments into the mainland have steadily increased since Beijing opened up access in the early 1990s. Because of a similar culture and language, and the mainland’s huge market potential and cheap labor, many capital-rich Taiwanese businesses relocated to the mainland. Today, China accounts for over 40 percent of Taiwan’s exports, of which 80 percent are intermediary goods that are assembled in China before being sold domestically or exported.

These developments have had the added effect of nurturing China’s economy during its reform and transformation era. The Taiwanese business community not only serves as a top capital source for once cash-strapped China but has also become an important means through which Beijing could influence the island and forge cross-strait connections.

Taiwanese outbound investment

And as such links grew, Taiwan found it had few options besides mainland markets and production. The island’s economy was plagued by years of stagnation, low wages and productivity throughout the 2000s, and it continues to face high-tech competitors in South Korea. Indeed, during the global financial crisis of the late 2000s, former Taiwanese President Ma Ying-jeou’s administration removed a host of restrictions on investment in key high-tech sectors on the mainland, contributing to an even heavier dependence on the mainland economy and creating new cross-strait supply chains in those industries.

As Taiwanese electronics firms outsource to mainland China, they are keeping higher value-added work — such as the development of semiconductors, chips and other key electronic components — at home. But a significant portion of these components are supplied to Chinese, Taiwanese or foreign firms in China. As much as 90 percent of Taiwanese-branded computers, laptops and mobile phones are produced outside the country, with a majority being produced in mainland China.

The Consequences of Linking Supply Chains

While the mainland and Taiwan have both benefited from their interconnectedness in economic terms, the relationship has spurred increasing debate within Taiwan about its impact on the island’s de facto independence. The mainland’s relatively high-skill, low-cost labor and integrated supply chains offer Taiwanese businesses competitive advantages, but they also open up the opportunity for China to interfere with Taiwan’s internal politics and, in a more extreme scenario, to challenge its industrial development.

Beijing’s ultimate imperative is reunification, so it has been careful in applying serious economic pressure on Taiwanese businesses on the mainland. But it has increasingly leveraged its economic influence to try to shape Taiwan’s internal politics in its favor, as it did during Taiwan’s presidential election in 2012.

Moreover, a heavy reliance on overseas production is eroding the Taiwanese incentive to innovate and allowing mainland competitors to gain knowledge as China pushes to move up the value chain. This drive threatens Taiwan’s competitive advantage in lower-end technology sectors. In particular, Beijing has been moving aggressively to develop a more self-reliant semiconductor industry, as outlined in its signature Made in China 2025 project.

These developments could have several implications for Taiwan. China has ramped up its efforts to absorb talent and technological capability, and Taiwan is a target due to Beijing’s reunification goal and its strategic intention to move up the semiconductor value chain. And Beijing’s capital- and state-led efforts are expected to boost China’s tech industry, putting Taiwanese companies in a race to climb the ladder of cutting-edge technology.

Of course, as the ZTE case has illustrated, Beijing is still perhaps a decade away from its goal of achieving greater technological independence, while Taiwan holds a leading position in the most advanced technologies, such as integrated circuit design, fabless integrated circuits and foundries. But the mainland’s efforts to climb the value chain with products such as solar panels and smartphones have rapidly eroded Taipei’s advantages in those global markets.

Taiwan Strives to Diversify

As the U.S.-China trade war threatens to disrupt supply chains and as China amplifies cross-strait tensions while growing more technologically competitive, Taiwan has urgently emphasized the development of economic relations beyond the mainland, which the island has pursued in one form or another for the past several decades.

Since taking office in 2016, Tsai has implemented her “New Southbound Policy” to ramp up connections with and investment in Southeast Asian states and India — an extension of similar goals held by two previous administrations. Her government has also accelerated its longtime quest for free trade agreements, hoping to better integrate Taiwan’s economy on a global level. This was a goal in the 2000s as well, as the proliferation of regional free trade agreements threatened to undermine Taiwan’s competitive advantage in the Asia-Pacific.

But the previous diversification policies didn’t yield much progress, since Beijing’s ever-growing and outperforming economy meant China remained the most lucrative place for investment. And Taiwan’s attempts to join multilateral free trade agreements, such as the Regional Comprehensive Economic Partnership between the 10 members of the Association of Southeast Asian Nations (ASEAN) and the Trans-Pacific Partnership, didn’t yield much success due to the island’s political status and the concerns of some countries that they would risk backlash from Beijing.

In the two years since Tsai took office, Taiwanese investment in Southeast Asia has moderately picked up but still fell short of what the island was investing in those regions in the late 1990s and early 2010s. Most of the current investments are concentrated in the retail and financial sectors, indicating that they are primarily oriented to capture those growing markets instead of directing markets away from mainland China. Moreover, Taiwan has so far made few electronics investments in Southeast Asia (with a few in Malaysia and Indonesia and some most recently in Thailand). After two decades of developing sophisticated, well-functioning supply chains for items such as semiconductors, Taiwanese businesses are less than eager to relocate and abandon the growing domestic Chinese market.

What’s Different Now

But Tsai’s conviction of the need to diversify Taiwan’s economy is strong, and things may change this time around. Many countries in the ASEAN, such as Vietnam, Indonesia and the Philippines, are developing strong economies of their own, working to move up the value chain and moving factories out of China. Inspired by their success, Taipei will likely work hard to keep up. Additionally, even as Taiwan remains an unlikely candidate for regional free trade agreements in the short term, its quest for bilateral free trade agreements with the United States and, to some extent, India may get new momentum as Washington challenges the current state of cross-strait relations.

All these developments, combined with the protracted U.S.-China strategic competition that could disrupt critical supply chains and with a mainland government that is increasingly challenging Taiwan’s autonomy, will drive Taipei to focus on its goal of disengaging its economy from the mainland, despite the barriers to that objective.

Russia: lumber export value 17.8% up in Jan-Apr 2018

July 13, 2018



In January-May 2018, Russia increased its sawn timber exports, both in value and in volume terms, indicate the statistics published by the Russian Federal Customs Office.

Thus, during the first five months of the current year Russia exported 7.616 million tonnes of sawn timber. That is 3.4% more than during the respective period of the last year.

The total value of the exported Russian sawn timber increased as well. In January-May it came up to $1.805 billion having gone up by 17.8%.

In their turn, Russian log exports went down in volume terms, but increased in value terms.

In January-May 2018, the Russian log exports came up to 7.313 million m3, having gone down by 6.2% year-on-year.

The total value of the Russian logs exported in January-May 2018 came up to $636 million, that is 5.9% more than during the respective period of 2017.

moscow bonanza

A “slow-mo” credit crunch has already taken hold, says HSBC.

bund bulldebt trap

Japan is reaching for yield in the U.S.

closin the gap

The nascent return of India’s biggest bond buyers

green shoots

Moody’s survey shows oil prices as the main risk to India’s economy

Special Correspondent

Mumbai, July 04, 2018 22:52 IST

indian gas

A   | Photo Credit: K_Pichumani

Special Correspondent

Mumbai, July 04, 2018 22:52 IST

Interest rates, politics too seen as risks

Oil prices, pace of banks’ balance sheet clean-up and investment remain the key credit risks in India, according to an investor survey by Moody’s Investors Service.

While market participants in Singapore and Mumbai were unanimous in pegging high crude price as the main risk to India’s economy, views varied on the second biggest risk, according to the ratings agency.

“When asked about the top risks facing the Indian economy, most of the respondents highlighted high oil prices as the top risk, while 30.3% of those in Singapore picked rising interest rates as the next top risk, and 23.1% of those in Mumbai picked domestic political risks as the second top risk,” Joy Rankothge, a vice president and senior analyst at Moody’s, said in a press release.

Participants at Moody’s 4th Annual India Credit Conference, conducted by the credit ratings agency along with its Indian affiliate ICRA Ltd. in Mumbai and Singapore in June 2018, were polled on some of the most pressing credit issues facing India.

Almost 175 people representing more than 100 local and international financial institutions attended the conference, Moody’s said.

Fiscal slippage seen

Most attendees at both locations opined that India would not meet the central government’s fiscal deficit target of 3.3% of GDP for the financial year ending in March 2019, according to the release.

Further, only 23.3% of the respondents in Singapore and 13.6% in Mumbai thought that the fiscal targets would be achieved, with 84.7% in Mumbai and 76.7% in Singapore expecting some fiscal slippage.

Those polled in both Singapore (85.7%) and Mumbai (93.6%) believed the government’s bank recapitalization package was mostly insufficient to resolve solvency challenges.

‘Capital insufficient’

“Although we expect the recapitalization package to be sufficient to meet the minimum regulatory capital needs, we think it will be insufficient to support credit growth,” Moody’s said in a report. “Banks have not been able to raise new capital from the equity markets as planned under the government’s recapitalization measures,” it said.

Incidentally, while 59.6% of the attendees in Mumbai thought that banks would be unable to raise capital from the markets as planned, only 32.1% of those polled in Singapore held that view, Moody’s said.

falling rupee


What the Falling Rupee Means for India’s Economy

india the bi picture


  • A strengthening U.S. dollar is causing the rupee to depreciate as the cost of India’s hefty, dollar-denominated oil imports are rising.
  • The falling rupee suggests that Indian monetary policy will enter a tightening phase to stem debt outflows, manage inflation and ease the currency’s fall in the world’s fastest-growing economy.
  • With an eye on re-election in 2019, Prime Minister Narendra Modi will continue to indulge in populist spending, which will expand the country’s deficit and slow the government’s fiscal consolidation drive.
  • While economic trends in India will weaken Modi as a candidate, the absence of a unified opposition indicates that he will remain the favorite in the 2019 general elections.

With a gross domestic product of $2.6 trillion, India recently eclipsed France to become the world’s sixth-largest economy. What’s more, the South Asian country of nearly 1.3 billion people is home to the world’s fastest-growing economy, having edged out China with its 7.7 percent growth rate from January through March. While these figures are impressive, they rest uncomfortably alongside less sanguine facets of India’s macroeconomic picture.

The Big Picture

Indian Prime Minister Narendra Modi will seek another five-year term in 2019 to try to advance the land, labor and tax reforms that he argues are necessary to produce the job growth needed to absorb the 12 million Indians who enter the labor market each year. But a weakening rupee, rising oil prices and other external vulnerabilities point to the challenges ahead for Modi as he campaigns for re-election.

See India’s Own Worst Enemy

India GDP chane

Ongoing shifts in U.S. monetary policy are causing India’s rupee to depreciate against the dollar. As the U.S. Federal Reserve cautiously raises interest rates to keep inflation in check — in June, the U.S. consumer price index hit its highest level since 2012 — the U.S. Treasury has increased its issuance of bonds to cover large deficits resulting from recent U.S. tax cuts. Together, these U.S. decisions have put additional pressure on the rupee, which has tumbled more than 8 percent against the rising dollar in 2018. This decline makes the rupee Asia’s worst-performing currency this year (though India’s real effective exchange rate — a measure of the rupee’s value in relation to trading partner currencies — is down only 3.5 percent since December)

US dollar per rupee

India’s $409 billion in foreign exchange reserves enable it to weather any currency shocks, giving the Reserve Bank of India the ability to intervene by quietly selling dollars to pull rupees out of circulation and thereby boost their value. But broadly speaking, the rupee’s performance against the dollar in tandem with rising oil prices will increase India’s import bill, lead to debt outflows and compel the Reserve Bank to embark on its own phase of monetary tightening while Prime Minister Narendra Modi’s populist spending in support of his 2019 re-election bid is expanding the country’s fiscal deficit.

oil fueling india growth

When voters swept Modi’s Bharatiya Janata Party to power in May 2014, giving the party the first majority in the lower house of Parliament in 30 years, the price of India’s crude oil basket over the previous three years had averaged $108 per barrel. Oil prices crashed soon after Modi took power, resulting in the per-barrel average falling to $58 over the next three years. This fall in oil prices proved a blessing for Modi. It enabled his administration to build on its political momentum by projecting itself as a sage steward of the Indian economy through trimming the current account deficit and keeping inflation in check while pocketing more revenue by raising taxes on fuel (meaning consumers didn’t see more than a 5 percent fall in fuel prices).

India Fuel costs and taxation

However, rising oil prices combined with increasing demand and a weakening rupee now threaten to scale back this advantage. In fiscal 2017-18, for example, which ended March 31, India’s oil import bill jumped by $20 billion. India’s current account deficit in the fourth quarter of fiscal 2017-18 ballooned to $13 billion. By comparison, its current account deficit during all of fiscal 2016-17 was $14.4 billion. India is the world’s third-largest consumer of oil and imports nearly 80 percent of its crude. And since oil is a key input across various sectors of the economy, rising crude prices will put upward pressure on inflation. Indeed, the latest inflation figures of 5 percent in June point to a five-month high.

indias inflation interst rates

Investors already have pulled $6.6 billion from India’s capital markets, and that figure includes the first foreign portfolio investment outflows in more than a decade as measured during the first six months of the year. Investors, especially in bond markets, are reallocating their capital to the United States, where the yields on Treasury bonds — considered the world’s safest investment — are rising in tandem with U.S. interest rates. But the Reserve Bank of India is not sitting idly by. For the first time under Modi’s administration, the Indian central bank raised its interest rate by a quarter-percentage point to 6.25 percent in June. While the move can blunt the outflow of funds — emerging market securities typically deliver higher yields because of higher risk — it’s coming at an inopportune time for the prime minister as he seeks to indulge in populist spending to court farmers in support of his 2019 re-election campaign.

India’s fiscal consolidation drive will slow as a consequence. Initially, the government had set a deficit target of 3.2 percent of GDP in fiscal 2017-18 and 3 percent in fiscal 2018-19. But last year, the deficit ended up being 3.5 percent of GDP, and the Finance Ministry set a target of 3.3 percent for this year. So the rising interest rates are going to raise the government’s borrowing costs as it essentially spends money on credit. For Modi, however, politics will override economics: While India’s farmers are stratified along economic, political and social lines, the group collectively makes up the country’s most important constituency. The country is home to some of the world’s largest cities — more people live in the Delhi metropolitan area than live in Greece — but about 70 percent of Indians still live in the countryside. Therefore agriculture accounts for about half of the labor force, even as it contributes to a dwindling share of the economy. (Already, Modi has promised to boost the minimum support prices the government has promised to pay farmers, adding another $2.18 billion to the government’s expenditure.)

snapshot india

Given India’s immense diversity in language, religion, ethnicity and caste, encouraging unity is a key pillar of Modi’s grand strategy. His 2014 parliamentary majority positioned his government to advance the economic component of promoting unity through legislating the Goods and Services Tax. The tax aims to undo the economic fragmentation along state lines by creating a single national value-added tax (though there are complications on this front, to be sure). The tax itself is part of a trinity of economic reforms — including land and labor overhauls — that the country needs to pass to create the labor-intensive economic growth capable of absorbing the 12 million Indians who enter the job market annually. Otherwise, it will fail to capitalize on its demographic dividend, and in the extreme scenario, large swaths of unemployed and underemployed people can lead to widespread social unrest.

Thus, for all the expectations triggered by its impressive growth rate, a weakening rupee, an overreliance on oil imports and a mediocre export performance are some of the economy’s key external vulnerabilities. And although India’s macroeconomic fundamentals are strong enough to avert a crisis in the near term, the combination of a monetary tightening cycle and increased populist spending will strain the fiscal deficit. But this is a price Modi is willing to pay as he courts voters. The economy clearly will be his weakest card come 2019. But the prime minister’s formidable campaigning skills and an opposition still struggling to coalesce mean the advantage belongs to Modi.


Pakistan: Government to Request Bailout From International Monetary Fund, Official Says

Strafor Situation Report Oct. 8 2018

What Happened: Pakistan’s government will request a loan from the International Monetary Fund (IMF) to help the country replenish its declining foreign exchange reserves, according to Pakistani Finance Minister Asad Umar, Dawn reported Oct. 8.

Why It Matters: A loan from the IMF would require the country to rein in its deficits by cutting expenditures, hindering Prime Minister Imran Khan’s development agenda.

Background: Pakistan’s rising energy bills, growing trade deficit and high debt payments have forced the government to tap into its foreign exchange reserves. If the country reaches a deal with the IMF, it will be its 22nd program with the organization since 1958.

Read More:


First and Second Quarter 2018 North American Housing News

2018 housin

Canadian Housing News

CREA cuts home sales forecast, May sales fall 16.2 per cent from year before

The Canadian Press

Published June 15, 2018 Updated June 15, 2018

The Canadian Real Estate Association is lowering its national home sales forecast for this year because of weaker sales in B.C. and Ontario.

The industry association, which represents about 100,000 real estate agents across Canada, said Friday it now expects home sales this year to fall 11 per cent compared with a year ago to 459,900 units in 2018. The prediction compared with a forecast for a 7.1-per-cent decline the association released in March.

“The decrease almost entirely reflects weaker sales in B.C. and Ontario amid heightened housing market uncertainty, provincial policy measures, high home prices, ongoing supply shortages and this year’s new mortgage stress test,” the association said in a statement.

The updated forecast came as CREA reported actual home sales in May hit a seven-year low as they fell 16.2 per cent compared with a year ago.

The national average price for homes sold in May was slightly more than $496,000, down 6.4 per cent from a year ago. Excluding the Greater Toronto and Greater Vancouver areas, the average price was a shade more than $391,100, down 2 per cent.

This drop in sales activity capped off a lackluster spring home-buying season, as March, April and May are typically the most active months in any given year. National home-sales activity in March and April were down 22.7 per cent and 13.9 per cent, respectively, according to CREA numbers.

Combined sales for the three-month period fell to a nine-year low, CREA said Friday.

Factors weighing on home sales include new government measures introduced in B.C. and Ontario, such as a foreign-buyers tax, as well as interest-rate hikes by the Bank of Canada.

The association on Friday again pointed the finger at a new stress test introduced at the beginning of the year for uninsured mortgages, which has cut the amount that certain home buyers are able to qualify for.

“The stress test that came into effect this year for home buyers with more than a twenty per cent down payment is continuing to suppress sales activity,” said CREA president Barb Sukkau, in a statement. “The extent to which it is sidelining home buyers varies among housing markets and price ranges.

As of Jan. 1, the Office of the Superintendent of Financial Institutions requires buyers who don’t need mortgage insurance to prove they can make payments at a qualifying rate of the greater of two percentage points higher than the contractual mortgage rate or the central bank’s five-year benchmark rate.

The bar was raised even higher in May, when the central bank’s five-year benchmark rate rose from 5.14 per cent to 5.34 per cent. The Bank of Canada uses the posted five-year fixed mortgage rates at the Big Six banks to calculate the benchmark rate. The central bank’s benchmark rate increased, in turn, after all the Big Six banks raised their posted five-year fixed mortgage rates in the preceding weeks, reflecting the higher borrowing costs associated with a recent rise in government bond yields.

“This year’s new stress-test became even more restrictive in May, since the interest rate used to qualify mortgage applications rose early in the month,” said Gregory Klump, CREA’s chief economist, in a statement Friday. “Movements in the stress test interest rate are beyond the control of policy makers. Further increases in the rate could weigh on home sales activity at a time when Canadian economic growth is facing headwinds from U.S. trade policy frictions.”

CREA’s latest figures support the notion that markets are stabilizing after the volatility at the beginning of 2018 related to the tightened mortgage rules introduced on Jan. 1, said TD economist Rishi Sondhi.

“On balance, this was a better-than-expected report. Sales were effectively flat during the month – their best turnout so far this year. Meanwhile, listings increased for the third time in four months, pointing to somewhat improved confidence on the part of sellers as prices edged higher for the second straight month.”

  • Summary
  • National data
  • City and neighbourhood data

Canada’s home prices gain a little ground

Canada’s home prices gained ground in June with a 0.9 per cent increase from May, according to the latest data from the Teranet-National Bank House Price Index.Marc Pinsonneault, senior economist at National Bank of Canada, says that, while impressive at first glance, the gain was the third smallest for June in the past 14 years.

The composite index of 11 metropolitan markets is now barely above its previous peak in August of 2017, the economist points out.

In June, prices rose compared with May in 10 of the 11 markets surveyed. The leader was Ottawa-Gatineau with a two per cent jump, followed by Hamilton with a 1.8 per cent gain, and Edmonton with a 1.5 per cent increase. The Victoria index rose 1.3 per cent; Toronto added 1.2 per cent; and Halifax, one per cent.

The average sale price of all the housing types in the cross-country index was $546,562 last month.

The composite index, which charts price trends based on a large sample of the property deals registered at land title offices, now stands at 223.82.

year over year june 18

Mr. Pinsonneault adds that when seasonal patterns are stripped out, the index has essentially remained stable in the past three months.  Carolyn Ireland

year over price change may 18

Canadian Housing Snippets

CHMC Highlights

Labour Force Survey, May 2018 Released at 8:30 a.m. Eastern time in The Daily, Friday, June 8, 2018

Employment was little changed in May, and the unemployment rate was 5.8% for the fourth consecutive month. On a year-over-year basis, employment grew by 238,000 or 1.3%, due to gains in full-time work. Over the same period, total hours worked were up 2.0%.


Highlights In May, employment decreased for people in the core working ages of 25 to 54. It increased for people aged 55 and older and was little changed among youth aged 15 to 24. Employment increased in Prince Edward Island, while it decreased in British Columbia and Nova Scotia. There was little change in the other provinces. There were employment increases in four industries in May: accommodation and food services; professional, scientific and technical services; transportation and warehousing; and finance, insurance, real estate, rental and leasing. At the same time, employment declined in health care and social assistance, manufacturing, construction, and “other services.” There was little change in the number of employees in both the private and public sectors, as well as the number of self-employed workers

unemployment rate

 Employment decreases for core age population

For people in the core working ages of 25 to 54, employment fell among both men (-19,000) and women (-19,000).

The unemployment rate for men in this age group held steady at 5.0%, while it increased by 0.2 percentage points to 4.9% for women.

In the 12 months to May, employment among core-aged men grew by 33,000 (+0.5%), the slowest year-over-year growth for this group since November 2016. Employment increased by 40,000 (+0.7%) for core-aged women on a year-over-year basis.

Among people aged 55 and older, employment increased by 29,000 in May, bringing year-over-year gains to 173,000 (+4.5%). The unemployment rate for this age group fell 0.2 percentage points in the month to 5.1%.

Employment was little changed among youth aged 15 to 24 on both a monthly and year-over-year basis. The unemployment rate for this age group held steady at 11.1% in May.

Employment little changed in most provinces

Employment in Prince Edward Island increased by 800 in May, while the unemployment rate fell by 1.9 percentage points to 9.3%. Compared with 12 months earlier, employment in the province was little changed.

In British Columbia, employment fell by 12,000 in the month. For the first time since May 2015, employment in British Columbia recorded virtually no growth on a year-over-year basis. The unemployment rate was little changed compared with the previous month, at 4.8% in May.

The number of workers in Nova Scotia was down by 3,600 in May, and the unemployment rate Increased by 0.5 percentage points to 7.2%. On a year-over-year basis, employment was little changed.

Employment in Quebec was little changed in May, as a decrease in full-time work was offset by more people working part time. The unemployment rate was little changed at 5.3%. In the 12 months to May, employment in the province increased by 65,000 (+1.6%).

In Ontario, there was virtually no change in the number of people working in May, and the unemployment rate was 5.7%. On a year-over-year basis, employment in the province was up by 126,000 (+1.8%).

The remainder of he provinces showed minimal change year to year.

Industry perspective In accommodation and food services, employment rose by 18,000 in May, driven by growth in British Columbia. Employment gains in April and May accounted for more than half of the year-over-year increase (+56,000 or +4.7%) in this industry.

Employment in professional, scientific and technical services rose by 17,000 in May, entirely due to gains in Ontario. On a year-over-year basis, employment in this industry was up by 31,000 (+2.1%).

There were 12,000 more people working in transportation and warehousing in May, bringing the year-over-year increase to 42,000 (+4.5%).

Employment in finance, insurance, real estate, rental and leasing rose by 12,000, almost entirely in Quebec. Despite this increase in the month, the number of people working in this industry was like that observed 12 months earlier.

There were 24,000 fewer people working in health care and social assistance in the month, while employment was little changed on a year-over-year basis.

Manufacturing employment was down by 18,000 in May, and was virtually unchanged compared with 12 months earlier. Employment in this industry reached a five-year peak in December 2017, and has been trending downward in 2018.

Employment in construction fell for the second consecutive month, decreasing by 13,000 in May. Employment was little changed from 12 months earlier, with recent declines offsetting gains observed in late 2017. Employment in “other services” fell by 12,000 (-1.5%) in May and was little changed on a year-over-year basis.

Other services” includes services related to civic and professional organizations, and private households. There was little change in the number of employees and the self-employed in May. On a year-over-year basis, there were increases in the number of public sector (+84,000 or +2.3%) and private sector (+105,000 or +0.9%) employees, while the number of self-employed was little changed.

Summer employment for students From May to August, the Labour Force Survey collects labour market data on youths aged 15 to 24 who were attending school full time in March and who intend to return to school full time in the fall. The May survey results provide the first indicators of the summer job market, especially for students aged 20 to 24, as many younger students are still in school. Data for June, July and August will provide further insight into the summer job market. Published data are not seasonally adjusted, therefore comparisons can only be made with data for the same month in previous years. Compared with 12 months earlier, employment among 20- to 24-year-old students was virtually unchanged in May. The employment rate (57.0%) and unemployment rate (13.6%) for this group of students were also little changed compared with May 2017.


Annual review of the labour market, 2017 Introduction and overview

This article analyses the Canadian labour market in 2017. The focus is on national trends as well as key provincial and industrial sector changes.

In general, consistent signals across key labour market indicators pointed to a tightening of the labour market, including the fastest total employment growth in a decade and a downward trend in the national unemployment rate.

At the same time, average weekly earnings increased notably, the number of regular Employment Insurance (EI) beneficiaries declined, and the job vacancy rate increased. All these changes coincided with stronger economic growth, as the real gross domestic product grew 3.0% in 2017, following growth of 1.4% in 2016.1

The analysis in this article uses a combination of major labour market indicators from different sources. All analysis is based on annual averages, unless otherwise noted. The Labour Force Survey (LFS) is used primarily for data on unemployment and employment details for demographic groups.

The Survey of Employment, Payrolls and Hours (SEPH) is used for payroll employment by industrial sector as well as average weekly earnings and hours for employees. Data from the Job Vacancy and Wage Survey (JVWS) and from EI statistics are also used.

Fastest employment growth rate in a decade, driven by increases in full-time work

Between 2016 and 2017, total employment rose by 336,500 or 1.9%, the fastest annual rate of growth in a decade.2 This follows three years of increases below 1.0%. Most of the growth was in full-time work (+280,600 or +1.9%). Employment gains were spread across several provinces, led by Ontario, Quebec and British Columbia. At the same time, there was a notable decline in Newfoundland and Labrador. At the national level, the largest increase was among people in the core working age group (25 to 54). This contrasted with 2016, when core age employment was virtually unchanged.

employment by type of work and growth rate

Unemployment rate trends down, participation rate edges up

Using annual data, the unemployment rate was 6.3% in 2017, down 0.7 percentage points compared with 2016. This was the largest decline since 2000. The unemployment rate fell among every major demographic group in 2017.

Provincially, the lowest unemployment rate was in British Columbia (5.1%), and the highest was in Newfoundland and Labrador (14.8%). On a monthly basis, the unemployment rate trended down throughout 2017, reaching 5.8% in December— matching a record-low previously observed in October 2007.3 The unemployment rate at the end of 2017 was 1.1 percentage points lower than 12 months earlier.

For most OECD (Organization for Economic Co-operation and Development) countries, the unemployment rate 4 also trended down in 2017, as economic conditions strengthened for this group of countries.

In December 2017, the unemployment rate in Canada was in line with the total OECD harmonized average unemployment rate of 5.5%. The participation rate—the proportion of the population either working or looking for work—rose for the first time since 2008, increasing by 0.1 percentage points to 68.5% in 2017.5 This was driven by increased participation among the core age population, particularly for women in this age group, which brought the core age participation rate to a record high of 87.0% (+0.5 percentage points compared with 2016). Labour force participation among people aged 55 and older continued its long-term upward trend, which is associated with the aging of the population as well as other social and economic factors

unemployment rate canada Jan 2007-dec 2017

Employment Insurance recipients decline, job vacancies rise The number of people receiving regular EI benefits was 529,700 in 2017, down 6.0% from 2016.6 This follows two years of increases. The declines were most notable in Alberta and Quebec, while the number of beneficiaries rose the most in Newfoundland and Labrador. At the same time, there was a higher number of vacancies among employers—the average number of job vacancies over the four quarters of 2017 rose 18.2% in comparison with the average of 2016.7 The average job vacancy rate—the number of job vacancies expressed as a percentage of all occupied and vacant jobs—over the four quarters in 2017 was 2.8%, up from 2.4% in 2016. The unemployment-to-job vacancy ratio—the number of unemployed people divided by the number of job vacancies—declined in 2017.8 There were 2.8 unemployed people for each job vacancy (down from 3.6 observed in 2016).9 This is a due to a combination of fewer unemployed people as well as a rise in the number of vacant positions being reported by employers

  1. Labour Force Survey estimates (LFS), by sex and age group, seasonally adjusted and unadjusted, monthly (282-0087). “Record-low” using comparable data starting in 1976.
  2. OECD (2018). Harmonised unemployment rate (HUR) (indicator). doi: 10.1787/52570002-en (accessed on 4 April 2018), htm#indicator-chart.
  3. Labour Force Survey estimates (LFS), by sex and detailed age group, annual (282-0002).
  4. Employment Insurance program (EI), beneficiaries by province, census metropolitan category, total and regular income benefits, declared earnings, sex and age, unadjusted for seasonality, monthly (276-0033). Calculated using the annual average of the calendar year.
  5. Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by economic region, unadjusted for seasonality, quarterly (285-0001). Calculated using the annual average of the four quarters.

Average weekly earnings increase in most provinces Following a record-low annual earnings growth of 0.5% in 2016, average weekly earnings of non-farm payroll employees increased by 2.0% to $976 in 2017.10 This growth rate was similar to the one observed in 2015 (+1.8%). Average weekly earnings trended upward in the second half of 2017. As a comparison, the annual average increase in the Consumer Price Index (CPI) was 1.6% in 2017.11 In general, changes in weekly earnings reflect a number of factors, including wage growth; changes in the composition of employment by industry, occupation and level of job experience; and average hours worked per week.

annual rowth rate of av weekly earnings

Average weekly earnings grew in almost all provinces; and in the majority, the growth rate was higher in 2017 than in 2016. Growth in average weekly earnings was above the national average in Quebec (+2.8% to $903), British Columbia (+2.5% to $943), Manitoba (+2.5% to $911) and Saskatchewan (+2.2% to $1,010).12 Alberta saw the most notable change in the growth rate in comparison with 2016, with average weekly earnings increasing 1.0% to $1,130 in 2017, after declining 2.4% in 2016. In Prince Edward Island, average weekly earnings were little changed in 2017

  1. The ratio is often used to describe how tight or slack the labour market is. Lower values of the ratio imply that there are fewer unemployed persons per job vacancy and possibly greater ease of finding a new job, suggesting a tight labour market. Conversely, higher values of the ratio imply that there are more unemployed persons per job vacancy and possibly greater difficulty finding a new job, suggesting a slack labour market. For more information, see “Linking labour demand and labour supply: Job vacancies and the unemployed.” Insights on Canadian Society (75-006-X),
  2. Labour Force Survey estimates (LFS), by sex and detailed age group, annual (282-0002); and Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by economic region, unadjusted for seasonality, quarterly (285-0001). Calculated using the annual average of the four quarters.
  3. Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0027).
  4. Consumer Price Index, annual (2002=100) (326-0021).
  5. Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0027)

Hours trend up for employees paid by the hour, hold steady for salaried employees

After trending downward through 2016 and reaching a recent low point in April 2017, average hours among hourly paid employees—who represent about 60% of non-farm payroll employment—trended upward through most of 2017.13 However, on an annual basis, average weekly hours were little changed from 30.2 hours per week in 2016 to 30.1 hours per week in 2017. For salaried employees, the regular work week was also little changed in 2017, at 36.9 hours per week on average. The regular work week for salaried employees has been hovering around that level since 2009.

Employment increases in both goods- and services-producing sectors

Most of the non-farm payroll employment growth in 2017 was driven by services-producing sectors, which rose by 219,900 (+1.7%), the largest level increase since 2008.14 Health care and social assistance was the main contributor. There were also notable increases in accommodation and food services; professional, scientific and technical services; as well as educational services.

Payroll employment growth in services-producing sectors has typically outpaced goods-producing sectors over the past decade, except for a brief period between 2010 and 2012, when goods-producing sectors increased at a faster rate, due mostly to increases in natural resources and construction.

Following two consecutive years of declines, employment in goods-producing sectors rose by 64,400 (+2.3%) in 2017. This growth was led by manufacturing and construction. Employment in the mining, quarrying, and oil and gas extraction sector recovered slightly

payroll employment change in srevices and goods

  1. Survey of Employment, Payrolls and Hours (SEPH), employment, average hourly and weekly earnings (including overtime), and average weekly hours for the industrial aggregate excluding unclassified businesses, seasonally adjusted, monthly (281-0049).
  2. Survey of Employment, Payrolls and Hours (SEPH), employment by type of employee and detailed North American Industry Classification System (NAICS), annual (281-0024)

Health care and social assistance jobs continue to rise

For the fourth consecutive year, health care and social assistance was the largest contributor to payroll employment growth, rising 39,600 (+2.1%) in 2017. This brought the total number of employees in this sector to 1.9 million, the second-largest sector by employment (behind the 2.0 million in retail trade).

The biggest employment increase for the health care and social assistance sector was in Ontario (+14,600 or +2.1%), and to a lesser extent Quebec (+8,400 or +1.9%), reflecting their larger populations. However, the rate of employment growth outpaced the national average in Manitoba (+3.2% or +2,900), British Columbia (+2.7% or +6,900) and Alberta (+2.6% or +4,900).

At the national level, increases in health care and social assistance were spread across several industries, led by general medical and surgical hospitals, individual and family services, as well as community care facilities for the elderly. Employment in community care facilities for the elderly has more than doubled since 2006, reflecting the needs of an aging population. The number of people aged 65 and older increased by 36.9% between 2006 and 2016.15

The unemployed-to-job-vacancy ratio in health care and social assistance was 0.9 in 2017, which means there are more job vacancies than unemployed persons in that sector.16

Average weekly earnings in health care and social assistance were $889 in 2017, an increase of 2.6% from a year earlier. While average earnings in this sector were slightly below the national average, there was large variation within industries: employees in offices of physicians earned on average $1,152 per week, while employees in home health care services earned $675 on average per week. Most of the growth in 2017 was led by gains in the largest industry, that is, general medical and surgical hospitals.17

payroll employment change by sector

Employment gains in restaurants Employment in accommodation and food services increased by 31,400 (+2.5%) in 2017, with more than half of the increase in Ontario (+19,500 or +4.2%). The gains were almost entirely in full-service restaurants and limited service eating places, with smaller increases in traveller accommodation. The rate of employment growth in the accommodation and food services sector has exceeded the national average growth rate each year since 2011. In total, this sector had 1.3 million employees in 2017.

  1. Statistics Canada. 2017. Age and Sex Highlight Tables. 2016 Census. Statistics Canada Catalog no. 98-402-X2016002. Ottawa. Released May 3, 2017 (accessed April 13, 2018), HTTP://
  2. Labour Force Survey estimates (LFS), by North American Industry Classification System (NAICS), sex and age group, annual (282-0008); and Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by North American Industry Classification System (NAICS), unadjusted for seasonality (285-0002). Calculated using the annual average of the four quarters.Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0027).
  3. Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0020)
    Average weekly earnings in accommodation and food services were the lowest among the sectors, with an average of $383 a week; however, earnings rose 3.4% compared with 2016, outpacing the national average growth rate. Accommodation and food services had the second highest job vacancy rate of all sectors on average over the four quarters in 2017, rising 0.5 percentage points to 4.5%.18 This is partly the result of high turnover in this sector

    Tech jobs growing at a fast pace

    One of the fastest growing sectors in 2017 was professional, scientific and technical services, which rose 3.4%, adding 29,300 payroll jobs. This is the fastest pace of growth in the sector since 2008. In total there were 892,000 employees in this sector.19 Employment growth in professional, scientific and technical services was almost entirely driven by Ontario (+14,100 or +3.8%) and Quebec (+10,600 or +5.7%). For the professional, scientific and technical services sector, average weekly earnings were $1,347 (+2.3%). There was a relatively high job vacancy rate in this sector, at 3.1% on average for 2017, in line with the rate observed for 2016.20 Most of the employment growth in the sector was in computer systems design and related services, which grew by 19,100 (+9.2%). This is a high-skilled and high-earning industry, with average weekly earnings of $1,577 (up 2.9% from 2016).21

    Strongest manufacturing growth in over a decade In 2017, manufacturing had the strongest employment growth since comparable data became available in 2001, adding 26,800 payroll jobs and growing at a pace of 1.8%. In total, there were 1.5 million employees in manufacturing, the third largest sector by employment. However, despite recent gains, there were nearly half a million fewer payroll employees in manufacturing compared with 2001.

    payroll employment in manufacturing

  4. Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by North American Industry Classification System (NAICS), unadjusted for seasonality (285-0002). Calculated using the annual average of the four quarters.
  5. Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0027).
  6. Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by North American Industry Classification System (NAICS), unadjusted for seasonality (285-0002). Calculated using the annual average of the four quarters.
  7. Survey of Employment, Payrolls and Hours (SEPH), average weekly earnings by type of employee, overtime status and detailed North American Industry Classification System (NAICS), annual (281-0027).

Gains in 2017 were spread across several subsectors, with the largest increases observed in food, as well as beverage and tobacco product manufacturing (+5,400 or +2.4% and +4,200 or +11.2%). There was also some contribution from transportation equipment manufacturing (+3,800 or +2.0%), particularly in motor vehicle parts manufacturing and motor vehicle and trailer manufacturing.

Most of the growth in manufacturing was in Quebec (+12,000 or +3.0%) and Ontario (+8,400 or +1.3%). To a lesser extent, there were increases in British Columbia and Alberta. At the same time, employment in manufacturing fell by 1,900 (-15.6%) in Newfoundland and Labrador, mostly in seafood product preparation and packaging.

Weekly earnings in manufacturing were $1,097 on average per week in 2017, virtually unchanged compared with 2016. The job vacancy rate for manufacturing was 2.5% on average for 2017, below the national rate for all sectors.22

The employment growth coincides with an upward trend in manufacturing sales, which rose by 3.3% in 2017—the highest pace of annual growth since 2010.23

Employment in mining, quarrying, and oil and gas extraction rebounds after two years of losses

Employment in mining, quarrying, and oil and gas extraction rose by 10,000 (+5.2%) in 2017.24 This follows two consecutive years of losses that resulted in an 18.1% decline in payroll employment for this sector from 2014 to 2016. Most of the decrease over this period was related to declines in global oil prices, with employees in Alberta most affected by this change.

In 2017, just under half of the increase in mining, quarrying, and oil and gas extraction was in Alberta (+4,700 or +4.8%). The increase in the province was led by “support activities”, which includes occupations such as oil and gas well drillers, servicers, testers and related workers. This subsector had the largest decline in employment following the oil price shock and, despite the recent increase, is still below its 2014 peak. Employment in the higher-paid “oil and gas extraction” subsector continued to trend downward in 2017.

There were also increases in mining, quarrying, and oil and gas extraction spread across British Columbia (+1,600 or +9.0%), Quebec (+1,400 or +8.5%) and Ontario (+1,200 or +5.0%). For these provinces, the rise was mostly in the metal ore mining industry.

In Newfoundland and Labrador, employment in the sector was virtually unchanged in 2017. This contrasts with notable growth from 2007 to 2014, during which employment in the sector grew by 8.4% due to oil exploration and investment in the province. On average, the job vacancy rate in 2017 for mining, quarrying and oil and gas extraction rose notably, up from 1.2% in 2016 to 2.3% in 2017.25

Wholesale trade has highest average weekly earnings growth

Looking at sectors, earnings grew the most in wholesale trade and in finance and insurance. Earnings in wholesale trade grew by 4.1% to $1,203, led by gains among wholesalers of machinery, equipment and supplies. The number of payroll employees in the sector has been on an upward trend throughout most of 2017, coinciding with increasing sales.26 Provincially, Ontario contributed the most to the earnings rise in the sector

  1. Job Vacancy and Wage Survey (JVWS), job vacancies, job vacancy rate and average offered hourly wage by North American Industry Classification System (NAICS), unadjusted for seasonality (285-0002). Calculated using the annual average of the four quarters.
  2. Real manufacturing sales, orders, inventory owned and inventory to sales ratio, 2007 dollars, seasonally adjusted, monthly (377-0009). Calculated using the annual average of the calendar year.
  3. Survey of Employment, Payrolls and Hours (SEPH), employment by type of employee and detailed North American Industry Classification System (NAICS), a(NAICS), unadjusted for seasonality (285-0002). Calculated using the annual average of the four quarters.
  4. Survey of Employment, Payrolls and Hours (SEPH), employment and average weekly earnings (including overtime) for all employees by detailed North American Industry Classification System (NAICS), Canada, seasonally adjusted, monthly (281-0047); and Wholesale trade, sales by the North American Industry Classification System (NAICS) (081-0011).

wholesale trade sales and payroll employment

United States Housing News

Real Estate

The U.S. Housing Market Looks Headed for Its Worst Slowdown in Years


Prashant Gopal


Sho Chandra

‎July‎ ‎26‎, ‎2018‎ ‎3‎:‎00‎ ‎AM Updated on ‎July‎ ‎26‎, ‎2018‎ ‎10‎:‎41‎ ‎AM

  • Market appears to be headed for its broadest slowdown in years
  • ‘Affordability is becoming a headache for homebuyers’: Yun

why pay full price

Seattle Situation

They were fed up with Seattle’s home bidding wars. They were only in their late 20s but had already lost two battles and were ready to renew with their landlord. Then, in May, their agent called.

Suddenly, Redfin’s Shoshana Godwin told the couple, sellers were getting jumpy, even here in the hottest of markets. Homes that should have vanished in days were sitting on the market for weeks. There was a three-bedroom fixer-upper just north of the city going for $550,000, down from more than $600,000. They made the leap in early June and had closed by the end of the month, for list price.

The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.

“This could be the very beginning of a turning point,” said Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles, in an interview. He stressed that he isn’t ready to make that call yet.

The Data

A slew of figures released this week gives ample evidence of at least a cooling.

Existing-home sales dropped in June for a third straight month. Purchases of new homes are at their slowest pace in eight months. Inventory, which plunged for years, has begun to grow again as buyers move to the sidelines, sapping the fuel for surging home values. Prices for existing homes climbed 6.4 percent in May, the smallest year-over-year gain since early 2017, and have gained the least over three months since 2012, according to the Federal Housing Finance Agency. Shares of PulteGroup Inc. fell as much as 4.9 percent Thursday morning after the national home builder reported that orders had declined 1 percent from a year earlier, blaming rising mortgage rates.

high cieling

“Home prices are plateauing,” said Ed Stansfield, chief property economist at Capital Economics Ltd. in London. “People are saying: Let’s just bide our time, there’s no great rush. If we wait six or nine months we’re not going to lose out on getting a foot on the ladder.” That means “we’re now looking at a period in which prices move more or less sideways, or increase no more quickly than growth in incomes, over the next few years.”

Stansfield projects a 5 percent gain this year and a 3 percent increase in 2019. That compares with 10.7 percent in 2005, shortly before the crash.

Supply Lines

Some of the most expensive markets, where sales are falling under the weight of prices, are now seeing substantial increases in supply, according to Redfin Corp. In San Jose, California, inventory was up 12 percent in June from a year earlier. It rose 24 percent in Seattle and 32 percent in Portland, Oregon. Those big jumps are from low numbers, so the housing crunch is still a serious problem.

“Inventory has increased quite a bit,” Godwin, the Seattle agent, said. “We’re seeing less competition.”

Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.

“Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”

taking inventory

This new wariness was noticeable in the latest consumer-sentiment data from the University of Michigan. In its preliminary July survey, 65 percent of Americans said it’s a good time to buy a home, the lowest since 2008, when the economy was still in recession.

Still, market watchers note that the housing sector has strong support from a healthy labor market and steady economic growth, which indicates a stabilizing trend for home prices rather than anything close to the experience of the crisis, when property values plunged. And shares of D.R. Horton Inc., which builds a lot of starter homes, rose as high as 8.7 percent Thursday morning after the company reported a 12 percent jump in orders.

“The rate of home sales, new and existing, has probably peaked,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But it’s not going to roll over. It will gently decline.”

The homeownership rate in the second quarter was 64.3 percent, up from 63.7 percent a year earlier, according to U.S. Census Bureau data released Thursday.

“While there appears to be a slowdown in the growth rate of home sales and prices, it has not slowed rising homeownership,” Freddie Mac Chief Economist Sam Khater said in a statement — though he added that the rate is a full percentage point below the 50-year average, reflecting “the long-lasting scars from the Great Recession and the lopsided nature of this recovery.”

New Record

S&P CoreLogic Case-Shiller data hint at the softening. The 20-city index of property values rose 6.6 percent in the 12 months ending in April. After seasonal adjustments, the gauge posted its smallest monthly increase in 10 months, with New York, San Francisco and Washington reporting declines.

Homeownership remains out of reach for many Americans, especially for first-time and younger buyers. For existing homes, the median price climbed in June to a record $276,900, while properties typically stayed on the market for 26 days, unchanged from the prior three months, according to the National Association of Realtors.

“Affordability is becoming a major headache for homebuyers,” said Lawrence Yun, the association’s chief economist. “You are seeing home sales rising in Alabama, where things are affordable. But in places like California, people aren’t buying.”

In addition, “no one knows how far and how fast” borrowing costs may rise as the Federal Reserve raises interest rates, Stansfield said. Lenders and borrowers alike are less likely to let credit spiral out of control than in 2005 and 2006. And with financing tighter and wage gains in check, “there’s not much scope for prices to continue to increase sustainably” at recent rates, he said.

The cooling, in turn, could curb housing starts, “because builders tend to only build what they think they can confidently sell,” Stansfield said. At the same time, he said, “it will decrease the risk of a bust.”

(Updates with PulteGroup in sixth paragraph and homeownership analysis just above New Record section.)

And finally, here’s what Joe’s interested in this morning Bloomburg

If you’re planning to do a cookout this 4th of July holiday, then I humbly suggest checking out this recent interview I did with Minneapolis Fed President Neel Kashkari. In the video, which we shot in his back yard, Neel walked me through his approach to grilling steak (he puts it right on the coals) and we also talked some monetary policy. An interesting admission he made was that, like many others, he’d seen the elevated level of unemployment in the post-crisis period as something to do with structural challenges facing the economy, like some sort of skills gap where the qualifications of job-seekers didn’t tally with the job openings employers needed to fill. In our chat, Neel admits that this view of the labor market has proven to be “dead wrong” and that high unemployment was simply a reflection of ongoing cyclical weakness. I was impressed: How many other people who espoused the structural view of the labor market admitted they were wrong? It’s hard to think of many others (though surely there must be some). Of course a lot of people got a lot of things wrong about the economy over the last 10 years. And it’s no crime to get things wrong, of course. But unless people acknowledge their errors, and attempt to get to the root of why they were wrong, it’s hard to be too confident in policy making the next time the cycle turns down.

hiring surprise

Flat Footed

Thursday was the Treasury market’s equivalent of lighting the candle at both ends: the spread between two-year and 10-year yields hit the lowest level since August 2007 as the short-term rate rose while the longer-term tenor retreated fractionally.

flatter from both sides

For all the ink spilled about a U.S.-China trade war — with the Federal Reserve eyeing the economic fallout and the like — the move suggests that the conflict is not at all conducive to a bull steepener.

(That’s where the yield gap widens as two-year rates fall by more than their 10-year counterparts, as traders reduce Fed hike expectations.) Also backing that idea are the central bank’s dot plot and its  assessment of the economic outlook. Put simply, the Fed’s concern about the ramifications of an onslaught of tariffs is dwarfed by its optimism on the U.S expansion.

The minutes from the July meeting showed that four officials saw the risks to growth as tilted to the upside (up from two in March), while a lone wolf continued to see things the opposite way. None viewed the risks to core inflation as biased to the downside. Add it all up, and it looks like Larry Kudlow’s wish might not come true.

But Brian Reynolds at Canaccord Genuity sees another way in which trade tensions have had an impact. “Banks were buying more Treasuries as they put on the ‘carry trade,’ buying longer-term bonds utilizing shorter-term funding,” he writes about the second quarter — suggesting the activity was driven by “trade-war worries.”

banks have been buyers

Meantime, nobody told break evens that trade wars were inflationary, or would foster a steepening in the inflation-risk premium. It’s possible that break evens could be distorted by a flight to safe and liquid assets thanks to deteriorating ties between the world’s two largest economies. But since these concerns about trade ratcheted higher in mid-June, market-based measures of inflation compensation drifted marginally lower — until Wednesday, at least.

inflation back on the menu

Breakevens did perk up materially that day, particularly the two-year tenor, which extended their advance after the Fed minutes referenced “supply constraints” on three occasions. As Bespoke Investment Group macro strategist George Pearkes observes, that’s the first time the phrase has appeared more than once in this communiqué in at least a decade. The Fed is bullish on growth and shifting to inflation-prevention mode under the presumption it’s the best way to sustain the expansion for as long as possible. Others might see continued Fed tightening as bringing the end of the cycle all the nearer.

Which in turn leads to an astute quip from Family Management Corp. CIO David Schawel on Twitter: “If you believe the yield curve flattening, and think we eventually go back into a recession with the Fed cutting, then the 5-10y part of the curve isn’t as unattractive as many think.

A Reprieve from IGnominy

It’s just three sessions into the third quarter (if you’re in the U.S.). But after blue-chip corporate debt was the worst-performing U.S. asset in the first half, it’ll take any stretch of out performance it can get:

top grade for IG

A recent Citigroup survey shows just how unloved investment grade U.S. debt is: hedge funds have pared their holdings in the most aggressive fashion since early 2016, with allocations at the lowest level since 2008. Bloomberg’s Sid Verma notes that this may be a contrarian bullish signal, because it means funds have more room to add to the asset class going forward.

But any time in the sun may prove fleeting should long-term yields trend back to their 2018 highs.

“IG has become more of a duration product as well in the past few years, so if intermediate rates stay range-bound in Q3 (as we expect) and issuance remains subdued (given the summer low-issuance period ahead), then this might be the one quarter of 2018 where IG catches a bid,” writes George Goncalves, head of Americas fixed-income strategy at Nomura, who warned that the soft-supply dynamic wouldn’t last forever.

“We would use any tightening of spreads to lighten up on IG, as duration-based products are likely to suffer in the coming quarters and we anticipate that the higher-rates theme will eventually become a credit story, where HY and IG are both hit,” Goncalves says.

To his point on rate sensitivity, mid-April saw bond managers’ allocation to corporate debt as a share of assets deteriorate as the 10-year Treasury yield made its push through 3 percent for the first time since 2014. It’s a picture of what happens when duration risk and the competition for capital collide.

less need to reach for yield

Buyout activity could change the supply picture materially for IG, to boot. Bloomberg Intelligence estimates more than $1 trillion in pending deals, and strategists warn of a flood companies coming to tap the market, raising questions about whether that’s already priced in. That’s the major wild card for high grade — and to a certain extent for the Russell 2000 Index as well, as many potential acquisition targets in the health care space have gone on tears this year.

There Is No U.S. Wage Growth Mystery

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Jul 14, 2017 | 8:26 AM ET | By Adam Ozimek •
Economists are puzzled over U.S. wage growth, wondering why it has been so slow despite a labor market that is allegedly back to or close to full employment. However, if you look at the right wage growth and the right measure of employment slack there is no mystery: Wage gains are right where they should be. And it indicates the labor market has room to improve.
Starting early in 2014, economists and pundits began debating the wage growth “mystery.” If unemployment has fallen so much (at the time, unemployment had fallen below 6%) then why hasn’t wage growth picked up? Theories abounded. Some argued that there were “pent-up wage cuts,” and therefore wages soon would accelerate rapidly. Others theorized there were measurement problems making wage growth look slower than it was: for example, lots of young workers entering the labor force and old workers retiring. Others worried that low productivity meant wage growth wasn’t getting any better. Some impressive economic acrobats have embraced all of these theories at different times.
However, there really is no wage puzzle. You just have to look at the right numbers and in the right way.
The first challenge is making sure you are looking at the right measure of wage growth. For this, the employment cost index is the most useful. Some argue that the Atlanta Fed median wage growth tracker is the best because it tracks growth for the same workers over time. However, this conflates experience-based raises with a general growth in wages. The ECI avoids this pitfall by tracking the same job over time instead of the same person.
Besides, the Atlanta Fed wage measure was at 3.3% in April 2015, leading to some concerns at the time that we were at full employment. But how do we interpret a wage growth measure that allegedly shouts “full employment” in an economy that over the next two years saw annual job growth of 2.3 million while the unemployment rate fell by more than a percentage point?
In fact, the performance of the economy over the last few years has resoundingly rejected the pent-up wage cuts, compositional changes, low productivity, and measurement problem theories of wage growth. There is simply no way we were at full employment then and yet added as many jobs as we have with inflation below target. It’s time to put those theories to bed and consider that, in fact, labor slack was greater than the full-employment hawks thought.
The problem of underestimating labor slack is twofold. First, there was a fear that the unemployment rate would remain above historical levels permanently. This has clearly proven overly pessimistic. Second, there is more slack outside of the unemployment rate.
The unemployment rate wage Phillips curve suggests that wage growth measured by the ECI for private sector wages and salaries has tracked relatively close to where you would expect it to be given the unemployment rate from 1994 through 2017. However, it has indeed fallen short in recent years compared with the line of best fit. Wage growth given the current unemployment rate would be expected at around 3% to 3.5%, but instead is around 2.5%. However, if wage growth is to reach 3.5% to 4%, this wage Phillips curve suggests the unemployment rate will need to fall still further.

wage growth a little low

However, the unemployment rate is not the right measure of labor market slack right now. If instead we look at the prime age non-employment rate (which is 100% minus the prime aged employment rate), we see an even tighter wage Phillips curve. According to this curve, wage growth is exactly where we would expect given the level of slack in the labor market. To get to 3.5% to 4% or higher wage growth, this graph suggests another 3 percentage points of improvement in the non-employment rate will be needed.

Whether you use the unemployment rate or prime non-employment Phillips curves, both suggest there is room to improve. The unemployment rate Phillips curve fails to explain the last two years of wage growth. The prime non-employment rate curve in contrast suggests wage growth should be exactly where it is. The better fit extends throughout the sample period: The r-squares from the lines of best fit indicate that the prime-age non-employment rate can explain 87% of the variation in wage growth since 1994 compared with 64% for the unemployment rate.

wage growth right on target for EPOP

Wage growth is not really that mysterious if this level of slack is correct. Labor market pessimists who have pivoted from one theory to the next only to see them debunked by subsequent economic performance should consider the parsimonious explanation that there remains slack in the labor market, and they have underestimated it for years.

© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licencors and affiliates (collectively, “MOODY’S”). All rights reserved.

US Housing Statistic Snippets

housing starts

North American Housing Association 2018



Characteristics of Home Buyers

First-time buyers made up 34 percent of all home buyers,a decrease from last year’s 35 percent.

The typical buyer was 45 years old this year, and the median household income for 2016 rose again this year to $88,800.

Sixty-five percent of recent buyers were married couples,18 percent were single females, seven percent were single males, and eight percent were unmarried couples.

Thirteen percent of home buyers purchased a multi generational home, to take care of aging parents, for cost savings, and because of children over the age of 18 moving back home.

Eighty-nine percent of recent home buyers identified as heterosexual, three percent as gay or lesbian, one percent as bisexual, and seven percent preferred not to answer.

Eighteen percent of recent home buyers are veterans and three percent are active-duty service members.

At 30 percent, the primary reason for purchasing a home was the desire to own a home of their own.

Characteristics of Homes Purchased

Buyers of new homes made up 15 percent and buyers of previously owned homes made up 85 percent.

Most recent buyers who purchased new homes were looking to avoid renovations and problems with plumbing or electricity at 36 percent. Buyers who purchased previously-owned homes were most often considering a better price at 32 percent.

Detached single-family homes continue to be the most common home type for recent buyers at 83 percent, followed by seven percent of buyers choosing townhouses or row houses.

Senior-related housing stayed the same this year at 13 percent, with 16 percent of buyers typically purchasing condos and six percent purchasing a townhouse or row house.

There was a median of only 15 miles between the homes that recent buyers purchased and the homes that they moved from.

Home prices increased slightly this year to a median of$23 5,000 among all buyers. Buyers typically purchased their homes for 98 percent of the asking price.

The typical home that was recently purchased was 1,870 square feet had three bedrooms and two bathrooms, and was built in 1991.

Heating and cooling costs were the most important environmental features for recent home buyers, with 85 percent finding these features at least somewhat important.

Overall, buyers expect to live in their homes for a median of 15 years, while 18 percent say that they are never moving.

The Home Search Process

For 42 percent of recent buyers, the first step that they took in the home buying process was to look online at properties for sale, while 17 percent of buyers first contacted a real estate agent.

Seventy-nine percent of recent buyers found their real estate agent to be a very useful information source. Online websites were the most useful information source at 88 percent.

Buyers typically searched for 10 weeks and looked at a median of 10 homes.

The typical buyer who did not use the internet during their home search spent only four weeks searching and visited four homes compared to those who did use the internet and searched for 10 weeks and visited 10 homes.

Among buyers who used the internet during their home search, 89 percent of buyers found photos and 84 percent found detailed information about properties for sale very useful.

Sixty-one percent of recent buyers were very satisfied with their recent home buying process.

Home Buying and Real Estate Professionals

Eighty-seven percent of buyers recently purchased their home through a real estate agent or broker, and seven percent purchased directly from a builder or builder’s agent.

Having an agent to help them find the right home was what buyers wanted most when choosing an agent at 52 percent.

Forty-two percent of buyers used an agent that was referred to them by a friend, neighbor, or relative and 12 percent used an agent that they had worked with in the past to buy or sell a home.

Seven in 10 buyers interviewed only one real estate agent during their home search.


National Association of REALTORS®

Eighty-nine percent of buyers would use their agent again or recommend their agent to others.

Financing the Home Purchase

Eighty-eight percent of recent buyers financed their home purchase. Those who financed their home purchase typically financed 90 percent.

First-time buyers who financed their home typically financed 95 percent of their home compared to repeat buyers at 86 percent.

For 59 percent of buyers, the source of the down payment came from their savings. Thirty-eight percent of buyers cited using the proceeds from the sale of a primary residence, which was the next most commonly reported way of securing a down payment.

Forty-three percent of buyers saved for their down payment for six months or less.

For 13 percent of buyers, the most difficult step in the home buying process was saving for a down payment.

Of buyers who said saving for a down payment was difficult, 49 percent of buyers reported that student loans made saving for a down payment difficult. Forty-two percent cited credit card debt, and 37 percent cited car loans as also making saving for a down payment hard.

Buyers continue to see purchasing a home as a good financial investment. Eighty-three percent reported they view a home purchase as a good investment.

Home Sellers and Their Selling Experience

The typical home seller was 55 years old, with a median household income of $103,300.

For all sellers, the most commonly cited reason for selling their home was that it was too small (16 percent), followed by the desire to move closer to friends and family (14 percent), and a job relocation (11 percent).

Sellers typically lived in their home for 10 years before selling, the same as last year.

Eighty-nine percent of home sellers worked with a real estate agent to sell their home.

For recently sold homes, the final sales price was a median 99 percent of the final listing price.

Recently sold homes were on the market for a median of three weeks, down from four weeks last year.


Thirty-seven percent of all sellers offered incentives to attract buyers.

This year, home sellers cited that they sold their homes for a median of $47,500 more than they purchased it.

Sixty-two percent of sellers were very satisfied with the selling process.

Home Selling and Real Estate Professionals

Sixty-four percent of sellers found their agent through a referral from a friend, neighbor, or relative or used an agent they had worked with before to buy or sell a home.

Seventy-four percent of recent sellers contacted only one agent before finding the right agent they worked with to sell their home.

Ninety percent of sellers listed their homes on the Multiple Listing Service (MLS), which is the number one source for sellers to list their home.

Seventy-six percent of sellers reported that they provided the agent’s compensation.

The typical seller has recommended their agent twice since selling their home. Thirty-three percent of sellers recommended their agent three or more times since selling their home.

Eighty-five percent said that they would (67 percent) or probably (18 percent) recommend their agent for future services.

For-Sale-by-Owner (FSBO) Sellers

Only eight percent of recent home sales were FSBO sales again, this year. For the third year, this is the lowest share recorded since this report started in 1981.

The median age for FSBO sellers is 55 years. Seventy-four percent of FSBO sales were by married couples that have a median household income of $103,100.

FSBOs typically sell for less than the selling price of other homes; FSBO homes sold at a median of $190,000 last year (up from $185,000 the year prior), and significantly lower than the median of agent-assisted homes at $250,000.

FSBO homes sold more quickly on the market than agent assisted homes. Fifty-eight percent of FSBO homes sold in less than two weeks—often because homes are sold to someone the seller knows.

Sixty-eight percent of successful FSBO sellers who knew the buyer was very satisfied with the process of selling their home.

demographic turning point

dependency ratios

racial and ethnic

foriegn born people.jpg

projected population chanes births and deaths


First Quarter 2018 Economic and Wood Product News Part 1 -Feng Shui forecast, Why Asia’s Tigers Suffer while the Nordics Thrive…

Well this news blog is a bit late but always fascinating to look at what happened retrospectively. I thought this was entertaining. A lot of things going on in the first quarter. I split the blog in two pieces…

Here’s the Feng Shui financial forecast for 2018, the Year of the Dog

I thought this entertaining!!

Chris Pash,

Business Insider Australia

Feb. 13, 2018, 9:57 PM

wong Campion

Wong Campion/Reuters

  • The Chinese Year of Dog is a good time to be cautious when it comes to finances, according to this year’s CLSA Feng Shui Index.
  • The guide, which farewells the Year of the Rooster, also includes top sector picks, property tips and zodiac predictions for health, wealth, love and careers in the Year of the Earth Dog.
  • In terms of sectors, the index says to stick with pharma and consumer as the Earth Dog sees strong gains in wood-related industries overall.
  • Telcos/internet, technology and utilities perform well but casinos and transport won’t get a leg up until October.

The Chinese Year of Dog is a good time to be cautious when it comes to finances, according to this year’s CLSA Feng Shui Index.

CLSA, a Hong Kong-based capital markets and investment group, has launched its 24th index, a tongue-in-cheek alternative look at what’s in store in the Chinese New Year.

The guide, which farewells the Year of the Rooster, also includes top sector picks, property tips and zodiac predictions for health, wealth, love and careers in the Year of the Earth Dog.

Feng Shui is a mystical system used in China seeking a balance between people and the elements of the world. Feng Shui masters are regularly consulted, sometimes at great expense, to make sure buildings about to be constructed are sited in harmony with its surroundings.

CLSA Feng Shui Index

“The Dog represents duty and loyalty and is a sign of defence and protection,” says CLSA.

“It’s a good time to be level headed and to err on the side of caution. Entrepreneurs should stick with their most loyal clients, and investors are advised not to bite off more than they can chew.”

The path of the Hang Seng index as mapped by the Feng Shui experts:

CLSA Feng Shui Index 2018 CLSA

According to the index, there could be a stock market high ahead.

It says: “The Earth Dog jumps out of the kennel, tossing the Fire Rooster back to the barn and sending the Hang Seng index in Hong Kong skyward.

“After a great start, the hound takes a tumble in March which sees the Index head south.

“Through to summer the market chases its tail and drops, before the Dog and our favourite Earth Rooster, the HSI (Hang Seng index), extend a little more consideration towards each other and get back on track.”

In terms of sectors, the index says to stick with pharma and consumer as the Earth Dog sees strong gains in wood-related industries overall.

Telcos/internet, technology and utilities perform well but casinos and transport won’t get a leg up until October.

Investors who expect decent returns from banking and financials are definitely barking up the wrong tree this year,” says CLSA.


The Bitter Truth: Why Asia’s Tigers Suffer while the Nordics Thrive 

why Asia tigers suffer

Yulin Huang

Why you need to know

Justin Hugo looks at how statistics suggesting the Asian Tiger economies have caught up with their Scandinavian counterparts mask a more sobering wage-based reality.

Wage wars

The Asian Tigers and Japan have enjoyed a remarkable growth streak over the last half a decade that has put them firmly in the league of high-income countries – at least as measured by GDP per capita – a phenomenon bested by only some oil-rich Gulf states.

But in terms of the actual livelihoods of their citizens, have they caught up?

Nordic countries are upheld as the gold standard of what a model country should look like, often featuring in lists of the world’s best places to live with the happiest people in the world. How would the Asian Tigers – known on the contrary for their high stress levels and rates of suicide – compare with the Nordics, and with the Netherlands, which Taipei mayor Ko Wen-je (柯文哲) said is “an excellent model [… and] the best country for Taipei to learn from,” having realized that Taiwan’s thriving democracy discounts emulating the region’s leading economic light, Singapore.

“[Former] President Lee Teng-hui (李登輝) had led Taiwan along a “democratic path,” that meant [that Taiwan] could never be like Singapore,” Ko reportedly said. Taiwan and the Netherlands also have significant historical links dating back to when Taiwan was a Dutch colony (1624-1662), the Taipei mayor added.

But the growth spurt among the Asian Tigers did not happen all at once. Back in 1950, the real GDP per capita of Hong Kong, Japan and Singapore was already among the highest in Asia, at US$4,013, US$2,519 and US$2,439, respectively. Taiwan’s real GDP per capita was US$1,393 and South Korea’s US$1,122, according to data from the University of Groningen’s Maddison Project Database, which provides researchers with tools to compare economic performance between regions.

real gdp per capita 1950

Source: University of Groningen

Meanwhile, the real GDP per capita of the Nordics and the Netherlands was twice at high, at between US$5,208 (Finland) and US$9,376 (Denmark) – they were already one of the richest countries in the world at that time.

real GDP per capita 2016

SnSource: University of Groningen

Nearly 70 years later, in 2016, Norway’s real GDP per capita had grown to US$76,397 while Singapore’s had shot past the rest of the pack to US$67,180.

At the same time, Hong Kong’s real GDP per capita had grown to US$47,043, similar to the Netherlands’ US$49,254 and Denmark’s US$45,141, Taiwan’s had risen to US$42,304 which is comparable with Sweden’s US$44,371. Japan and South Korea real GDP per capita were roughly on par with Finland’s US$38,335.

real GDP per capita 1950 to 2016

Source: University of Groningen

One might assume that a similar level of national wealth might equate to citizens enjoying a similarly high standard of living, but this is where the GDP per capita statistics are misleading.

A more illuminating comparison involves looking at the minimum and median wages of each country.

monthly minimum wage

Source (data from latest year): Norway: Norwegian Labour Inspection Authority, Denmark: 3F – Danmarks Stærkeste Fagforening, Sweden: Swedish Work Environment Authority, Finland: Service Union United PAM, Netherlands: Government of the Netherlands, Japan: Japan International Labour Foundation, South Korea: (Maeil Business Newspaper’s English news site), Taiwan: Ministry of Labor Republic of China (Taiwan), Hong Kong: Labour Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

In the Nordics, there are no minimum wages – salaries are collectively bargained for by labor unions in different industrial sectors – which by the way, results in the highest wages in the world. According to the International Labour Organisation (ILO), collective agreements cover about 90 percent of workers in Finland, 89 percent in Sweden, 84 percent in Denmark and 67 percent in Norway.

For the purposes of this comparison, we can use the wages of transport workers as the de facto minimum wages in the Nordics: Norwegians earn a monthly minimum of approximately 27,662.25 krone (US$3,517), the Swedes 25,088.00 krona (US$3,107) and the Finns €2,080 (US$2,542). For the Danes, workers in the industrial sector earn a minimum of 18,502.22 krone (US$3,039). In the Netherlands, where there is a nationally legislated minimum wage, it is €1,578.00 (US$1,929).

Turning to East Asia, Japan has the most respectable monthly minimum wage, at about 168,608 yen (US$1,524). South Korea’s historic minimum wage increase to 1,573,770 won (US$1,475) last year is also palatable.

So far, the minimum wages of these countries correspond roughly to their nominal GDP per capita, where the higher the nominal GDP per capita, the higher the minimum wage.

GDP per Capita vs Min wage

Source (data from latest year): Nominal GDP per Capita: The World Bank, Monthly Minimum Wage: Norway: Norwegian Labour Inspection Authority, Denmark: 3F – Danmarks Stærkeste Fagforening, Sweden: Swedish Work Environment Authority, Finland: Service Union United PAM, Netherlands: Government of the Netherlands, Japan: Japan International Labour Foundation, South Korea: (Maeil Business Newspaper’s English news site), Taiwan: Ministry of Labor Republic of China (Taiwan), Hong Kong: Labour Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Denmark, Sweden and Finland generally perform better by having minimum wages that are higher than the regression line, and the minimum wage increase that South Korea implemented last year elevated its position to a similarly lofty level.

Taiwan’s minimum wage of NT$22,008 (US$749) that took effect at the start of this year still leaves the country lagging below the regression line.

There are two other distinct outliers – Singapore and Hong Kong. Even though they have higher nominal GDP per capita than Taiwan, their minimum wage is set at a similarly depressed level – Singapore’s de facto monthly minimum wage is SG$1,100 (US$833) and Hong Kong’s is HK$6,724.74 (US$860).

In fact, Singapore does not have a minimum wage – basic minimum wages are set for the cleaning, landscape and security sectors but unlike the Nordics, the “minimum wages” set for these sectors are low – basic minimum wages for security officers are used for this comparison. According to Singapore’s Ministry of Manpower, these “minimum wages” are “developed by tripartite committees consisting of unions, employers and the government.”

However, it should be noted that the government has its hands in the unions and businesses, which precipitates something more like a “one-partite” arrangement. The confederation of trade unions in the country – the National Trades Union Congress (NTUC) – is headed by a minister – Chan Chun Sing – who is widely tipped to be Singapore’s next prime minister. There is also high state control of publicly traded companies in Singapore – 23.6 percent as compared to only 1.1 percent, 3.0 percent, 3.7 percent and 5.1 percent in Japan, Taiwan, Hong Kong and South Korea, respectively ­– though the figure for Taiwan is higher if you include companies indirectly controlled by state-owned shareholders.

Singapore’s nominal GDP per capita of US$52,963 is two times higher than Taiwan’s and puts it in between Denmark and Sweden. If Singapore were to adopt a similar minimum wage, it would be at least US$3,000 (SG$3,963) – or around US$2,300 (SG$3,039) if following the regression line above. Similarly, Hong Kong’s minimum wage should be closer to US$1,850 (HK$14,459) – on a par with the Netherlands, which has a similar level of nominal GDP per capita.

As such, low-income workers in Singapore and Hong Kong are being short-changed.

But the minimum wage does not give an overall perspective of the wage situation in these countries, so we also need to address median wages.

Monthly Median Wage

Source (data from latest year): Eurostat, Sweden: Statistics Sweden, Finland: Statistics Finland, Japan: (derived from Ministry of Health, Labour and Welfare Summary Report of Basic Survey on Wage Structure (Nationwide) 2012 and Ministry of Health, Labour and Welfare Year Book of Labour Statistics 2015, South Korea: The Hankyoreh, Taiwan: Focus Taiwan News Channel, Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Norway has the highest monthly median wage (€4,562.37 / US$5,576) among the Nordics and the median wage in the Netherlands is €2,672 (US$3,226).

Japan has the highest median wage among the East Asian countries, of an estimated US$2,711, while Taiwan (NT$40,612 / US$1,382) has the lowest. South Korea’s (2,017,692.31 won / US$1,891) median wage is second-lowest.

As you can also see from the below, the higher the nominal GDP per capita, the higher the median wage as well.

GDP per Capita vs median wgae

Source (data from latest year): Nominal GDP per Capita: The World Bank, Monthly Median Wage: Eurostat, Sweden: Statistics Sweden, Finland: Statistics Finland, Japan: (derived from Ministry of Health, Labour and Welfare Summary Report of Basic Survey on Wage Structure (Nationwide) 2012 and Ministry of Health, Labour and Welfare Year Book of Labour Statistics 2015, South Korea: The Hankyoreh, Taiwan: Focus Taiwan News Channel, Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Denmark (€ 3,828 / US$4,679) and Finland (€3,001 / US$3,668) have the second- and third- highest median wages in the Nordics and also sit above the regression line.

On the other hand, for Singapore and Hong Kong, median wages are considerably lower than trend. If median wages were to follow the regression line, Singapore’s should be closer to US$3,800 (S$5,020) and that of Hong Kong should be nearer to US$3,000 (HK$23,448), instead of the current S$3,500 (US$2,649) and HK$16,200 (US$2,073), respectively. In other words, the citizens of both cities should be earning a median wage of about US$1,000 more.

Whys and wages shares

What accounts for the discrepancy between wages and the GDP per capita in Singapore? If Singapore is considered one of the richest places in the world, why would its (de facto) minimum wages be among the lowest in high-income countries?

To see why, let’s look at the wage share of each country – or the share of GDP that goes to wages.wage share

Source: OECD Statistics Working Papers, Taiwan: Directorate General of Budget, Accounting and Statistics (DGBAS), Executive Yuan, (R.O.C. Taiwan), Hong Kong: Hong Kong Economy The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Trade and Industry Singapore.

We saw that Denmark, Sweden and Finland had de facto minimum wages that were higher than the regression line. One reason for this is their relatively higher wage shares – of 63.4 percent, 62.1 percent and 62.0 percent.

At the other end of the scale, Singapore’s wage share of only 42.5 percent explains why its de facto minimum wage is lower than the regression line.

Of note, too, is that Taiwan’s wage share is also low – at only 44 percent. As such, similar to Singaporeans, Taiwanese are not being compensated fairly for their labor, at least compared with high-income peers.

If the Taiwanese were paid a wage share of 50 percent – closer to the workers of South Korea (wage share of 51.8 percent) and Hong Kong (50 percent), then it follows by a back-of-an-envelope calculation that the minimum wage would also fall in line with theirs at about NT$25,000 (US$851). By the same logic, if wage share was elevated to the 60 percent level of Denmark, Sweden and Finland, then Taiwan’s minimum wage would amount to NT$30,000 (US$1,021)

Moreover, Chang Wen-po (張溫波), a former professor at National Taiwan University and retired department director at the Economic Development Council has shown in a Taipei Times article that when dividing Taiwan’s nominal GDP per capita last year by current wage share, the amount of NT$26,974 is actually lower than the NT$30,792 you would have obtained in the late 1980s and early 90s, when wage share was half of GDP. “[NT$30,792] would probably be acceptable for low-income earners [as a minimum wage],” he concluded.

Of course, a minimum wage of NT$30,000 (US$1,021) is “a dream” according to Taiwan President Tsai Ing-wen (蔡英文), who in a television interview recently declined to set out a timetable for when that dream might come true. Still, the fact that the figure is on the table is a step in the right direction.

Similarly, if Singapore’s wage share were to increase to 50-60 percent, minimum wages should correspondingly rise to between SG$1,230 (US$931) and SG$1,550 (US$1,173) – just a touch higher than in Taiwan under the same framework. But as explained previously, Singapore’s minimum wage should range between US$2,300 and US$3,000.

Inequality, poverty and corporate cultures

What is the cause of the large differentials in wage levels outlined in part 1? The reason lies in the Gini coefficient *. Singapore is the most unequal country among the developed nations – even when you include the United States and the United Kingdom.

Singapore also has the highest Gini coefficient, at 0.38 of the countries we are considering here. Hong Kong has the second-highest at 0.379 (derived from the Hong Kong’s Census and Statistics Department for comparison on OECD’s scale.)

By contrast, Denmark and Norway are the most equal countries in the world, with Gini coefficients of 0.256 and 0.257, respectively. (Note that the Gini coefficient figures account for taxes and transfers aimed at reducing the inequality – even so, Singapore and Hong Kong still present the largest income inequality.)

gini coefficient

Source (data from latest year): OECD, Taiwan: Directorate General of Budget, Accounting and Statistics (DGBAS), Executive Yuan, (R.O.C. Taiwan), Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Department of Statistics Singapore

*The Gini coefficient; sometimes expressed as a Gini ratio (or a normalized Gini index) is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents and is the most commonly used measurement of inequality.

You can see income inequality manifested in the gap between minimum and median wages. Because Singapore and Hong Kong have the highest Gini coefficient, they also have the highest wage gap – the median wage is 3.18 times higher than the de facto minimum wage in Singapore and 2.41 times higher in Hong Kong.

In Denmark and Norway, the median wage is 1.5 times higher – even so, de facto minimum wages in Norway, Denmark and Sweden are already higher than even median wages in the East Asian nations. Their workers already earn higher wages than half the population of the East Asian countries – because workers at the bottom in the Nordics start from a high wage base. South Korea’s wage difference is lower because of this year’s robust minimum wage increase. As a result, income inequality in South Korea could be even lower next year.

wage difference vs gini coefficient

If Singapore’s inequality were reduced and the wage share returned to Singaporeans, you might see a wage distribution like that of Denmark and Sweden.

After all, Singapore has a nominal GDP per capita similar to both countries, and taking the median wage share of above 60 percent as a reasonable optimal level – and which Denmark and Sweden employ – and a Gini coefficient on par, then Singapore should have a similar wage distribution.

That would put the city state’s minimum wage at about US$3,000 (SG$3,963) or US$2,300 (SG$3,039) if it were to follow the regression line, instead of the SG$1,100 (US$830) we see now. The median wage would be around US$3,800 (SG$5,020), similar to Sweden, instead of the current SG$3,500 (US$2,635). Another way to look at it would be that if Singapore’s wage share were 60 percent instead of 42.5 percent, then Singapore’s median wage should correspond to US$3,720 (SG$4,914) – giving a similar result.

As for Taiwan, it has a comparable nominal GDP per capita to South Korea. By the same logic of adjusting wage share and Gini coefficient, this should give the country a similar minimum and median wage, putting the former twice as high as it is now, closer to US$1,500 (NT$44,078). The median wage would balloon to US$2,000 (NT$58,771) instead of the US$1,382 (NT$40,612) it is now.

Alternatively, if Taiwan’s wage share of 44 percent were increased to 60 percent, it would give the Taiwanese a median wage of NT$55,380 (US$1,884), achieving much the same result.

Is NT$40,000 as a minimum wage feasible? It is already being done on a localized level in Taiwan. A-Zen Bakery in Changhua County’s Lugang Township already gives its workers a minimum monthly salary of more than NT$40,000 a month. In fact, owner Cheng Yung-feng has increased his workers’ wages by 20 percent for the past two consecutive years, Taipei Times reported President Tsai as sharing. Because of that, the newest employees – who have two to three years of experience – have seen their salaries rise to more than NT$40,000 and are set to receive NT$48,000 this year. Workers who have been with the company for more than 20 years earn more than NT$100,000.

Now, A-Zen Bakery is an SME, yet it has the resources to give its workers significant wage increases and so far, it is still earning high profits, suggesting that Taiwan’s businesses do have a lot of leeway to increase the wages of Taiwan’s workers. In fact, in spite of the significant increase in wages, A-Zen Bakery continues to sell its buns at a low price of NT$20 and generates annual revenue of NT$50 million – resisting the temptation to raise prices along with wages. It is therefore not a question of how much the wages of Taiwan’s workers should increase, but how we can develop a roadmap to increase the wages of Taiwan’s workers to the ideal. As Tsai said, “Business owners should not think of raising wages as a burdensome increase to their overheads, but as a way for them to share their joy with colleagues who have worked hard to grow their businesses.”

According to Cheng, business owners and their employees are in the same boat. He believes that if everyone reaps the benefits together, employees would be more than willing to strive hard together with a company to help it succeed. His motto is, “The more we give, the more we get,” and as long as his company earns profits, he is happy to share them with his workers and increase their wages. Indeed, Cheng’s workers reveal that over the years, he has been giving the workers significant increases in salary, and because of that, not only has it done much to boost staff morale, they say that this has made them put in more effort to work harder for the company.

Salaries and poverty

comparison of salaries at the top makes the disparity even more glaring. Top executives in Singapore earn €250,000 / US$305,566 per annum (about €210,000 after taxes and social security – which is the second-highest net executive salary in the world). Those in Hong Kong earn about €230,000 (close to €200,000 after deductions, or the fourth highest).

In the Nordics, the Netherlands and Japan, executives earn about €150,000 to €185,000 per annum (or €115,000 to €125,000 after deductions in Japan and South Korea, respectively, and between €80,000 and €100,000 in the Nordic countries and the Netherlands).

Taiwan’s executives earn about €120,000 before taxes and social security but about the same as the Norwegians, Danes and Dutch after deductions – around €95,000.

Middle managers in Singapore and Hong Kong earn similarly higher salaries, both before and after taxes and social security, as the Nordic countries, the Netherlands and the other East Asian countries.

The fact that the Nordics have the highest “minimum wages” in the world but executive pay is relatively lower reflects how a fairer wage distribution helps reduce inequality.

Taiwan’s executives earn a similar net salary as their Norwegian and Danish counterparts but the minimum wage in Taiwan is only a fifth or a quarter of the de facto minimum wage in Norway and Denmark, which clearly shows the massive income gap in Taiwan vis-à-vis the Nordics. Taiwan’s low Gini coefficient therefore does not present a complete picture of Taiwan’s income distribution.

Singapore and Hong Kong also have one of the lowest minimum wages among the developed high-income countries – on par with Taiwan – but among the highest executive pay brackets in the world, helping explain the extremely high inequality that plagues the two cities.

This also explains the high level of poverty in both the cities.

poverty rate

Source (data from latest year): OECD, Taiwan: National Statistics, Republic of China (Taiwan), Hong Kong: The Government Information Centre The Government of the Hong Kong Special Administrative Region, Singapore: Singapore Management University and Lien Centre for Social Innovation.

The Singapore government has refused to define a poverty line, claiming to fear an arbitrary “cliff effect”. However, a report by the Singapore Management University and Lien Centre for Social Innovation quoted Associate Professor Irene Ng from the National University of Singapore as estimating Singapore’s relative poverty rate to be about 20 percent, which would put the city as a leader in poverty among high-income countries.

This is perfectly plausible since Singapore has a de facto minimum wage that is even lower than Hong Kong’s and a cost of living ranked by The Economist as the highest in the world for the fourth year in a row in 2017 – Hong Kong’s poverty rate is 14.7 percent. Japan (16.1 percent) and South Korea (13.8 percent) have similar levels of poverty.

The Nordics and the Netherlands all have low levels of poverty, at between 6.3 percent (Finland) and 9 percent (Sweden).

Interestingly, Taiwan’s relative poverty rate is also low at 6.6 percent but this could be due to stagnant wages, which depress the median wage and therefore the relative poverty rate (which is defined by the Organisation for Economic Co-operation and Development (OECD) as half the median household income of the total population). On a similar note, Singapore’s depressed wages and the lower median wage could also result in a lower estimation of the poverty rate.

A better estimation of relative poverty would be to first define the optimal median income corresponding to the country’s GDP per capita, and calculating the poverty line from this optimal level – so, half of optimal median income. In Singapore, taking the optimal median wage as about US$3,800 (SG$5,020) would correspond with a poverty line at SG$2,500 (US$1,892). This puts more than 30 percent of the population in relative poverty. Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy estimated a relative poverty rate of around 35 percent based on a poverty line set at 60 percent of the national median equivalized income.

One other statistic gives us a broader perspective of the countries’ wage situation – the top 10 percent income shares.

Top 10% income share

Source (data from latest year): World Wealth & Income Database, South Korea: The Hankyoreh, Hong Kong: Education Bureau The Government of the Hong Kong Special Administrative Region.

Naturally, Singapore’s and Hong Kong’s high income inequality implies that the share of income that goes to the top 10 percent is one of the highest among the high-income countries – at 43.8 percent and 41 percent, respectively.

The top 10 percent income share in the Nordics and the Netherlands is lower, ranging from 26.9 percent in Denmark to 30.9 percent in the Netherlands.

Japan and South Korea’s top 10 percent income share is also high at 41.6 percent and 45 percent, respectively. However, they have relatively higher minimum wages, which should help close the wage gap, and the higher wage shares should enable a greater portion of the GDP allocated to wages to be available for fairer distribution, when compared with Singapore and Hong Kong. (Note that South Korea’s income share statistic comes from a separate source, and is used as an approximate.)

As a comparison, assuming the top 10 percent income share as a portion of the wage share, Chart 13 below shows the share of GDP that can be distributed to the remaining 90 percent of workers. For Singapore, this allows only 23.9 percent of the GDP to be distributed to the 90 percent of workers. In South Korea, it would be higher, at 28.5 percent, while Japan would register 36.1 percent. The shares are higher in the Nordics and the Netherlands. The share in Norway is slightly lower than the other Nordics because Norway starts off with a higher GDP per capita, and a higher income base.

In other words, because Singapore has a low wage share of 42.5 percent but 43.8 percent of the income goes to the top 10 percent, only 23.9 percent of the GDP would be available for the rest of the 90 percent as wages – based on our assumptions. In comparison, even though the top 10 percent income share in Japan is also high at 41.6 percent, but there is a high wage share of 61.8 percent, there is still 36.1 percent of the GDP that can be distributed to workers in terms of wages.

income share GDP for bottom 90% work share

When we compare the difference between the annual executive pay and minimum wage, Singapore and Hong Kong again have the highest wage gap. Even though Taiwan’s wage disparity is not as wide, it still has the third highest gap ahead of Japan and South Korea.

ratio of exec pay to min wage

Moreover, when comparing the pay gap between executives and middle managers (see chart below), the gap in Taiwan shows a similar disparity with Singapore and Hong Kong, suggesting that wages also fall off quickly from the top in Taiwan as well. Still, Taiwan’s income inequality is notably low as compared to the other East Asian countries, which could be due to the social welfare transfers that compensate for the wage gap, or the higher concentration of small and medium-sized enterprises (SMEs) – we will look at these later.

ratio of exec pay to middle managerpay

Source: Approximate data of executive and middle manager pay from ECA International.

One possible reason why Taiwan’s executives and the rich pay themselves such high comparative salaries in relation to the minimum wage could be due to the control of top families in the largest firms. As can be seen in the chart below, two-thirds of the 20 largest firms in Taiwan were controlled by families (defined as having 10 percent control rights) in 1996. A similar pattern is also seen in Hong Kong and Singapore, with 70 percent and 45 percent, respectively – which helps further explain the high inequality in those cities. Taiwan’s Gini coefficient might therefore be relatively low due to the sharp drop-off in wages from the top which influences a more equitable wage distribution at the bottom. This idea led to a popular joke in Taiwan: “That wages are equal – because they are equally low.”

Taiwan’s low wages could therefore be attributed to the high family control which in spite of the country’s democracy has resulted in its economy functioning in a similarly familial fashion as Singapore and Hong Kong. But how does a politically-democratic and corporately-authoritarian country run? Could Taiwan’s relatively strong social welfare system but depressed wages and relatively poor labor standards in terms of rest days be a result of this odd combination?

family ownersip 20 largest firms

Source (data from 1998 to 2000): Eklund, Johan E., and Sameeksha Desai. “Ownership and allocation of capital: Evidence from 44 countries.” Journal of Institutional and Theoretical Economics JITE 170.3 (2014): 427-452.

Among the Nordics, Sweden’s top families also have significant control in the top 20 largest firms – 55 percent – but the developed culture of collective bargaining for workers’ wages and a transparent democratic structure might serve to limit the families’ ability to expand their wealth at the expense of workers.

Fortunately, even as the top families in Taiwan have significant control in the largest firms, the corporate assets held by the top 15 families in Taiwan as a percentage of GDP is still not as high as Singapore and Hong Kong.

corporate assets top 15 families as % GDP

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

The concentration of control of the top 15 families comprised 17 percent of GDP in 1996, which is lower than in Hong Kong (84.2 percent) and Singapore (48.3 percent). However, it is still higher than Japan (2.1 percent) and South Korea (12.9 percent), which could explain the challenges faced by the Taiwanese in reforming their system for more equitable distribution, vis-à-vis Japan and South Korea.

State control publicly traded corp

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

However, as mentioned, Singapore stands out from other East Asian Tigers due to high state control – when looking at control of publicly traded companies in East Asia, 52 percent of companies are in family hands (with at least 10 percent of voting rights) while 23.6 percent is controlled by the state, effectively totaling 75.6 percent.

state & family control of publically traded companies

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

In South Korea, 67.9 percent of companies were controlled by families but only 5.1 percent were state-controlled. Similarly, in Hong Kong, it was 64.7 percent versus 3.7 percent and 65.6 percent versus 3.0 percent in Taiwan. In Japan, the control by both families (13.1 percent) and state (1.1 percent) is low.

But as Johan E. Eklund and Sameeksha Desai, authors of the study “Ownership and Allocation of Capital: Evidence from 44 Countries”, explain, “family control and ownership concentration negatively influence capital allocation. Economies with highly concentrated ownership structures display economic entrenchment and persistent misallocation of capital.”

There is evidence to support this. In “Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance,” researchers found that “the longer CEOs were at the helm, the more pronounced was their firms’ poor performance.” Forbes reported the study’s authors as saying this is “because those CEOs are able to appoint more allies to their boards, and those board members are likely to go along with the bosses’ bad decisions.”

Among the Asian Tigers, the top firms are predominantly family-controlled (and state-controlled, in Singapore’s case), and the families’ (and state’s) voting rights of at least 10 percent effectively allow them to appoint their allies to company boards.

Michael Cooper of the University of Utah’s David Eccles School of Business, a co-author of the “Performance for Pay” study, added: “For high-pay CEOs, with high overconfidence and high tenure, the effects are just crazy” In fact, the returns on shareholder value of these companies over three years is 22 percent worse than their peers.

Indeed, long tenures are also a concern in Taiwan – a 104 Job Bank survey last year showed that 86.1 percent of Taiwanese companies polled do not have any succession plans while only 13.9 percent have thought of enacting one.

However, the problem also lies with how well executives pay themselves. Historian Nancy F. Koehn from the Harvard Business School suggests that in America, the salaries of board directors are usually decided by compensation committees, and since “Most board members of public companies are themselves well-paid executives … they have incentives to approve large pay packages for men (and the many fewer women) who are effectively their peers.”

Bloomberg writes up a very good summary of the thinking here.

In essence, the make-up of the companies in the Asian Tigers mean that they already function internally like compensation committees, and in conjunction with other families related to them, and via their intermarriages. Blogger Jess C. Scott has dug out and pieced together the relationships of the top families in Singapore from the corporate and political scene. Blogger Roy Ngerng had also drawn out several family tree maps of their relationships.

Koehn adds that these executives are “operating in a system that presumes the contribution of a good senior executive is very, very high.” But as we have seen from Cooper’s study, the evidence points to the contrary – “the more CEOs get paid, the worse their companies do over the next three years.”

In an analysis of American companies, former CEO Steven Clifford concludes that, “board directors and compensation committees have directly contributed to the rising salaries and bonuses of the country’s richest executives; [… but] each of those companies could have paid their CEOs 90 percent less and performed just as well.”

“From the outside, this may look a lot like cronyism or poor corporate governance, and no doubt both are at work,” says Koehn.

The Economist has calculated that Taiwan – and Singapore – has high levels of crony capitalism, at 3.2 percent and 10.7 percent of the GDP, respectively, when analyzing for billionaire wealth in the crony sector. In an earlier reiteration of the index, Hong Kong was also ranked as having the highest crony capitalism* level in the world, at 58 percent of the GDP. In comparison, Japan and South Korea have comparatively low levels of cronyism – at 0.6 percent and 0.5 percent, respectively. You can see a correlation between crony capitalism and the control of corporate assets within the top 15 families in the GDP.

corp assets of top 15 familes vs crony capitalism

Source: Corporate Assets of Top 15 Families: Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112., Crony Capitalism: The Economist, Crony Capitalism (Hong Kong): The Economist.

*Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.

As The Economist explains, “Behind the crony index is the idea that some industries are prone to “rent seeking” […] when the owners of an input of production – land, labour, machines, capital – extract more profit than they would get in a competitive market.

“Rent-seeking can involve corruption, but very often it is legal,” it adds.

But Eklund and Desai offer this point of view: “We argue that it is not ownership concentration per se that creates inefficiencies in the allocation of capital but rather, key governing institutions. Therefore, strong private property and investor protection [will] reduce [the] equilibrium concentration ownership and improve [the] allocation of capital.”

In short, when wages are low and inequality is high, it is because of government inaction, and if wages are to be increased, then the government needs to act or citizens have to badger their government to do so, and hold politicians accountable for not acting on their promises to the citizens and workers, or for having too cosy relationships with big business.

The authors Stijn Claessens, Simeon Djankov and Larry H.P Lang, of the paper, “The separation of ownership and control in East Asian Corporations”, explain: “In most developing East Asian countries, wealth is very concentrated in the hands of few families. Wealth concentration might have negatively affected the evolution of the legal and other institutional frameworks for corporate governance and the manner in which economic activity is conducted.

“It could be a formidable barrier to future policy reform,” they conclude.

Singapore’s case therefore presents a danger to its citizens. Whereas in Norway the state also has a high control of publicly traded firms, there is transparency as to how these firms are managed and the Norwegian government is therefore accountable to its citizens and cannot withhold from them their rights and gains.

However, the Singapore government does not operate in a transparent manner. It was Singapore Prime Minister Lee Hsien Loong who famously said: “I would not believe that transparency is everything” when discussing the government’s management of investment funds (which the country’s national pension funds are transferred into).

Social protections and saving graces

As touched on in part 3, Taiwan’s saving grace lies in its social welfare system.

Taiwan ranks eighth in a global list of unemployment benefit replacement rates*, which compare unemployment benefits received when not working to wages earned when last employed in a given year (in this case the year 2000). The list was compiled based on underlying data for this IMF working paper and does not take into account the eligibility of recipients for unemployment benefit, the duration they are able to receive it, or the conditions attached to its distribution.

Taiwan can be said to offer adequate protection, which at 60 percent of the previous salary is just below the Netherlands’ 70 percent, Sweden’s 68.5 percent and Norway’s 62.4 percent. In general, the Nordics and the Netherlands have high replacement rates, and they also start at a high wage base.

Singapore does not have any unemployment benefits – the government has refused to considerintroducing them on the basis that employers are mandated to pay laid off workers retrenchment benefits and Singapore has persistently low unemployment. Manpower Minister Lim Swee Say told Singapore’s parliament in 2016 that nine out of 10 retrenched workers receive such benefits.

Prime minister Lee Hsien Loong said at the May Day Rally in 2016: “Actually, we have something even better than unemployment insurance, because (for) unemployment insurance the worker has to pay out of his salary.” He added, “Ours is different. The scheme is not paid by the workers or the employers. It is paid by the government and the scheme is […] to help you get employed, get a job [and] upgrade yourself.” Lee was referring to the SkillsFuture scheme introduced in 2016 where Singaporeans aged 25 and above received SG$500 to attend training courses. However, this money is not given on an annual basis and Singaporeans only receive “periodic top-ups”. But early this month, it was revealedthat since its launch, only 285,000 working adult Singaporeans used SkillsFuture and in 2017, only about 160,000 Singaporeans, did so. The Online Citizen calculated that this would mean that only 11.4 percent of Singaporeans have used this money over the last two years – it would be lower when accounting for only 2017. It is not known if these figures account for the money which Singaporeans were scammed of – it was later found that SG$40 million worth of fraudulent claims to SkillsFuture were made by a criminal syndicate and 4,400 individuals submitted false claims of SG$2.2 million.

But academics, economists and opposition members have been calling for unemployment benefits. In the book, “Singapore Perspectives 2012: Singapore Inclusive : Bridging Divides”, published by the Institute of Policy Studies, the authors wrote that, “within policymaking circles, it is often argued that unemployment benefits create moral hazard, […] but even if our policymakers remain sceptical, […] how should our social security system help workers transit between sectors as the pace of restructuring intensifies?” At a budget forum organized by the Economic Society of Singapore in 2016, Assistant Professor Giovanni Ko at Nanyang Technological University also said, “You can’t just have a push towards automation without something to help catch these people who will probably lose their jobs,” and that, “there needs to be some kind of safety net”.

OCBC Bank’s head of treasury research and strategy Selena Ling echoed: “I think if you want people to take risks, you want people to give up their bread-and-butter kind of jobs to start up companies, try new things, see the world, fail nine times before they get one right … definitely you have to have some form of support infrastructure.”

Japan and South Korea’s unemployment benefits provide for only 28.9 percent and 25 percent of the previous salary, respectively, and in Hong Kong, it is only 41 percent.

It should be noted that in Japan, unemployment insurance is legislated at 50 percent to 80 percent of the previous salary but because there is a maximum daily limit of 7,830 yen (US$70.75) in unemployment benefits, the average gross replacement rate is therefore low in comparison with wages. Similarly, in South Korea, unemployment benefits cover 50 percent of the previous salary, and again because the maximum daily limit is only 40,000 won (US$37.48), the average gross replacement rate is low as well.

Source: European Welfare States blog (based on: IMF).

unemployment benefits gross replacement rate

*Replacement Rates The replacement rate for given income levels measures the proportion of out-of-work benefits received when unemployed against take home pay if in work. While there is no pre-determined level of replacement rate which would influence every individual’s decision to work, clearly the higher the replacement rate, the lower the incentive to work. A replacement rate more than 70% is considered to be excessive.

On pension adequacy, Taiwan also does well – the gross pension replacement rate stands at 70 percent, coming third after the Netherlands and Denmark, at 96.9 percent and 86.4 percent, respectively.

pension fund gross replacement rate

Source: OECD (2017 report), Taiwan; OECD (2009 report), Hong Kong and Singapore: OECD (2013 report).

However, there is a wide disparity in the pension payments received by Taiwanese workers. Before last year’s pension reform, the average monthly pension for public school teachers was NT$68,025 (US$2,315), NT$49,379 for military personnel and NT$56,383 for civil servants. However, for private sector employees, private school teachers only received NT$17,223 – just a quarter to a third of what their public sector counterparts received – while employees covered by labor insurance received only NT$16,179 and farmers received a paltry NT$7,256.

Moreover, 46 percent of retirees actually received an average pension of only NT$3,791 because they have not worked enough years to be eligible for pension payments. After the pension reform, the replacement rates for public teachers have decreased from 75 percent to 60 percent – still high – with a base pension payment amount of NT$32,160, which means that public school teachers will still receive at least twice as much as their private sector counterparts.

In addition, public sector workers already earn higher wages, a minimum of NT$29,345 as compared to NT$22,000 for private sector workers. Private sector workers in Taiwan are short-changed in terms of their wages and benefits.

The other East Asian countries fared poorly in their pension adequacy, with replacement rates at between 34.6 percent (Japan) and 39.3 percent (South Korea). Singapore’s and Hong Kong’s replacement rates were 38.5 percent and 34.8 percent, respectively. In addition to Hong Kong’s Mandatory Provident Fund (MPF) public pension scheme, the government also provides various social security schemes for the elderly based on their income level: 13 percent of the elderly received a monthly payment of HK$5,548 (US$710) in 2015, 37 percent received HK$2,390 and 19 percent received HK$1,235.

The amounts are actually low in comparison to the cost of living and do not do much to increase the replacement rates, but if you think these are low, look at what Singapore provides – only between SG$100 (US$76) and SG$250 a month, and it is only given to the bottom 20 percent of retirees, who have to meet stringent criteria. Retirees in Singapore are also not guaranteed a minimum pension amount or a minimum pension payment as a percentage of their previous wage as the other countries do. In 2014, the median pension payment from Singapore’s Central Provident Fund (CPF) was only SG$394, as compared to the median wage of SG$3,276 in that year, making up only 12 percent of the median wage.

The Singapore government transfers Singaporeans’ CPF pension funds into the government investment firm GIC Private Limited. The fund claims on its website that it “receives funds from the government […] without regard to the sources” while the Singapore government claims that the funds from the CPF are “comingled” with other funds such as government surpluses and land sales, and ultimately transferred to GIC for management.

The other government investment firm, Temasek Holdings, clearly states that “Temasek does not manage CPF savings.” There is little transparency in how the GIC and Temasek are being managed, and the size of the funds managed by the GIC are not even published. In 2015, Nominated Member of Parliament Chia Yong Yong said that she was “not entirely sure” if Singaporeans “have the right to spend [their CPF monies]” because “at the end of the day […] I am not the only person contributing to that fund, I cannot be the only person to call the shots as to how I’m going to spend it.”

Prime Minister Lee later said that Chia “made an excellent speech about the CPF” about the “broader perspective: whether it is right to think of the CPF as “our money”, to be spent solely as we choose.”

“I am glad that she did, and to such good effect,” Lee added.

Singaporeans have often complained that their CPF monies are trapped inside the government’s coffers and it has become commonplace to hear Singaporeans lament that the “CPF is not my money.”


On health expenditure, the Taiwanese government’s contribution of 60 percent of total health expenditure again puts Taiwan ahead of Singapore and Hong Kong, where the governments only spend 52 percent and 49 percent, respectively. However, Taiwan is still some way off from the governments of the Nordics, the Netherlands and Japan, which spend between 77 percent and 85 percent on healthcare.

govt health expenditure as % total Health expend

Source (data from latest year): World Health Organisation, Taiwan: Ministry of Health and Welfare Taiwan, Hong Kong: Food and Health Bureau The Government of the Hong Kong Special Administrative Region.

Also in the Nordics, the Netherlands and Japan, there is an annual maximum payment limit that citizens need to pay when they seek healthcare, or a limit to the co-payment. Citizens in these countries only need to pay a maximum of between US$409 (Sweden: 3,300 krona) and US$845 (Finland: €691) in a year. It is higher in South Korea, where the limit is set at 2 million won (US$1,874) for the bottom 50 percent, 3 million won for the middle 30 percent, and 4 million won for upper 20 percent.

There is also an annual limit in Taiwan, but the cap of NT$59,000 (US$2,008) pertains to each condition, though it is understood that patients seldom have to pay this maximum amount. Patients pay as low as NT$50 (US$1.70) to see a general practitioner (GP) or NT$150 (US$5.10) for emergency care at a district hospital.

annual payment limit for patient fees

Source (data from latest year): Norway: The Local Norway, Denmark: Danish Medicines Agency, Sweden: The Newbie Guide to Sweden, Finland: City of Helsinki, The Netherlands: Zilveren Kruis, Japan: Tokyo Securities Industry Health Insurance Society, South Korea: National Health Insurance Service South Korea, Taiwan: National Health Insurance Administration, ROC, Hong Kong: Hospital Authority.

In Hong Kong, there is no annual limit set, but the government mandates specific charges that patients only need to pay when they seek healthcare at public hospitals. These charges are relatively low, ranging from HK$50 (US$6.40) for general outpatient services to HK$180 (US$23) per attendance to the Accident and Emergency.

Again, Singapore stands out for not having such protections – there is no annual payment limit. In the GP Fee Survey in 2013 published last year by the Singapore Family Physician journal, it was found that the median consultation fee was SG$35 (average of SG$40) with fees going up to as high as SG$100 (US$75.70).

Citizens have been known to pay astronomical amounts for healthcare – in fact, in 2012, it was foundthat 2,400 Singaporeans had to pay more than SG$10,000 (US$7,570) for their hospital bills. A studyby Associate Professor Tilak Abeysinghe and then-PhD student Himani Aggarwal in 2014 also showed that as early as 2007, of 30,192 cases of elderly patients hospitalized at a public hospital, there were seven cases where the net hospital bill after government subsidies exceeded SG$100,000 (US$75,670), where the highest was SG$207,741 (US$157,259). In fact, Singaporeans have been known to “choose death over dialysis when their kidneys fail,” one reason being that dialysis is too expensive. It is preposterous that whereas other countries set a limit as to how much citizens have to pay for healthcare, the Singapore government instead sets a limit as to how much citizens’ can claim for healthcare.

In contrast, it is free for citizens to see a GP in FinlandDenmark and the Netherlands. In Sweden, it is between 100 krona (US$12.39) and 300 krona (US$37.16), and between 152 krone (US$19.32) and 257 krone (US$32.67) in Norway. In Taiwan, it is only NTS$50 (US$1.70). In Singapore, median and average consultation fees in 2013 were SG$35 (US$26.49) and SG$40 (US$30.27), respectively, but can go as high as SG$100 (US$76).

In Japan, people who go to the GP only need to pay 20 to 30 percent of the costs, while in South Korea, it is 30 percent. In Singapore, the average citizen stumps up the full cost.

In almost all these countries, there is a maximum limit for how much citizens need to pay for patient fees in a year, but again, there is no such ceiling in Singapore.

Lancet study has shown that high co-payments and hospital bills increase “potentially avoidable hospital admissions due to worsening of the condition, or emergency visits to obtain medication in acute episodes in patients with chronic diseases. Co-payments reduce demand for preventive services, because people tend to overestimate present costs and underestimate future health benefits.” This results in patients still having to go to hospital and pay even more than they would initially.

Unless they choose to die – which some Singaporeans have opted to do.

This could be why Singaporeans have developed a “kiasu” and “kiasee,” or fight or die, attitude. But this has created a self-centered culture – studies have shown that given Singapore is the most unequal country among the developed nations, Singaporeans are also less trusting towards one another and the level of self-enhancement – where people believe that they are better than someone else – is also the highest among developed nations. Social mobility in Singapore is impeded because of the city state’s unequal social and economic structure.

On the other hand, even though wages in Taiwan are the lowest in this comparison, the country in fact offers a solid social safety net – even though it might not seem so to some Taiwanese. By most metrics, Taiwan’s social welfare system can be considered a strong one – it just does not feel like it because low wages make the benefits look insufficient.

It should also be noted, however, that Taiwan’s government pays for only 60 percent of health expenditure, which compared to other developed countries, is relatively low. As such, there is room for the government to increase spending to between 70 and 85 percent, so that the quality of Taiwan’s healthcare system can be maintained, and is not compromised by unnecessary cost-cutting measures. As such, instead of reducing the top rates of income tax, the Taiwan government would do better to redistribute the budget to improving healthcare standards. This could begin with improving the quality of life of healthcare workers by hiring more of them – Taiwan already has the lowest physician densityamong the high-income countries – tied with Singapore and Hong Kong. Their governments spend the lowest among the developed countries on healthcare.

physician density.png

Source (data from latest year): World Economic Forum, Hong Kong: Department of Health The Government of the Hong Kong Special Administrative Region.

On paper, Taiwan stands out as a place that protects its poor and sick. That’s a saving grace, at least.

Equality and the future

There is an important area in which East Asian countries still have not caught up and perform poorly as a whole – work hours and off days.

annual hours worked

Source (data from latest year): The Conference Board.

In terms of work hours, Singaporeans work the longest among the developed countries – 2,237 hours annually. People in Hong Kong work the second-longest, at 2,175 hours, while South Korea comes in third at 2,088 hours. Taiwanese endure long hours as well, but not to the same extent as their counterparts in the other Asian Tigers do, clocking in 1,915 hours per year.

Japan fares a bit better, but it is the Nordics that shine – after the Germans, the Danes, Norwegians and Dutch work the shortest hours in the world.

fertility rate

Source (data from latest year): Central Intelligence Agency

It would also be reasonable to conclude that the situation for low-income workers in Singapore is completely out of whack – they earn comparatively low wages, work long hours and can only take short breaks, but suffer from scant social protection. Workers have limited protection from unemployment.

Singapore’s harsh inequality therefore also results in the country having one of the lowest purchasing powers (as measured by purchasing power parity*) when compared with the high-income countries. Even though Singapore has one of the highest GDPs per capita in the world, because the wage share is low and inequality is high, wages are therefore relatively low. This, coupled with being the most expensive place to live in the world, equates to low purchasing power. If it is of any consolation to Singaporeans, Taiwan has a lower purchasing power, though Taiwan’s redeeming feature is that it has a stronger social welfare system. On the other hand, precisely because the Nordics have one of the highest GDPs per capita in the world, and these countries have a high wage share and the lowest income inequality in the world, they therefore also have the highest purchasing power in the world after Switzerland and Australia and enjoy a high standard of living that is only available to the rich in Singapore and Hong Kong.

prchasing power parity

Source (data from latest year): World Economic Forum

Purchasing power parity (PPP) is an economic theory that compares different countries’ currencies through a “basket of goods” approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (considering the exchange rate) is priced the same in both countries.

Singapore’s socio-economic structure embodies many of the fundamentalist views on eugenics expressed by Singapore’s first prime minister Lee Kuan Yew. In 1969, the late Lee said in parliament: “free education and subsidized housing lead to a situation where less economically productive people in the community are reproducing themselves at rates higher than the rest.”

In 1980, as the birthrate among women who were more educated fell faster than that of those who were less educated, Lee then said: “If we continue to reproduce ourselves in this lop-sided way, we will be unable to maintain our present standards. Levels of competence will decline. Our economy will falter; and administration will suffer; and society will decline.”

The irony is that it is these very beliefs that have resulted in Singapore developing along such unequal lines. Singapore’s government has implemented these ideas to their full extent, treating the poor with contemptible disdain. If “society will decline” – as Lee put it – then it is because of his own ideals. By marginalizing the poor and denying them opportunities to move up the social ladder – Singapore’s social mobility is low because of its inequality – the Singapore government reinforces structural poverty. The poor cannot move up not because they do not want to, but because they are not allowed to. The examples of the Nordics show that that where resources are distributed equally, and everyone is uplifted, society progresses together. Whether or not the current leaders in Singapore subscribe to the late Lee’s views, they have continued to indulge them.

In truth, it is not because people are “less educated” that makes them poor, it is their poverty that makes them “less educated.” A study in the American Journal of Preventive Medicine found that people who are consistently exposed to having low incomes for two decades showed worse cognitive function and intelligence levels, and that living in poverty and hardship also meant a higher possibility of premature aging.

Research from Princeton University suggests that people who are poor are not less capable because of any inherent traits but because poverty impedes their cognitive capacity. The researchers explain: “Poverty and all its related concerns require so much mental energy that the poor have less remaining brainpower to devote to other areas of life.”

The researchers go on: “Thusly, a person is left with fewer mental resources to focus on complicated, indirectly related matters such as education, job training and even managing their time.” As a result, the poor “make mistakes and bad decisions” because they are poor – and must spend too much time thinking about how to make ends meet. It might take having to fall into poverty for people to really appreciate what this means.

But the study also shows that when people are lifted out of poverty, “low-income individuals performed competently, at a similar level to people who were well off,” then doctoral student and co-author Jiaying Zhao explains. As such, people who are considered intelligent now but who are made to live in poverty can also become less intelligent, when their resources are constrained. It is not a zero-sum game and definitely does not conform to the eugenics ideology expounded by the late prime minister.In sum, our society can be smarter as a whole when people are paid higher wages, and when resources are more equitably distributed to let everyone have the same chance. Unfortunately, the ruling People’s Action Party appears too deeply embroiled in the situation to pull itself out and Singaporeans are too fearful – or complacent – to do anything about it.

Taiwan’s future

Taiwan, on the other hand, by its metrics, has a relatively strong social welfare system, with high adequacy in unemployment benefits and gross pension replacement rates, as well as healthcare that is generally cheap.

However, the key issue with Taiwan is low wages, which drag down Taiwan’s otherwise strong social welfare system. It has thus become commonplace to read reports or hear government officials talk about how the national health insurance or pension system might go bankrupt, but this neglects the wage issue, which results in lower contributions to Taiwan’s social welfare system.

But Taiwan is on the crux of change. Should the country continue down the misguided path of neoliberalism and inequality, which even the IMF is now cautioning against, or focus on pursuing progressive ideals as part of its democratic evolution?

When Taiwan’s President Tsai Ing-wen (蔡英文) was elected, she promised to increase workers’ wages.

“Our young people still suffer from low wages. Their lives are stuck, and they feel helpless and confused about the future,” she said.

Indeed, Commonwealth Magazine wrote about the 30-somethings in Taiwan who grew up during as wages became depressed, and because of that, Lin Thung-hong, an associate research fellow in Academia Sinica’s Institute of Sociology, explains, “(Living in the moment) is rational behavior when wages are low because saving doesn’t have any benefits.”

Therefore, when Hsu Chung-jen (徐重仁), president of PX Mart, one of Taiwan’s largest supermarket chains, complained that Taiwan’s youths were “spending too much money” and that they should “tolerate rather than complain about low pay,” he could not be more out of touch.

“Nowadays, young people are really spendthrift,” Hsu said, “Young people should not fuss over having lower salaries than other people. Withstand rather than complain; work diligently and your boss will see you one day.” But have the bosses of Taiwan met his expectations?

Hsu later apologized, saying “the incident led him to reflect whether he — and those of his generation — tend to pass judgement too quickly on the younger generation,” Taipei Timesreported him as saying.

Perhaps Hsu might not be completely to blame for his lack of understanding. As in Singapore, the rich-poor gap in Taiwan has also resulted in a separation of experience and understanding, where “the Elites – due to their wealth – do not suffer the detrimental effects” of inequality and “appear to be oblivious” to the plight of those at the bottom, as a study on collapsed societiesexplains.

Taiwan and Singapore are of course different – Taiwan is a democracy where its citizens have the right and ability to push for change. In Singapore, activists have been intimidated,interrogatedsuedcharged and jailed, while some have lost their jobs simply for speaking up – just like in China.

Taiwan president Tsai also said at her inauguration: “Young people’s future is the government’s responsibility. If unfriendly structures persist, the situation for young people will never improve, no matter how many elite talents we have. My expectation is that, within my term as president, I will tackle this country’s problems step by step, starting with the basic structure.”

Compare this with Singapore’s Prime Minister Lee who mocked income inequality as a “fashionable thing to talk about.”

He also said: “If I can get another 10 billionaires to move to Singapore and set up their base here, my Gini coefficient will get worse but I think Singaporeans will be better off, because they will bring in business, bring in opportunities, open new doors and create new jobs, and I think that is the attitude with which we must approach this problem.”

Well, statistics suggest otherwise.

President Tsai also campaigned on a platform of marriage equality in the last general election, yet her administration has dragged its heels on following through. Premier William Lai (賴清德)said in October last year that the Legislative Yuan was still working on submitting a proposal on marriage equality for discussion before the end of 2017 but we are now into the new year, and not a sound has been heard. Nonetheless, Taiwan remains the only Asian country which has a road map towards marriage equality by the middle of 2019 – putting it in the same league as the Nordics and the Netherlands, even as its East Asian counterparts remain nonplussed by the issue.

Same-sex marriage recognition (year of legalization) No same-sex marriage recognition Criminalization of male same-sex sexual relationships
Netherlands (2001) Norway and Sweden (2009) Denmark (2012)Finland (2017) Japan (partnership certificates issued in six local governments)

Hong Kong and South Korea-none


In Singapore, after a record number of international corporate sponsors joined in the eighth run of the annual PinkDot SG event in 2016, held in support of the Lesbian, Gay, Bisexual and Transgender (LGBT) community, the government announced that foreign entities would not be allowed to sponsor the event unless they apply for permission. Even then, Google, Apple, Facebook, Salesforce, Airbnb, Uber, Microsoft, NBC Universal and Goldman Sachs did just that,but had their applications rejected. The government also introduced new rules to prohibit foreigners from participating or to sponsor the event. Those deemed to be illegally participating can be fined while organizers are threatened with fines and jail time if they flout the rules.

However, the ban has had the opposite effect – more than 100 local companies then stepped up to provide sponsorship for the event. Still, male same-sex sexual relationships are still illegal even though the ILGA-RIWI Global Attitudes Survey on Sexual, Gender and Sex Minorities released last year showed that 61 percent of Singaporean participants believe that equal rights and protections should be applied to people who are romantically or sexually attracted to people of the same sex – which was the second-highest acceptance level in Asia.

In Hong Kong, the High Court said in a landmark ruling last year that the government should provide the same benefits that it provides to heterosexual couples, to same-sex couples. Justice Anderson Chow Ka-ming (周家明) called the Civil Service Bureau’s policy “indirect discrimination” – the bureau had denied benefits to senior immigration officer Leung Chun-kwong and his partner, Scott Adams from New Zealand, whom he married in 2014, claiming the need to protect “the integrity of the institution of marriage”, leading Leung to challenge the bureau in court. However, the government has decided to appeal the ruling.

In South Korea, homosexual activity is banned in the military and after a video showing two male soldiers having sex was uploaded onto social media, human rights group reported a witch hunt against gay soldiers which even used dating apps to entrap them, leading to 32 soldiers being charged. The Associated Press also reported the South Korean President Moon Jae-in as opposing homosexuality.

On the other hand, in Japan, partnership certificates can be issued to same-sex couples in six local governments and the city of Sapporo, even though they are not legally recognized as marriage certificates. Attitudes towards homosexuality are said to be conservative, though the ILGA-RIWI survey also showed that 55 percent of participants believe that same-sex couples should be treated with equal rights and protections.

Overall, among the Asian Tigers, Taiwan is a mixed bag. On the one hand, wages are low but on the other, Taiwan has a good social welfare structural system and same-sex marriage will soon be legal in the next one and a half years at most. It seems almost as if the Taiwanese government is pushing all the right buttons except the most important one – wages (and related to it, rest days).

Vice Premier Shih Jun-ji did discuss the possibility of increasing wages by 6 percent every year to achieve a minimum wage of NT$30,000 (US$1,021) by 2024, or by 8 percent to achieve it by 2022. However, Shih’s calculations do not consider the inflation rate, which in 4 years time might mean minimum wage should have gone up to NT$32,000 (US$1,089), which would mean that wages should be increasing by 9 to 10 percent every year – noting the study mentioned earlier which showed that a 10 percent increase would only lead to a 0.4 percent increase in overall prices and 4 percent in food prices.

Taiwan’s government should come out with a projection as to the different scenarios that wages can be increased by, and how these would affect prices and employment, so as to come out with a practical solution.

Even so, Premier William Lai had side-stepped the topic of implementing a minimum wage of NT$30,000 even as he suggested that listed companies and multinational corporations should pay graduates a starting wage of NT$30,000. But a minimum wage policy is important as can be seen in the announcement of the Workforce Development Agency (WDA) annual career fair. At its upcoming fair, of the 3,500 jobs available, only half will have a starting salary of NT$30,000 per month. In spite of Lai’s calling on businesses to increase starting salaries to NT$30,000, this call has not been heeded – which is why increasing minimum wage as a policy is necessary.

While NT$30,000 is not only the “ideal” minimum wage, it is also necessary to bring Taiwan’s wages to parity. Taiwan’s current minimum wage is only NT$22,000, but public-sector workers already earn a minimum of NT$29,345 and with the pension reform last year public sector pensioners are also guaranteed a minimum pension payment of NT$32,160.

Clearly, the government acknowledges that NT$30,000 to NT$32,000 is the minimum necessary for basic living for the Taiwanese. Leaving private-sector workers in the lurch to earn only NT$22,000 and leaving it to the private sector to increase wages without legislating minimum wages to the ideal would be irresponsible.

In fact, when you take the example of Denmark and Sweden, public and private-sector workers earn about the same wages, and skilled private-sector workers actually earn higher wages than public-sector workers, so it begs the question why public sector workers in Taiwan are earning such significantly higher wages than private-sector workers. Shouldn’t they be earning similar – and higher – wages if the Taiwanese are to be uplifted together? Which is why the continuous push by retired public servants to fight to keep their high pension payments – which already would put them in the top 10 percent income earners – is incredulous.

What kind of example are the public school teachers setting for their students when they would fight for their own pension and not for the general public, when the very people they teach would go out into the workforce to earn significantly lower pay than them? Already, public school teachers already received an average pension of NT$68,025 last year, or 18 times higher than the average pension of only NT$3,791 that 46 percent of Taiwanese retirees were able to receive. Shame is perhaps not the right word, but where we should work for the benefit of all of Taiwan, where is the self-respect of the public school teachers when their role should be to educate the public of their responsibility to society?

Shih also said that the government would adopt a targeted approach to increase minimum wages in industry sectors where wages are low such as in the retail and food industries, and where unemployment is high such as among young workers and first-time job seekers, instead of a “broad approach aimed at improving the entire economy.”

But labor unions should take note – the Nordic example where collective bargaining is done for each sector actually helped to increase wages to the highest in the world, but that is because they are democracies. Taiwan may be a democracy, but it has not attained the level of transparency that the Nordics have and because the top families’ control of businesses in Taiwan is similar to Singapore’s top families’ (and state’s) control – and where crony capitalism is high. Taiwan might fall into a similar situation where wages would remain low as in Singapore’s case, even if there were any increase. Where Taiwan will go depends on the integrity of Taiwan’s politicians and their commitment to democracy, and the strength of the labor unions and the Taiwanese to hold the government accountable.

The World Economic Forum highlighted this: “Recent empirical research indicates that the most important explanation for the falling wage share is workers’ weaker bargaining position.”

It added that, “The conclusion is that it is absolutely possible to restore the wage share through the right policies, [… by] strengthening the welfare state, supporting trade unions and providing workers with […] a social safety net,” among other things.

Additionally, the Nordic model has shown how high wages and a strong social welfare system can help design an ecosystem which has led the Nordic countries to be one of the most innovative in the world, and which has moved the Nordic countries into high-skilled and high-value industries.

At the very least, at her year-end conference, President Tsai did talk up her promise of setting a minimum wage act.

Tsai also said: “The government will provide support to companies willing to give bigger pay raises. When companies share more of their profits with employees, this increases employees’ buying power, creating a positive cycle that benefits both enterprise and labor.”

Tsai’s point is backed up by evidence which showed that “the marginal propensity to consume of high-income earners is substantially less than for low-income earners,” as reported by The Guardian of the study by Brookings Institution and the Reserve Bank of Australia. also showed that the richest 10 percent in America actually spends about the same on basic necessities as the rest of the 90 percent – US$1,601 vs US$1,455, respectively, but with the top 10 percent spending only 10 percent of their income. As such, Michael Linden of the Center for American Progress’ managing director for economic policy told HuffPost: “It’s a real problem to the extent that more and more income is going to people at the top and more of that income is not going to places that are productive.”

Sam Pizzigati, an associate fellow at America’s Institute for Policy Studies added that, “This whole hoarding episode [among the rich] just tells us once again that any society that lets wealth concentrate at the top is making a very foolish move economically.”

“There’s a bit of a vicious cycle,” Linden said. And this is where Taiwan is today.

For too long, Taiwan’s government has pandered far too much to the big businesses. This has resulted in a vicious cycle, as Tsai’s proposal hopes to undo, or at least we hope it will. But this also requires the cooperation of the top families in Taiwan and the bosses of SMEs to understand the role they play not only as business leaders but as the citizens of Taiwan. If Taiwan is to become relevant on the international stage again, the Taiwanese have to first take themselves seriously and to uplift the livelihoods of one another, so that the Taiwanese will gain a new confidence and foothold and be able to take Taiwan forward together as a nation.

On many indicators, Taiwan already performs admirably – in terms of social welfare and human rights. But if Taiwan were to truly become one of the developed and democratic countries in the world, it has to start with wages – by increasing them.

The World Economic Forum explained: “Strong unions, collective wage bargaining and high minimum wages can offset the negative impact of other factors, as the Nordic countries have proved,” which together can help design an ecosystem which has led the Nordic countries to be one of the most innovative in the world, and which has moved the Nordic countries into a high-skilled and high-value industry.

The solution therefore, is doable. Writing before the recently-concluded World Economic Forum Annual Meeting 2018, Executive Director of Oxfam International Winnie Byanyima said: “I will be urging political leaders [at the meeting] to limit rewards to shareholders and senior executives, introduce a statutory living wage, build fairer tax systems, invest in healthcare and education, and shepherd in a technological revolution that works for all. I will be calling on business leaders to stop paying huge share dividends and awarding bumper pay packages to top executives until they can guarantee that all of their workers are getting a living wage and that their suppliers in their supply chains are being paid fair prices.”

The same needs to be done in Taiwan.

Already, Taiwan’s low wages are causing Taiwanese youths to leave to seek higher paying jobs, ironically in China. Where Taiwan is losing talent, the other irony is that Taiwan’s companies are still resistant to increasing wages while yet fretting about losing talent. In short, Taiwan’s businesses cannot have their cake and eat it. If they want wages to be kept low, then they have to content with Taiwan losing its lead and the continued stagnation. Otherwise, Taiwan’s businesses need to also increase wages to kickstart Taiwan’s economy once again.

It is a misguided strategy to hope that Taiwan can be kept as a low-cost manufacturing hub to compete with countries like Vietnam or Cambodia. Like the World Economic Forum explained, Taiwan’s government has to “avoid a prisoner’s dilemma in which [they] suppress wages to gain a competitive advantage over others”. Taiwan has outgrown this strategy and needs to move up the value chain to become more like the Nordic countries and the Netherlands. What it takes now is whether Taiwan’s businesses – and the government – have the foresight and confidence to take the next step to bring Taiwan forward. This means investing in Taiwan’s workers, to lift their wages, so that in turn they can help to lift local businesses.

Premier Lai had mentioned that in Taiwan, the “private sector is not short of funds, [however] much of it is invested overseas.” If Taiwan’s businesses would heed the government’s call to channel the funds back to Taiwan, this could give Taiwan the much-needed chance for change.

At this juncture, where the government’s Southbound policy seems to be gaining traction, Taiwan’s renewed collaborations with countries like Japan, Australia and India, as well as the United States and parts of Europe means that Taiwan can once again play a central role in the regional economy. Now all it takes is for the Taiwanese and Taiwan’s businesses to believe in Taiwan’s potential and to help bring Taiwan’s hopes and possibilities to fruition.

First Quarter 2018 Economic and Wood Product News Part 2- China, India, and Second Quarter Forecast by Strafor

China economy stable but housing to hit growth

FTCR China Busniess Activity Index.jpg

Real estate again weakest link as FTCR Business Activity Index drops below 50

China economy stable but housing to hit growth Real estate again weakest link as FTCR Business Activity Index drops below 50

Financial Time’s latest data covering the Chinese economy pointed to stable growth as 2017 ended. FTCR measures of internal and external trade continued to defy expectations for a meaningful slowdown in the fourth quarter, while household sentiment remained near record levels of optimism.

The FTCR Freight Index ended the year at 52.5, slightly below the previous month’s reading but suggesting a fourth straight month of improving conditions. Our export index also weakened on slower volume growth, but exporting companies reported that profits improved for a ninth straight month. However, our Business Activity Index, a monthly aggregate of our data, was dragged to a four-month low of 49 in December on the back of a slowing housing market.

Other public and private sector measures of the economy, released after our data were published, confirmed that growth remained strong last month. The purchasing managers’ index distributed by Caixin rose to a four-month high, while that produced by the China Federation of Logistics and Purchasing, a government-linked association, remained at levels suggesting manufacturing conditions continued to improve in the final month of the year.

purchaser's managers indice

The FTCR Real Estate Index fell to its lowest level since January 2017, however, as rising mortgage rates continued to strangle sales activity, particularly in first-tier cities. We anticipate more pain ahead for housing, and its importance to the Chinese economy is such that overall growth will slow.

The government sees financial risk as a key threat to national security, and the country’s property market as a major source of that risk. Deleveraging was not directly name-checked in the statement marking the conclusion of the Central Economic Work Conference in December, prompting speculation that growth considerations will dominate in 2018. However, enough was made of the need to prevent financial system risk to suggest the leadership will continue its regulatory crackdown on finance in 2018. This also means that the purchase restrictions introduced by city governments starting at the end of 2016 will remain in place to snuff out speculation.

Despite tighter policies, consumers are still bullish on house prices. Our monthly gauge of price expectations showed that 62.5 per cent of respondents in December expected prices to keep increasing in the first half of this year, including 18.1 per cent who expect gains of more than 10 per cent. Over a year after local governments began making it more difficult to buy, far more Chinese consumers still expect prices to continue rising than during the peak of the previous tightening cycle in 2014, when just 41.5 per cent expected continued gains.

Consumer sentiment housing market.jpg

As price inflation cools, the market’s ongoing slowdown will have a knock-on effect on consumer views towards the economy. Recommended Chinese consumers fret about healthcare and education costs. Rising Chinese interest rates will suppress future Tier One City house price gains. China governments will see more defaults as regulators implement tougher regulations. The government’s response to a slowing economy will be crucial. Previously when growth fell below target, the Chinese leadership would loosen policy. Although the 2018 annual growth target will reportedly be set at 6.5 per cent again, the government has signalled that it will tolerate a slower pace of expansion, in accordance with its new-found goal of improving the lot of Chinese households rather than just chasing growth. The growth target will be announced at the opening of the annual meeting of the National People’s Congress in early March. Allowing growth to slip below target, to about 6.3 per cent, would demonstrate the leadership’s commitment to reform. However, while we expect greater tolerance for slower economic growth, the government will resort to stimulus if the slowdown goes too far. The FTCR China Business Activity Index is a composite reading of business activity and sentiment based on our surveys of companies in the real estate, export and freight sectors. For individual survey methodologies click here. A full set of survey results can be found in the Financial Times Database.

purchaser's managers indice
Rising Chinese interest rates check big-city house price gains

FTCR China Real Estate Index takes another lurch down as credit woes hit sales
Rising Chinese interest rates check big-city house price gains FTCR China Real Estate Index takes another lurch down as credit woes hit sales Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Mail Save Save to myFT FT Confidential Research DECEMBER 28, 2017 Print this page House prices stopped rising in major Chinese cities in December as a scarcity of cheap mortgage deals choked sales. The FTCR China Real Estate Index fell to 43.5, its lowest level since January, as sales activity across all city tiers slowed further. Although prices continued to rise in second- and third-tier cities, developers in China’s biggest markets, where the gains have been most intense during this most recent cycle, said that prices had stopped rising in December, the first time they had done so since July 2014. This is not to say that prices are falling outright; 77.8 per cent of developers in these cities said that prices were unchanged relative to the previous month. Nonetheless, the Chinese housing market’s woes look set to continue as the government tries to make good on its pledge to stamp out the speculative impulses that have driven heady price gains across the country during the past two years. Although the number of developers reporting the availability of discounted mortgage rates ticked up in December, more than 90 per cent said first-time buyers were having to pay at or above the benchmark, signalling that credit remains historically tight. Although developers expect sales to fall again at the start of 2018, prices are expected to remain supported by a widespread belief among consumers that prices will continue to rise in the coming months. Share this graphic Sales fell across all city tiers at a faster pace than in November, with our Home Sales Index down another 4.1 points to 39.5, its lowest reading since January. First-time buyers were again the biggest source of demand (47.2 per cent), with those looking to buy an additional home accounting for 20.7 per cent of buyers, and upgraders making up the remaining 32.1 per cent. Developers reported that the volume of sales inquiries fell for a second month, with our inquiries index at 46.4, versus 45.1 in November. Share this graphic Developers in first-tier cities reported that house prices failed to rise in November, the first month they have done so since mid-2014. Increases in second- and third-tier cities were enough to lift the FTCR China Home Price Index 0.3 points to 58.5. The proportion of developers offering discounts rose 2 percentage points to 57.4 per cent, having hit a 44-month low of 53.1 per cent in October. Share this graphic The supply of new houses to the market shrank in all city tiers for a second month, with our New Home Supply Index falling 1.1 points to 44.6. The share of developers reporting rising sales volumes outstripped those reporting supply growth: 16.7 per cent said transactions increased while 15.8 per cent said supply did. Share this graphic Our Home Sales Outlook Index dropped 1.1 points in December to 47.9, but developers across all city tiers expect prices to rise further in the coming month. Our Home Price Outlook Index rose 0.3 points month on month to 56.9. Share this graphic The number of developers reporting that discounted mortgage rates were available for first-time buyers rose for the first month since January. However, credit remains historically tight, with 91.4 per cent saying that buyers are paying rates at or above benchmark. Share this graphic Our Home Sales Index for first-tier cities dropped 2 points to 37.8, in second-tier cities it fell 4.7 points to 39.1, and in third-tier cities it fell 3.9 points to 41.2. Our first-tier-city house price sub-index fell 3.4 points to 50, while the second-tier city sub-index rose 1.2 points to 60.4 and the third-tier city index increased 0.5 points to 59.3.

No ordinary ZhouZhou Xiaochuan, China’s central-bank chief, is about to retire

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If you seek his monument, survey China’s economy

 Print edition | Finance and economics

Feb 1st 2018

WHEN Zhou Xiaochuan took the helm of China’s central bank 15 years ago, the world was very different. China had just joined the World Trade Organisation and its economy was still smaller than Britain’s. Foreign investors paid little heed to the new governor of the People’s Bank of China. He seemed safe to ignore: another black-haired, bespectacled official whose talk was littered with socialist bromides.

Mr. Zhou is widely expected to retire in the coming weeks. He leaves with China far stronger and his own role much more prominent. No one person can take credit for the flourishing economy. But Mr. Zhou, who is 70, deserves more than most. He helped forge the monetary environment for China’s growth. He also went a long way to dragging the financial system out of the mire of central planning, even if reforms fell short of his own wishes.

His achievements are surprising. China makes no pretence of having an independent central bank. The People’s Bank is under the State Council, or cabinet. But with political acumen and a command of economics, Mr. Zhou carved out power for himself. As the years silvered his hair, his decision to leave it undyed, rare among high-ranking cadres, marked him out as different, even a bit daring.

It did not hurt that, as the son of Zhou Jiannan, a senior Communist official, he enjoyed the privileged status of “princeling”. From his early career in the 1980s, he advocated a more market-based economy. He helped design the “bad banks” that freed Chinese banks of their failed loans and paved the way for a boom. As stock market regulator, he was nicknamed “The Flayer” for trying to root out corruption. Mr. Zhou was not a radical but, by China’s standards, a staunch economic liberal.

When party leaders chose Mr. Zhou as central-bank governor in 2002, they made him the point-man for financial reform. Over time he also became the face of Chinese economic policy in global markets, much liked for his jovial manner and straight talk. At the last big shuffle of government personnel five years ago, he was old enough to retire. A former aide says that Mr. Zhou hoped to return to his other love, music. Sent to work on a farm during the Cultural Revolution, he kept a contraband collection of classical-music records; in the 1990s, when he was a banker, he wrote a book about musicals on the side. But when Xi Jinping became China’s leader in 2012, he asked Mr. Zhou to stay on. The Flayer had come to be seen as a wise elder, an indispensable guide for the financial system through a dangerous period.

His first big move as central banker, back in 2005, was to unpeg the yuan from the dollar. China’s currency remains tightly managed, but it has not stood still. It rose by a third against the dollar in the decade after unpegging. Mr. Zhou also steered China towards a system in which banks set interest rates themselves, rather than merely follow government diktats. Frustrated by the torpor of China’s other regulators, he oversaw the creation of a vibrant exchange for “medium-term notes”, a bond market in all but name. Rather than big-bang reforms, with all their attendant dangers, these were small changes that added up to something bigger.

Yet Mr. Zhou craved more. He wanted to open China’s financial system to the world, believing that only with true competition would it be possible to curb wasteful investment. As a vehicle for this he lighted on internationalising the yuan. Politically, it was an easy sell—leaders liked the idea of having a powerful currency. Economically, it proved complex, requiring China to open its sheltered financial system to more risks. When cash flooded out of the country in 2016, the central bank retreated, ratcheting up capital controls.

Criticism has come from opposite sides. Some economists, mostly in China, feel that Mr Zhou pushed too hard for market forces, especially in his drive to internationalise the yuan. One former adviser, a more conservative economist, calls him “relentless”. The other criticism, more often heard abroad, is that Mr Zhou did too little to cure China’s financial ills. Debt levels soared on his watch, a threat to stability that the government is trying to reduce.

Neither criticism is entirely fair. The project to make the yuan global was never just about the currency. Mr. Zhou knew that opening the capital account would reveal financial shortcomings in China and press the government to crack on with reform. To some extent this is now happening, with officials more focused on risks. As for the debt explosion, Mr. Zhou could do little to restrain it. Given that the government was committed to ambitious growth targets, the central bank had to provide supportive monetary policy. But it has not let things get out of hand: inflation has remained generally low and stable.

Legacy systems

Mr. Zhou is well aware that reputations change. He started his term as central-bank governor when Alan Greenspan was seen as the Federal Reserve’s “maestro”, not yet as a villain of the 2008 global financial crisis. Over the past half-year Mr. Zhou issued several warnings that debts were too high and that, without stricter regulation, China could face serious trouble. To some it looked as if he was trying to protect his legacy, since, if financial turmoil erupts, he cannot be accused of failing to foresee it.

The front-runners to replace him are Guo Shuqing, China’s most senior banking regulator, and Jiang Chaoliang, party chief of Hubei, a central province. Whoever gets the job will have less personal clout than Mr. Zhou. And with decision-making more centralised under President Xi, the central bank itself may play a diminished role. Yet in one respect its next governor will start from a much stronger position. China’s financial reforms are far from finished, but the system as a whole is much more advanced than 15 years ago. As an architect, Mr. Zhou never saw his vision fully realised, but he designed solid foundations.

China Economic Update

By Eric Wong 

eric wongManaging Director, Canada Wood China

May 2, 2018

Posted in: China

2018 Q1 highlights:

  • Based on the report issued by the official statistics bureau on April 17th, China’s GDP growth increased 6.8% in the first quarter which exceeded the previous expectation (6.7%); real estate investment is expected to go slower because China intends to restrain excessive speculation in this sector;
  • The industrial output growth in March 2018 slowed down to 6% year-on-year compared to the 7.2% from January to February period which showed the strengthen policy to reduce environmental pollution from industry; retail sales are estimated to have rose 9.7% in March which match readings in the first two months, meanwhile industrial production increased 6.4%, made a slower pace compared from January and February; fixed asset investment grew slowly to 7.5% year-on-year from January to March 2018, decreased from 7.9% in January and February this year. Above-mentioned indicators are combined for the first two months of the year because of the annual holiday in China.ii

PMI (Caixin) indexes decreased unexpectedly to 51.0 in March 2018 from 51.6 in February which skipped market consensus of 51.8.iii China Exports dropped 2.7% year-on-year to USD 174.12 billion in March 2018 which didn’t make the market expectations of a 10% growth

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China Consumer Price Index (CPI) fluctuated, rose from 101.5 (January 2018) to 102.9 (February 2019) and then decreased slightly to 101.7 (March 2018).v USD/CNY fluctuated, increased from 6.30 (February 1st) to 6.36 (March 1st) and then went slightly lower to 6.29 (April 1st);vi CAD/CNY dropped continuously from 5.13 (February 1st) to 4.95 (March 1st) to 4.88 (January 1st), hit the lowest spot (4.83) on March 16th during the past 12 months.vii

Building material prices

Cement price dropped slightly from RMB 410.83 to RMB 398.33 per metric ton (down 3.04%) over March 2018.viii Rebar steel price went down by 12.22% from RMB 4,088.12 per metric ton on March 1st 2018 to RMB 3,588.46 per metric ton on March 31st 2018.ix The log price index in March 2018 was 1,115.91 points which decreased 0.48% less than February 2019 and grew 2.22% compared to the same period year-on-year; the lumber price index in March 2018 was 1,123.99 which went down slightly of 0.33% month-on-month and decreased 0.56% year-on-year.x

Wood import of Chinaxi

Normally during Chinese New Year (January to February) wood imports to China tend to decrease lower while volume of wood inventory stays higher in most ports. This year the volume of wood imports in total dropped to a new low at 5.49 million m3 in February which decreased 14.81% year-on-year and 35.28% month-on-month. On the contrary log and softwood inventory at Taicang, Wanfang and Meijing Ports increased steady from September 2017 (1.05 million m3) and hit 1.26 million m3 in February 2018, the latter figure shows 2.5% growth year-on-year and fits the total trend. Based on the market trend in previous years it is expected to see wood imports to China to go up and inventory goes down in the coming months. This trend shows consistency when it comes to softwood lumber imports from Russia and Canada, both figures decreased to new lows in February 2018 during the past 12 months especially for Canadian softwood lumber (194,423m3) which dropped 38.93% year-on-year and almost half (44.95%) compared to the volume of last month.

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demand for wood

i Huileng Tan (April 17th, 2018). China says its economy grew 6.8% in the first quarter of 2018, topping expectations
ii Bloomberg News (April 16th, 2018). China’s Economy Brushes Aside Trump to Power Ahead in 2018
iii Trading Economics (April 17th, 2018). China Caixin Manufacturing PMI
iv Trading Economics (April 17th, 2018). China Exports
v Trading Economics (April 17th, 2018). China Consumer Price Index (CPI)
vi XE Currency Charts: USD to CNY
vii XE Currency Charts: CAD to CNY
viii Sunsirs (April 2018). Spot Price for Cement
ix Sunsirs (April 2018). Spot Price for Rebar Steel
x BOABC (April 2018). China Wood and Its Products Market Monthly Report
xi BOABC (January to April 2018). China Wood and Its Products Market Monthly Report


Lumber Shipments

By Tai Jeong

Tai JeongTechnical Director, Canada Wood Korea

May 2, 2018

Posted in: Korea

BC softwood lumber export volume to South Korea for the first two months of 2018 decreased 38.6% to 24,430 cubic meters as compared to 39,784 cubic meters for the same period of 2017.

This significant downward trajectory comes from many reasons including weakened BC Coastal shipments in the first quarter of 2018 (36% decrease) and decreased housing starts in the South Korean residential construction segment forced by the South Korean government’s strong intervention to limit the supply of new homes from August 2016 to check rise in household debts and curb rising house prices.

Export value for the same period decreased 23.3% to CAD$8.048 million as compared to CAD$10.489 million for the same period in 2017.

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Bank of Japan abandons ‘fiscal 2019’ target for inflation goal

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Time frame on Kuroda’s pledge to hit 2% inflation has been postponed six times Haruhiko Kuroda has begun his second term as Bank of Japan governor The Bank of Japan has abandoned a pledge to hit its 2 per cent inflation target “around fiscal 2019” in a belated recognition that prices are less sensitive to monetary policy than it once believed. Japan’s central bank did not change its inflation forecasts, continuing to predict price rises of 1.8 per cent in the year to March 2020, but it scrapped the written time frame it has kept in place since the start of its massive monetary stimulus in 2013. The change of wording signals the BoJ is settling in for a long campaign to raise prices as Haruhiko Kuroda began his second term as governor. Policy stayed on hold, with overnight interest rates kept at minus 0.1 per cent, 10-year bond yields capped at around zero per cent and the BoJ buying assets at an official pace of around ¥80tn ($730bn) a year. “We do not think this will have any near term policy implications, but think the removal of the fiscal year 2019 timeline gives the BoJ more policy flexibility, avoiding the need for more aggressive stimulus,” said Mitul Kotecha, a strategist at TD Securities in Singapore. At the start of his stimulus in 2013, Mr Kuroda promised to hit 2 per cent inflation in about two years, but he has been forced to postpone the time frame six times since then. Those repeated changes have undermined Mr Kuroda’s credibility. Recommended The Big Read Central bankers face a crisis of confidence as models fail The lack of change in policy signals that the reconstituted BoJ board, including two new deputy governors, will carry on with the stimulus in place since 2013. The policy board voted 8-1 in favour of the decision. Board member Goushi Kataoka dissented in favour of more stimulus. New deputy governor Masazumi Wakatabe, who is regarded as a dove, followed tradition and voted with the governor. Inflation in Japan remains subdued with prices, excluding fresh food and energy, up 0.5 per cent on a year ago in March. There is little momentum towards the BoJ’s objective of 2 per cent inflation. Speaking at a press conference, Mr Kuroda said there was no change in policy, but the BoJ had dropped the language to correct market misconceptions about a direct link between changes in the date and changes in the BoJ’s monetary stance. “I think there is a high chance we will achieve something like 2 per cent inflation around fiscal 2019,” he said. The BoJ left its economic forecasts largely unchanged. It expects inflation of 1.3 per cent in the year to March 2019 and 1.8 per cent in the year after that, excluding the effects of a planned rise in consumption tax. Most external analysts are more pessimistic. “Japan’s economy is likely to continue growing at a pace above its potential in [the year to March 2019],” said the BoJ. But it added: “The year-on-year rate of change in the consumer price index has continued to show relatively weak developments.” The BoJ said that risks to growth next year were “skewed to the downside” because of the consumption tax rise, from 8 per cent to 10 per cent, scheduled for October 2019. Its cautious outlook highlights how far Japan still has to go to achieve a permanent escape from the past two decades of on-and-off deflation. Despite slow progress on inflation, economic activity remains robust, with the ratio of open jobs to applicants hitting a fresh 44-year high of 1.54 times. The unemployment rate held steady at 2.5 per cent. The BoJ hopes that tight labour markets will ultimately lead to upward pressure on wages, higher consumption and a faster pace of increase in prices.


The elephant in the room India’s missing middle class

Multinational businesses relying on Indian consumers face disappointment


Print edition | Briefing

Jan 11th 2018| MUMBAI

THE arrival of T.N. Srinath into the middle class will take place in style, atop a new Honda Activa 4G scooter. Fed up with Mumbai’s crowded commuter trains, the 28-year-old insurance clerk will become the first person in his family to own a motor vehicle. Easy credit means the 64,000 rupees ($1,000) he is paying a dealership in central Mumbai will be spread over two years. But the cost will still gobble up over a tenth of his salary. It will be much dearer than a train pass, he says, with pride.

Choosing to afford such incremental comforts is the purview of the world’s middle class, from Mumbai to Minneapolis and Mexico City to Moscow. Rising incomes and the desire for status have, in recent decades, seen such choices become far more widespread in a host of emerging markets—most obviously and most spectacularly in China. The shopping list of the newly better off includes designer clothes, electronic devices, cars, foreign holidays and other attainable luxuries.

Many companies around the world are looking to India for a repeat performance of China’s middle-class expansion. India is, after all, another country with 1.3bn people, a fast-growing economy and favourable demography. And China’s growth is flagging, at least by the standards of the past two decades. Companies which made a packet there, both incomers such as Apple and locals like Alibaba, are seeking pastures new. Firms that missed the boat on China or, like Amazon and Facebook, were simply not allowed in, want to be sure that they do not miss out this time.

Enthusiasm about India is boundless. “I see a lot of similarities to where China was several years ago. And so I’m very, very bullish and very, very optimistic about India,” Tim Cook, Apple’s boss, recently told investors. A walk around the Ambience Mall in Delhi shows he is not the only multinational boss with big ambitions in the country. Indian brands like Fabindia, a purveyor of fancy clothes and crafts, are outnumbered by Western ones such as Levi’s, Starbucks, Zara and BMW. The slums that host a quarter of all India’s city dwellers feel a long way off.

Beyond the mall, Amazon has committed $5bn to establish a presence in the world’s biggest democracy. Alibaba has backed Paytm, a local e-commerce venture, to the tune of $500m. SoftBank, a Japanese investor, has funded a slew of start-ups premised on the potential buying power of India’s middle class. Uber, the world’s biggest ride-hailing firm, has hit the streets. Google, Facebook and Netflix are vying for online eyeballs. IKEA is putting the finishing touches to the first of 25 shops it plans to open over the next seven years. Paul Polman, boss of Unilever, has described India as potentially the consumer giant’s biggest market. Reports put out by management consultants routinely point to 300m-400m Indians in the ranks of the global middle class. HSBC, a bank, recently described nearly 300m Indians as “middle class”, a figure it thinks will rise to 550m by 2025.

But for some of the firms trying to tap this “bird of gold” opportunity, as McKinsey once called it, an awkward truth is making itself felt: a lot of this middle class has little money to spend. There are many rich people in India—but they number in the mere millions. There are a great many more who have risen above the poverty line—but not so far above it that they spend much on anything other than feeding their families. And there is less in between the two than meets the eye.

Missing the mark

Companies that have tried to tap the Indian opportunity have found that returns fell short of the hype. Take e-commerce. The expectation that several hundred million Indians would shop online was what convinced Amazon and local rivals to invest heavily. Industry revenue-growth rates of well over 100% in 2014 and 2015 prompted analysts to forecast $100bn in sales by 2020, around five times today’s total.

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That now looks implausible. In 2016, e-commerce sales hardly grew at all. At least 2017 looks a little better, with growth of 25-30%, according to analysts (see chart 1). But that barely exceeds the 20% the industry averages globally. Even after years of enticing customers with heavily discounted wares, perhaps 50m online shoppers are active in India—roughly, the richest 5-10% of the population, says Arya Sen of Jefferies, an investment bank. In dollar terms, growth in Indian e-commerce in 2017 was comparable to a week or so of today’s growth in China. Tellingly, few websites venture beyond English, a language in which perhaps only one in ten are conversant and which is preferred by the economic elite.

India has yet to move the needle for the world’s big tech groups. Apple made 0.7% of its global revenues there in the year to March 2017. Facebook, though it has 241m users in India, probably the most in the world in one country, registered revenues of just $51m in the same period. Google is growing more slowly in India than in the rest of the world. Mobile phones have become popular as their price has tumbled—but most handsets sold are basic devices rather than the smartphones that are ubiquitous elsewhere in the world.

Eating their words

Fast-food chains once spoke of a giant market. Their eyes were bigger than Indian stomachs. Despite two decades of investment McDonald’s has hardly any more joints in India than in Poland or Taiwan. The likes of Domino’s Pizza and KFC have struggled to come close to expectations that were once sky-high. Starbucks says it has big plans for India but has opened about one new coffee shop a month over the past two years, bringing its total to around 100—on a par with Utah or the United Arab Emirates. A new Starbucks opens in China every 15 hours, adding to 3,000 already operating.

Executives remain relentlessly upbeat in public—even if investments do not always follow. Anurag Mehrotra, boss of Ford India, told the Financial Times in May that car sales in India were set to double every three to five years. That would be an extraordinary change in fortunes: sales grew by less than 20% overall in the six years to 2016. There is one car or lorry for every 45 Indians, according to OICA, a trade group. The Chinese own five times as many. Motorbike sales have grown fast but only because their price has tumbled by 40% since 2000, points out Neelkanth Mishra of Credit Suisse, another bank.

India-boosters point to middle-class services that have taken off. With 20% annual growth in passengers, aviation is already booming at the rate Mr Mehrotra hopes to see in the car industry. But taken together, all India’s domestic airlines are no larger than Ryanair, the world’s fifth-biggest carrier, according to FlightGlobal, a consultancy. SpiceJet, an airline, says that 97% of Indians have never flown. A mere 20m Indians travelled abroad in 2015, about one in 40 adults.

Optimists also argue that the rapid growth of things like Chinese mobile-phone brands shows that the Indian middle class is out there and spending—just not on Western brands. Locally based fast-food chains that undercut McDonald’s or KFC have done much better than the new arrivals. But local consumer businesses face much the same problem as multinationals. Inditex, Zara’s parent firm, has 46 clothes shops in India, fewer than in Ireland, Lithuania or Kazakhstan. For the kind of goods the global middle class aspires to own at least, executives whether at global or local firms clock the number of potential customers at 50m and no more. Even selling basic consumer goods does not necessarily work. Hindustan Unilever, which purveys sachets of shampoo for just a few rupees, has seen virtually no sales growth in dollar terms since 2012.

“The question isn’t whether Zara or H&M can open 50 stores in India. Of course they can. The question is whether they can open 500,” says a banker who asks not be named, on the ground that it is best not to be seen questioning the Indian middle-class narrative. “You can try to push beyond the 50m people who have money, but how profitable would that be? Companies can expand for a time, but the limits to growth are getting obvious.”

The bullish argument that brought Western brands to India was basically this: although the country remains, for the most part, very poor, its population is so enormous that even a relatively small middle class is large in absolute terms, and fast overall growth will, as in China, quickly increase its size yet further. This assumes two things. One is that the middle class in India is the same relative size as in other developing countries where marketers have succeeded in the past. The other is that growth will benefit this middle class as much as other parts of the population. Neither is true in India, which as well as being poor is deeply unequal, and becoming more so.

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For all the talk of wanting to tap the middle class, no firm moving into India thinks it is targeting the middle of the income distribution. India’s mean GDP per head is just $1,700, and 80% of the population makes less than that. Adjust for purchasing-power parity by factoring in the cheaper cost of goods and services in India and you can bump the mean up to $6,600. But that is less than half the figure for China (see chart 2) and a quarter of that for Russia. What is more, foreign companies have to take their money out of India at market exchange rates, not adjusted ones.

Defining the middle class anywhere is tricky. India’s National Council of Applied Economic Research has used a cut-off of 250,000 rupees of annual income, or about $10 a day at market rates. Thomas Piketty and Lucas Chancel of the Paris School of Economics found in a recent study that one in ten Indian adults had an annual income of more than $3,150 in 2014. That leaves only 78m Indians making close to $10 a day.

Meager market

Even adjusting for the lower cost of living, that is hardly a figure to set marketers’ heartbeats racing. The latest iPhone, which costs $1,400 in India, represents five month’s pay for an Indian who just makes it into the top 10% of earners. And such consumers are not making up through growing numbers what they lack in individual spending power. The proportion making around $10 a day hardly shifted between 2010 and 2016.

Another gauge is whether people can afford the more basic material goods they crave. For Indians, that typically means a car or scooter, a television, a computer, air conditioning and a fridge. A government survey in 2012 found that under 3% of all Indian households owned all five items. The median household had no more than one. How many of them will be anywhere near able to buy an iPhone or a pair of Levi’s if they cannot afford a TV set?

To get in the top 1% of earners, an Indian needs to make just over $20,000. Adjusted for purchasing-power parity, that is a comfortable income, equating to over $75,000 in America. But in terms of being able to afford goods sold at much the same price across the world, whether a Netflix subscription or Nike trainers, more than 99% of the Indian population are in the same league as Americans that count as below the poverty line (around $25,000 for a family of four), points out Rama Bijapurkar, a marketing consultant.

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The top 1% of Indians, indeed, are squeezing out the rest. They earn 22% of the entire income pool, according to Mr Piketty, compared with 14% for China’s top 1%. That is largely because they have captured nearly a third of all national growth since 1980. In that period India is the country with the biggest gap between the growth of income for the top 1% and the growth of income for the population as a whole. At the turn of the century, the richest 10% of Indians made 40% of national income, about the same as the 40% below them. But far from becoming a middle class, the latter’s share of income then slumped to under 30%, while those at the top went on to control over half of all income (see chart 3).

Such economic success at the top leaves less for everyone else. Consider the 300m or so adults who earn more than the median but less than the top 10%. This group has fared remarkably badly in recent decades. Since 1980, it has captured just 23% of incremental GDP, roughly half what would be expected in more egalitarian societies—and less than that captured by the top 1%. China’s equivalent class nabbed 43% in the same period.

The rich get richer

Some have doubts about Mr Piketty’s methodology. But other surveys suggest similar distribution patterns. Looking at wealth as opposed to income, Credit Suisse established in 2015 that only 25.5m Indians had a net worth over $13,700, equating roughly to $50,000 in America. And two-thirds of that cohort’s wealth was held by just 1.5m upper-class savers with at least $137,000 in net assets.

India’s middle class may be far from wealthy, but the rich are truly rich. There are over 200,000 millionaires in India. Forbes counts 101 billionaires and adds one more to the list roughly every two months. It shows. The Hermès shop next door to the Honda dealership frequented by Mr. Srinath sells scarves and handbags that cost far more than his scooter. Flats in posh developments start at $1m. In other emerging economies, there are fewer very rich and a wider base of potential spenders for marketers to tap.

In absolute terms, India has wealth roughly comparable to Switzerland (population 8m) or South Korea (51m). Although India’s population is almost the size of China’s, it is central Europe, with a population about the size of India’s top 10% and boasting roughly the same spending power, that is a better comparison. Global companies pay attention to markets the size of Switzerland or central Europe. But they do not look to them to redefine their fortunes.

Confronted by this analysis, India bulls concede the middle class is comparatively small, but insist that bumper growth is coming. The assumptions behind that, though, are not convincing. For a start, the growth of the overall economy is good—the annual rate is currently 6.3%—but not great. From 2002 China grew at above 8% for 27 quarters in a row. Only three of the past 26 quarters have seen India growing at that sort of pace.

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Another assumption is that past patterns will no longer hold and that the spoils of growth will be distributed to a class earning decent wages and not to the very rich or the very poor. Yet the sorts of job that have conventionally provided middle-class incomes are drying up. Goldman Sachs, another bank, estimates that at most 27m households make over $11,000 a year—just 2% of the population. Of those, 10m are government employees and managers at state-owned firms, where jobs have been disappearing at the rate of about 100,000 a year since 2000, in part as those state-owned enterprises lose ground to private rivals.

The remaining 17m are white-collar professionals, a lot of whom work in the information-technology sector, which is retrenching amid technological upheaval and threats of protectionism. In general, salaries at large companies have been stagnant for years and recruitment is dropping, according to CLSA, a brokerage.

Might those below the current white-collar professional layer graduate to membership of the middle class? This happened in China, where hordes migrated from the countryside to relatively high-paying jobs in factories in coastal areas. But such opportunities are thin on the ground in India. It has a lower urbanisation rate than its neighbours, and a bigger urban-rural wage gap, with little sign of change. It is not providing jobs to its young people: around a third of under-25s are not in employment, education or training.

There are other structural issues. Over 90% of workers are employed in the informal sector; most firms are not large or productive enough to pay anything approaching middle-class wages. “Most people in the middle class across the world have a payslip. They have a regular wage that comes with a job,” points out Nancy Birdsall of the Centre for Global Development, a think-tank. And women’s participation in the workforce is low, at 27%; worse, it has fallen by around ten percentage points since 2005, as households seem to have used increases in income to keep women at home. Households that might be able to afford luxuries if both partners worked cannot when only the man does.

Spent force

Across the income spectrum, households that do make more money tend to spend it not on consumer goods but on better education and health care, public provision of which is abysmal. The education system is possibly India’s most intractable problem, preventing it becoming a consumer powerhouse. Attaining middle-class spending power requires a middle-class income, which in turn requires productive ability. Yet most children get fewer than six years of schooling and one in nine is illiterate. Poor diets mean that 38% of children under the age of five are so underfed as to damage their physical and mental capacity irreversibly, according the Global Nutrition Report. “What hope is there for them to earn a decent income?” one senior business figure asks.

None of this leaves India as an irrelevancy for the world’s biggest companies. Whether India’s consumer class numbers 24m or 80m, that is more than enough to allow some businesses to thrive—plenty of fortunes have been made catering to far smaller places. But businesses assuming the consumer pivot in India is the next unstoppable force in global economics need to ask themselves why it already looks to have run out of puff—and whether it is likely to get a second wind any time soon.

This article appeared in the Briefing section of the print edition under the headline “The elephant in the room”

BanyanAsia is taking the lead in promoting free trade

Asian voters know open markets have lifted billions of them out of poverty

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 Print edition | Asia

Jan 24th 2018

THE obituary of the Trans-Pacific Partnership (TPP) was widely written when Donald Trump pulled America out of the 12-country free-trade deal on the third day of his presidency. Yet, a year later and against all the apparent odds, the pact lives on. On January 23rd its remaining 11 members met in Tokyo to thrash out the final details of pressing ahead regardless. The plan is to sign a final agreement in March, to come into force in 2019. It will be one of the world’s most exacting trade pacts, measured by openness to investment from other members, the protection of patents and environmental safeguards.

The pact’s resurrection is one of the more unlikely events in a year of surprises. After all, America accounted for almost two-thirds of the original bloc’s $28trn in annual output. Access to the vast American market was what made other members readier to open up their own. Moreover, Mr. Trump’s retreat had sent a dismal message about the prospects of the open, rules-based order that America had underwritten. The Asia-Pacific region had benefited more than any from that order in recent decades—yet Mr. Trump was declaring multilateralism dead and signalling an intention to raise barriers to trade. Soon afterwards, he ordered South Korea to renegotiate its free-trade agreement with America. And this week he imposed punitive tariffs on imported washing machines and solar panels, aimed at South Korean and Chinese manufacturers (see article).

In spite of this forbidding backdrop, the dauntless 11—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam—have regrouped. In Vietnam in November their leaders sketched out an agreement on the core features of a revised deal. The pact’s name has changed, to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in case the original had tripped too lightly off the tongue. But remarkably few (22, to be precise) of the original provisions have been frozen. The victims are mainly strictures insisted on by America. For instance, copyright has been reduced from 70 to 50 years. And special protections for biologics, a booming category of drugs, have been suspended.

A few concessions were made to those still in the pact. Malaysia will not immediately have to liberalise its state-owned enterprises. Communist Vietnam can put on hold new rules about resolving labour disputes and allowing independent trade unions.

The biggest foot-dragger was Canada, the second-biggest economy in the group (after Japan), which had wanted special treatment for cultural industries such as television and music—a concern for Francophone Canadians—and changes to the rules on imports of cars. Canada has a big car-parts industry, which caters mainly to American carmakers. Now that America has dropped out of the pact, fewer cars from this integrated North American supply chain will have enough content from CPTPP countries to qualify for tariff-free access to other members. But Canada will still have to open its market to Asian cars, subjecting its car-parts firms to a one-sided dose of foreign competition.

In the end Canada’s concerns were met with a favourite TPP trick: “side letters” between it and other members, that are not officially part of the deal. One of them promised Canada greater access to the Japanese car market. CPTPP’s members were sufficiently determined to revive the pact, in other words, that they gritted their teeth and compromised.

How does CPTPP carry on, even as multilateralism has fallen out of favour elsewhere? For some members, including Japan, which has done most to keep the show on the road, there is a strategic imperative: to prop up the old rules-based order in America’s absence. (The less-welcome alternative might be an order overseen by China.) Bilahari Kausikan, a Singaporean ambassador-at-large, predicts that America will eventually return to the partnership. After all, CPTPP (and TPP before it) is not typical of the tariff-cutting deals that Mr. Trump claims have shafted America. Rather, it breaks ground in setting American-inspired standards and safeguards for everything from online commerce to creative industries. Mr. Kausikan believes it is only a matter of time before American firms are clamouring to take part.

Before then, others may seek to join an arrangement designed to be infinitely expandable. South Korea, Indonesia and the Philippines have expressed interest—even Britain has. And CPTPP is not the only trade deal making progress in Asia. Japan has just concluded a sweeping agreement with the European Union. The Association of South-East Asian Nations is seeking to create a vast free-trade area encompassing China and India, among others.

Fair blow the Asian trade winds

In Asia free trade is more popular than it is in America and much of Europe. The question is why. One explanation is that in the West, trade creates winners and losers; in Asia, at a lower stage of development, it mainly creates winners, though some gain more than others.

Yet that is not quite right. Asia’s pell-mell development creates lots of losers. It can be traumatic to be forced off your land to make way for a palm-oil plantation or a high rise. Inefficient rice-farmers across the continent have much to fear from free trade. Even in prosperous Singapore, points out Deborah Elms of the Asian Trade Centre, an advocacy group, it is still an emotional wrench to see nearly every landmark of your childhood vanish in an orgy of rebuilding.

The difference is that most Asians don’t have what Mr Kausikan calls the illusion of choice. Trade is how billions of them have attained a modicum of prosperity. And thanks to rapid, trade-fuelled growth, the drawbacks of opening markets seem relatively insignificant. For as long as wrenching change is offset by the prospect of a better tomorrow, Asia will fly the flag of global trade even when it is being furled elsewhere.


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Stratfor Worldview March 11 2018


The White House Takes on the World: The White House will bump up against the laws of the United States and the central tenets of the World Trade Organization as it launches a global trade offensive in the name of national security. U.S. production costs will rise in response, and countries will target America’s politically sensitive sectors in retaliation.

Trade, Technology and Taiwan: Tension between the United States and China will spike, putting businesses caught in the fray at risk. While the White House targets Chinese trade and investment with its protectionist policies, Congress will rouse Beijing’s ire by upgrading U.S. ties with Taiwan.

A Race to the Cutting Edge: As the United States turns its attention toward its competition with China and Russia, the development of disruptive weapons technology among the great powers will further degrade the world’s arms control treaties. Beijing will funnel state funds toward artificial intelligence research in hopes of catching up with its American adversary while the West struggles to navigate antitrust and data privacy concerns.

The Stubborn Problem of Nuclear Proliferation: Building on a brief detente, South Korea will try to persuade the United States and North Korea to reconcile their mostly intractable positions on the issue of denuclearization. Meanwhile, Iran will rely on Europe’s support to keep its nuclear deal alive as Saudi Arabia uses the same agreement to negotiate a civilian nuclear program of its own.

Fighting for the Future of Europe: Headed by a divided Germany and an emboldened France, the debate over euro zone reforms will expose the deeper divides threatening Continental unity as Italy stands ready to flout any rules-based regime that Berlin and its northern allies propose.

Balancing Oil and Building Batteries: Global oil producers, led by Saudi Arabia and Russia, will extend and adjust their agreed-upon production cuts to counter U.S. shale output over the long run. In the alternative energies sector, battery developers will have to contend with the Democratic Republic of the Congo’s attempt to rake in more revenue as the world’s demand for cobalt grows.

Trouble Brews in the Americas: Mexico will let Canada take the lead in confronting the United States on trade issues during NAFTA negotiations. Trade tension will likewise mar Washington’s rocky relationship with Brazil as the two remain at odds over how to manage Venezuela’s economic crisis and its regional spillover.

India Protects Its Periphery: China’s deep pockets and wide maritime reach will draw India into closer defense cooperation with the United States, Japan and Australia as it works to balance against its increasingly powerful neighbor.

Ankara’s Ambitions Take Center Stage: A rising power in its own right, Turkey will push its troops deeper into northern Syria and Iraq while laying claim to the eastern Mediterranean Sea, upsetting Cyprus’ plans for the energy resources that lie beneath the disputed waters.

Global Trends

The Bull in the China Shop

As U.S. President Donald Trump’s 2018 trade agenda put it, “these are exciting times for U.S. trade policy.” That may be the understatement of the year. The White House is ready to take aim at the global economy this quarter, and the bull’s-eye is sitting squarely on Beijing.

Trump is convinced that China’s economic rise poses a national security threat. And when it comes to China’s penchant for dumping goods, enacting unfair subsidy regimes, distorting the market and violating intellectual property rights, many countries in the developed world would agree. The United States, however, isn’t willing to wait around for the European Union and Japan to address these challenges in a managed, multilateral forum. Instead it will follow an “act now, talk later” strategy that it believes — rightly or wrongly — will coerce Beijing into coming to the negotiating table on Washington’s terms. The United States also hopes its tactics will galvanize free-trade advocates to reform institutions like the World Trade Organization (WTO) so that they, too, can bring China in line with international trade and investment norms. That’s the idea, anyway.

But just as the United States claims that China benefits from a rules-based global trade order [1] by refusing to play by those rules, the White House is bending many of them to make its point. For instance, the sweeping tariffs on steel and aluminum [2] that Washington will use to combat overcapacity in the name of national security will produce a litany of legal challenges within the United States and at the WTO, as affected countries — including members of the European Union, China, Brazil, Japan and South Korea — protest the measures.

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In fact, many will retaliate with anti-dumping and countervailing duties of their own against the United States, taking care to target politically sensitive sectors like agriculture ahead of midterm elections in November. These reprisals may even take on an anti-American tone: The European Union has already threatened to crack down on iconic American imports, including Harley Davidson motorcycles, bourbon and blue jeans.

By using creative arguments to wield the most powerful trade weapons in its arsenal, the United States will back the WTO into a corner. Legal challenges in the organization take years to play out, but if the arbitration ends in Washington’s favor, it will endorse a dangerous precedent of invoking national security to justify economic protectionism. Should the WTO rule against the United States, the White House could opt to ignore the decision altogether by citing American sovereignty, undermining the institution’s credibility in the process. (Notably, the White House will also continue to paralyze the WTO’s arbitration system by blocking new appointments to the appellate body.)

In the meantime, steel and aluminum consumers in the United States will have to bear higher input costs. Contrary to Trump’s logic that higher tariffs will reduce trade deficits, they aren’t guaranteed to make Chinese steel less competitive in the United States. Metals exporters subject to U.S. tariffs will divert their goods to other markets around the world, which in turn will cause big metals importers to throw up barriers to protect their markets from a flood of foreign products. Amid the ensuing trade scramble, the United States hopes to persuade the European Union and Japan to join its crusade to counter excess global steel capacity. But Washington’s partners may instead choose to stand up to its blatant protectionism and push back against the United States under the auspices of the WTO.

The United States’ opening trade move may be to target overcapacity, but intellectual property will be high on its list of concerns as well. Under a Section 301 investigation into whether China’s technology transfer and investment requirements of American firms operating inside its borders are discriminatory, Washington will take action against Beijing — both within and beyond the bounds of the WTO. (The investigation must wrap up by August, but Washington may release its findings before then.) The United States is already entertaining some legally questionable moves, such as declaring a national emergency [6] in response to China’s intellectual property violations, to impose punitive measures and erect safeguards around certain U.S. industries like consumer electronics, household appliances and automotives. Along with Europe, it will also continue to block Chinese investments in the tech sector as it sees fit, pointing to national security as its motive.

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China, of course, won’t take Trump’s trade jabs lying down. In addition to imposing its own restrictions on some U.S. agricultural goods, Beijing is likely to selectively apply regulatory pressure on American companies with stakes in China. And when the time comes for Beijing to negotiate with Washington, it will have a handful of concessions — expanding U.S. access to the Chinese market and boosting Chinese imports of U.S. goods in certain sectors, to name a few — to offer. The external pressure mounting against China’s economy may even accelerate the country’s ongoing attempts to tackle overcapacity at home.

Though the White House may be willing to stomach the political risk attached to tariffs that ratchet up metals prices for U.S. industrial consumers, it will show more caution as it navigates North American trade negotiations. The ongoing NAFTA talks will stretch beyond this quarter, thanks to major sticking points on rules of origin requirements for the auto sector and to Canada’s more assertive stance against the United States. So far, domestic political checks on Trump’s actions have dissuaded the president from abruptly withdrawing from the pact. As he leans on more aggressive trade measures in the months ahead, overruling defenders of free trade within his administration, Congress will take on a more assertive role in regulating the country’s commerce abroad. Though U.S. lawmakers will have greater room to insulate existing free trade agreements, including NAFTA, their ability to counter unilateral tariffs leveled by the executive branch will be limited.

The White House’s trade policy will be one of several factors fueling market volatility [in the second quarter. Any uptick in expectations of inflation could lead to four hikes in U.S. interest rates this year instead of three. While by no means certain, this outcome would cause overvalued asset prices in U.S. equity markets to deflate. Higher interest rates could also strengthen the dollar and put more pressure on the central banks of the euro zone, Japan and China to tighten their monetary policies as they guard against the outflow of capital — with consequences for economic growth that could ripple across the globe.

Reining in Rogues and Rivals

The president’s approach to trade offers yet another example of his willingness to override the concerns of national security professionals within his administration on certain issues. Many have called for a more measured and targeted approach to avoid entrapping strategic U.S. allies and increasing the costs of U.S. defense. Still, as long as these voices remain in the White House, they will continue to restrain Trump’s responses to thornier foreign policy matters.


Among them will be nuclear containment. Despite worsening military friction between the United States and North Korea this quarter, a U.S. strike on the Korean Peninsula will remain an unlikely prospect — particularly given the promised summit between Trump and North Korean leader Kim Jong Un. Meanwhile, even as the United States urges Europe to threaten Iran with sanctions related to its ballistic missile program, Washington will stop short of tearing up Tehran’s nuclear deal altogether. But new nuclear proliferation concerns are emerging in the Middle East. Having already secured Russia’s stamp of approval for a preliminary roadmap, Saudi Arabia will use the Joint Comprehensive Plan of Action between Iran and global powers as a framework for a deal on a civilian nuclear program in the kingdom that includes domestic enrichment rights. Though it won’t be thrilled with the idea, the United States will work to ensure that it — rather than a rival like Russia — is best positioned to partner with allies in the Arab world that seek civilian nuclear programs of their own.

As it fends off Moscow’s encroachment in the Middle East, Washington will prepare for a more fundamental competition with Russia and China. At the beginning of the year, a series of U.S. defense reviews all but confirmed this by dubbing the two eastern giants the main strategic threats to the United States today. As the great power competition [9] takes shape, countries caught in the middle will have no choice but to adapt. Some, like Ukraine and Taiwan, will use the contest to fortify their alliances with the United States. Others, like the Philippines, will find it increasingly difficult to balance their relationships with both sides.

Spurred by their rivalry, the United States, China and Russia will continue to develop disruptive weapons technology. But rather than force all parties into compliance with existing arms treaties, this dangerous race is more likely to further degrade the deals [10] as time goes on. Accusations of violations will continue to fly between the United States and Russia as the pivotal Intermediate-Range Nuclear Forces Treaty steadily falls apart, undermining talks on the extension of the New Strategic Arms Reduction Treaty in the process.



A Mad Dash to the Cutting Edge

At the same time, the United States and China will jockey for the leading edge in artificial intelligence, which stands to have a profound impact on both military and civilian life. The United States is still ahead of China on this front, but Beijing is sprinting to catch up. And whereas big tech firms will have to contend with data privacy concerns and antitrust investigations in the West, China’s corporate giants will be largely unfettered in the mad dash for technological dominance [11].

Data privacy and its role in the evolving relationship among citizens, companies and states will take the spotlight in the European Union in the months ahead. Though European governments are particularly keen to protect the privacy rights of individuals, the Continent is simply too large a market for tech companies to avoid entirely. The General Data Protection Regulation set to take effect across the European Union on May 25 will thus set a global precedent for tech firms trying to navigate data privacy challenges.

The financial tech sector will follow the same path. Now that the speculative bubble around cryptocurrencies has burst, states will have more space to craft rules for cryptocurrencies, distributed ledger technology and initial coin offerings. Other industries — from supply chain management to insurance to health care — are beginning to adopt and regulate distributed ledger technology as well, albeit at a slower pace. Pending regulatory approval, a recently announced joint venture between IBM and Maersk Line shipping will bear watching because it may pioneer the use of block chain technology in the management of global supply chains.

As governments wrap their heads around the benefits of alternative currencies, more state-backed cryptocurrencies will crop up throughout the year, each driven by a different motive. For advanced countries, such as Estonia, cryptocurrency adoption is a natural step in digitizing their economies. For Iran and Russia, it could offer some insulation from the sanctions against them. Cryptocurrencies can also be useful to shambolic economies like Venezuela or Zimbabwe, where people have lost trust in fiat currencies, want to back their currencies with a commodity or hope to shield themselves from sanctions. And as small, dollarized countries like the Marshall Islands are discovering, cryptocurrencies can offer greater economic flexibility and an alternative to the dollar.

Old Challenges and New Appetites in Energy

The U.S. energy industry, a major steel consumer, will be hit hard this quarter by hefty steel tariffs that jack up its production costs — and at a time, no less, when U.S. oil output has broken records at over 10 million barrels per day. Though U.S. shale production may moderately decline as a result, it won’t be enough to ease the concerns of OPEC and its external partners, which have trimmed back their output in an effort to balance out the growing supplies of their American competitors. So far, production dips in Mexico, China and Venezuela are helping to offset the relentless climb in U.S. and Canadian output. OPEC and non-OPEC producers will probably extend their cuts through the end of the year when they meet in Vienna in June. The details of a longer-term agreement, led by Saudi Arabia and Russia, to counter U.S. shale production will likely emerge around the same time as well.

Elsewhere in the energy realm, demand for lithium-ion batteries — and the corresponding need for cobalt and lithium — is on the rise. At its heart is China, whose environmental reforms and technological drive are fueling the development and demand for electric vehicle batteries. But the world’s newfound appetite [15] for these resources will create a host of geopolitical challenges. This quarter, battery producers will have to grapple with new legislation in the Democratic Republic of the Congo, a major source of cobalt that will increase mining royalties owed to the government. And although Argentina and Chile are well-positioned to attract foreign investment into their lithium sectors, growing political instability in Bolivia will hurt its chances of doing the same.



The Bell Heard ‘Round the World

For months, the nuclear threat rising from the Korean Peninsula has transfixed the globe, but during this quarter, a different issue will take center stage in Asia: China’s brewing trade spat with the United States. With Washington determined to bring Beijing’s behavior in line with its own agenda, it will ratchet up pressure by targeting China’s economy and strategic interests in the region — including its claim to sovereignty over Taiwan. Rather than take these measures lying down, China will retaliate, sounding the bell for a boxing match that will determine the moves and countermoves of smaller nations caught between the sparring giants.

The impending showdown has loomed for over a year. Throughout 2017, China parried most of the United States’ jabs by answering Washington’s calls to ramp up economic pressure on North Korea. To that end, Beijing scaled back its trade ties and severed its lingering financial connections with Pyongyang. But as North Korea accelerated its weapons development, China’s ability to shape events on the peninsula waned, eroding its ability to link trade matters to security issues [17] in the process. No longer able to fend off the United States’ blows, and faced with the maturation of several U.S. punitive trade measures against it, China could respond in kind by slapping tariffs on U.S. exports, including on agricultural and chemical products; by challenging U.S. measures at the World Trade Organization (WTO); and by pressuring American firms operating in China. All the while, Beijing will try to create room for negotiation with Washington by offering to open up Chinese markets and boost its imports of U.S. goods. Despite its best efforts, however, the United States will keep its sights trained on Chinese trade practices.

The timing of this feud couldn’t be worse for Beijing. On the heels of a crucial quinquennial transition in political leadership, China’s elite face the daunting task of pushing through a raft of delayed socio-economic reforms. Over the past few months, the country has taken advantage of its robust economic growth and stable trade ties to advance important aspects of a plan to shift its economic model away from credit-based investment and toward domestic consumption. Among these steps are deleveraging China’s financial system and deeply indebted state-owned enterprises, eliminating overcapacity in resource-intensive industries, and increasing the enforcement of environmental regulations.

As Beijing expands its reforms in the months ahead, the central government will concentrate on making sure that local governments and industries effectively enforce them. So far China’s attempts to curb informal lending and overhaul the bloated state-run companies at the heart of the nation’s debt crisis have fallen short at the local level; governments and companies there collectively hold debt equal to about 80 percent of China’s gross domestic product. Likewise, the implementation of environmental laws has been lackluster across the southern provinces and among a handful of industries, including steel and coal. Beijing will try to rectify these problems by stressing the importance of compliance but doing so will carry the risk of widespread failure caused by overly hasty implementation or by local resistance stemming from a desire to preserve economic growth and jobs.

Having cemented his grip on power, President Xi Jinping will have few excuses left for such failures. He will rely in part on the new National Supervision Commission to keep a sharp eye on local officials’ performance and ensure that they don’t botch the job. One issue will draw particularly close attention from Beijing: easing China’s massive local debt burden by correcting an imbalance between the fiscal responsibilities of the central and local governments. Since the start of the year, Beijing has made significant headway on its long-delayed tax reforms, in part by shoring up local tax bases. Though its centerpiece property tax likely won’t emerge until 2020, the Chinese government will continue to enact fiscal reforms, encourage domestic consumption, reallocate resources to underdeveloped regions and lighten corporate debt loads in the coming months — all with the aim of setting the Chinese economy down a more sustainable path.

Of course, a deepening trade dispute with the United States [25] will present a formidable obstacle on the road to reform. On March 23, Washington will impose high tariffs on U.S. steel and aluminum imports to protect itself from what it deems to be unfair trade practices by other countries, including China. Because only about 2 percent of U.S. steel imports come from China, the volume of these imports will remain fairly steady. But China, which accounts for roughly half of the world’s steel production, will still be hit hard as steel prices tumble and major exporters divert their supplies from the United States, snatching up a portion of China’s market share along the way. To make matters worse, Washington’s actions could inspire European countries and Japan to erect their own trade barriers against China to protect producers at home. Each new source of strain could damage China’s steel industry, potentially reducing employment in the sector and undermining Beijing’s ability to address stubborn overcapacity issues.

Steel and aluminum tariffs aren’t the only weapon at the United States’ disposal, either. Washington could opt to establish tariffs or import quotas on major Chinese exports, such as electronics. It may also charge hefty fines intended to alter China’s market restrictions and intellectual property practices. Each of these tactics would become even more effective if the United States were to join forces with the European Union and Japan — a scenario China is undoubtedly eager to avoid. But try as it might, Beijing’s efforts to open up its services, finance and manufacturing industries to the rest of the world won’t satisfy Washington’s demands or discourage its scrutiny of Chinese investment in the high-tech sector.

Regardless of which means the United States uses to achieve its ends, China will have to expend more and more resources to prop up its precarious economy. And as its funds run low, Beijing will be forced to compromise on some of its key economic objectives. For instance, should Washington’s measures chip away at China’s growth or employment figures, Beijing may back off its planned production cuts and environmental reforms, or it may use lines of credit to buoy the economy. In the direst circumstances, the central government could even bolster the real estate market, potentially creating a real estate bubble and, in the long run, the heightened risk of a national debt default.

Second Quarter 2018 Economic and Wood Product News -Demographic Challenges, Update China’s Belt and Road Initiative, North Korean and Stratfor’s Outlook

Gone in their prime Many countries suffer from shrinking working-age populations

There are things they can do to mitigate the dangers

 Print edition | International

May 5th 2018| VILNIUS

workin age populations

MANY developed countries have anti-immigration political parties, which terrify the incumbents and sometimes break into government. Lithuania is unusual in having an anti-emigration party. The small Baltic country, with a population of 2.8m (and falling), voted heavily in 2016 for the Lithuanian Farmer and Greens’ Union, which pledged to do something to stem the outward tide. As with some promises made elsewhere to cut immigration, not much has happened as a result.

“Lithuanians are gypsies, like the Dutch,” says Andrius Francas of the Alliance for Recruitment, a jobs agency in Vilnius, the capital. Workers began to drift away almost as soon as Lithuania declared independence from the Soviet Union in 1990. The exodus picked up in the new century, when Lithuanians became eligible to work normally in the EU. For many, Britain is the promised land. In the Pegasas bookshop just north of the Neris river in Vilnius, four shelves are devoted to English-language tuition. No other language—not even German or Russian—gets more than one.

Mostly because of emigration, the number of Lithuanians aged between 15 and 64 fell from 2.5m in 1990 to 2m in 2015. The country is now being pinched in another way. Because its birth rate crashed in the early 1990s, few are entering the workforce. The number of 18-year-olds has dropped by 33% since 2011. In 2030, if United Nations projections are correct, Lithuania will have just 1.6m people of working age—back to where it was in 1950.

Lithuania was an early member of a growing club. Forty countries now have shrinking working-age populations, defined as 15- to 64-year-olds, up from nine in the late 1980s. China, Russia and Spain joined recently; Thailand and Sri Lanka soon will. You can now drive from Vilnius to Lisbon (or eastward to Beijing, border guards permitting) across only countries with falling working-age populations.

It need not always be disastrous for a country to lose people in their most productive years. But it is a problem. A place with fewer workers must raise productivity even more to keep growing economically. It will struggle to sustain spending on public goods such as defence. The national debt will be borne on fewer shoulders. Fewer people will be around to come up with the sort of brilliant ideas that can enrich a nation. Businesses might be loth to invest. In fast-shrinking Japan, even domestic firms focus on foreign markets.

The old will weigh more heavily on society, too. The balance between people over 65 and those of working age, known as the old-age dependency ratio, can tip even in countries where the working-age population is growing: just look at Australia or Britain. But it is likely to deteriorate faster if the ranks of the employable are thinning. In Japan, where young people are few and lives are long, demographers expect there to be 48 people over the age of 65 for every 100 people of working age in 2020. In 1990 there were just 17.

Some countries face gentle downward slopes; others are on cliff-edges. Both China and France are gradually losing working-age people. But, whereas numbers in France are expected to fall slowly over the next few decades, China’s will soon plunge—a consequence, in part, of its one-child policy. The number of Chinese 15- to 64-year-olds, which peaked at just over 1bn in 2014, is expected to fall by 19m between 2015 and 2025, by another 68m in the following decade, and by 76m in the one after that (see chart 1).

sloping off

Jörg Peschner, an economist at the European Commission, says that many countries face demographic constraints that they either cannot or will not see. He hears much debate about how to divide the economic cake—should pensions be made more or less generous?—and little about how to prevent the cake from shrinking. Yet countries are hardly powerless. Even ignoring the mysterious business of raising existing workers’ productivity, three policies can greatly alleviate the effects of a shrinking working-age population.

Never done

The first is to encourage more women to do paid work. University-educated women of working age outnumber men in all but three EU countries, as well as America and (among the young) South Korea. Yet female participation in the labour market lags behind men’s in all but three countries worldwide. Among rich countries, the gap is especially wide in Greece, Italy, Japan—and South Korea, where 59% of working-age women work compared with 79% of men.

Governments can help by mandating generous parental leave—with a portion fenced off for fathers—to ensure that women do not drop out after the birth of a child. And state elderly care helps keep women working in their 50s, when parents often become needier. But a recent IMF report argues the greatest boost to recruiting and keeping women in paid jobs comes from public spending on early-years education and child care.

Employers can do more too, most obviously by providing flexible working conditions, such as the ability to work remotely or at unconventional hours, and to take career breaks. Fathers need to be able to enjoy the same flexible working options as mothers. Some women are kept out of the workforce by discrimination. This can be overt. According to the World Bank, 104 countries still ban women from some professions. Russian women, for example, cannot be ship’s helmsmen (in order, apparently, to protect their reproductive health). More often discrimination is covert or the unintended consequence of unconscious biases.

Countries can also tap older workers. Ben Franklin, of ILC UK, a think-tank, argues that 65, a common retirement age, is an arbitrary point at which to cut off a working life. And in many countries even getting workers to stick around until then is proving difficult. Today Chinese workers typically retire between 50 and 60; but by 2050 about 35% of the population are expected to be over 60. Thanks to generous early-retirement policies, only 41% of Europeans aged between 60 and 64 are in paid work. Among 65- to 74-year-olds the proportion is lower than 10%. In Croatia, Hungary and Slovakia it is below one in 20.

The levers for governments to pull are well known: they can remove financial incentives (tax or benefits) to retire early and increase those to keep working. Raising the state retirement age is a prerequisite almost everywhere; if the average retirement age were increased by 2-2.5 years per decade between 2010 and 2050, this would be enough to offset demographic changes faced by “old” countries such as Germany and Japan, found Andrew Mason of the University of Hawaii and Ronald Lee of the University of California, Berkeley.

Employers, too, will have to change their attitudes to older workers. Especially in Japan and Korea, where they are most needed, workers are typically pushed out when they hit 60 (life expectancy is 84 and 82 respectively). Extending working lives will require investment in continued training, flexible working arrangements, such as phased retirement, and improved working conditions, particularly for physically tough jobs. In 2007 BMW, a German carmaker, facing an imminent outflow of experienced workers, set up an experimental older-workers’ assembly line. Ergonomic tweaks, such as lining floors with wood, better footwear and rotating workers between jobs, boosted productivity by 7%, equalling that of younger workers. Absenteeism fell below the factory’s average. Several of these adjustments turned out to benefit all employees and are now applied throughout the company.

A final option is to lure more migrants in their prime years. Working-age populations are expected to keep growing for decades in countries such as Australia, Canada and New Zealand, which openly court qualified migrants. Others can try to entice foreign students and hope they stick around. Arturas Zukauskas, the rector of Vilnius University, thinks that he could improve greatly on the current tally of foreign students—just 700 out of 19,200. In particular, he looks to Israel, which has the highest birth rate in the rich world. Lithuania had a large Jewish population before the second world war, and many prominent Israelis have roots in the country. Partly to signal the academy’s openness, Vilnius University has started awarding “memory diplomas”, mostly posthumously, to some Jewish students evicted on Nazi orders.

The trouble is that the countries with the biggest demographic shortfalls are often the most opposed to immigration. For example, the inhabitants of the Czech Republic and Hungary view immigrants more negatively than any other Europeans do, according to the European Social Survey. Those countries’ working-age populations are expected to shrink by 4% and 5% respectively between 2015 and 2020. Countries that lack a recent history of mass immigration may have few supporters for opening the doors wider. Even if they wanted new settlers, they might have to look for them far afield. Countries with shrinking working-age populations are often surrounded by others that face the same problem.

“China has never been a country of immigrants,” explains Fei Wang of Renmin University in Beijing. It is unlikely to become one, but is trying to lure back emigrants and to attract members of the ethnic-Chinese diaspora. In February the government relaxed visa laws for “foreigners of Chinese origin”. In Shanghai, and perhaps soon in other cities, foreign-passport holders are allowed to import maids from countries such as the Philippines. That is a small step in the right direction.

italian jobs

Just as countries’ demographic challenges vary in scale, so the remedies will help more in some countries than in others. Take Italy and Germany. Both have shrinking working-age populations that are likely to go on shrinking roughly in parallel. But Italy could do far more to help itself. Because the women’s employment rate in Italy lags so far behind the men’s rate, its active population would jump if that gap closed quickly—and if everybody worked longer and became more educated (see chart 2). Germany could do less to help itself, and Lithuania less still.

In theory, every rich country can prise open the demographic trap. Governments could begin by lowering barriers to immigrants and raising the retirement age. They could entice more women into the workforce. They could raise the birth rate by providing subsidised child care, which would create a wave of new workers in a couple of decades, just when the other reforms are petering out. But, when a country is shrinking, many things come to seem more difficult. Earlier this year, Poland built up a large backlog of immigration applications, many of them from Ukrainians. It turned out that the employment offices were badly understaffed, and could not process the paperwork in time. They had tried to take on workers, but failed.

This article appeared in the International section of the print edition under the headline “Small isn’t beautiful”


Why people are working longer

Labour-force participation rates are rising for older people in advanced economies


The Economist explains

Jun 11th 2018

THE golden years of retirement, when decades of toil are traded for some downtime, are starting later. In the mid-1980s, 25% of American men aged 65-69 worked; today, nearly 40% do. The situation is the same for younger men. In 1994, 53% of 60- to 64-year-olds worked; now 63% do. American women are working longer too, and similar upticks have been witnessed in Japan and other parts of western Europe. Since unhealthy workers tend to retire earlier, many attribute the ageing workforce of today to improvements in health. Mortality rates for American men in their 60s have declined by 40% since 1980; for women, they have fallen by 30%. Education and occupation are also relevant. In countries of the OECD, the share of 55- to 64-year-olds with a college education has increased in the past three decades, and better-educated people tend to work longer, doing white-collar jobs. In a similar vein, the fact that modern jobs in general are less physically taxing than those of yore allows all people to work for longer or look for jobs suitable to their advancing years.

But these are not the primary drivers of the greying workforce, suggests Courtney Coile, an economist at Wellesley College. Social-security reforms and other institutional changes play a central role. In recent decades, many countries and companies have altered the way they fund pensions. About half of Americans working in the private sector participate in employer-sponsored plans. In the 1980s a third of these were “defined benefit” (DB) schemes, under which a company pays its retired employee a predetermined lump sum depending on tenure, age and past earnings. Now, though, “defined contribution” (DC) plans, for which employees contribute a percentage of their paycheques to their retirement fund, have largely supplanted DB plans. These are generally lower than DB pensions (hence their popularity with employers), so their recipients cannot afford to retire so early. By working longer, they increase the size of the pot. Researchers reckon the growth in DC plans has led to a five-month increase in the median retirement age.

Reductions in the generosity of social security and disability insurance have also had an impact. Since the 1990s, Italy, Germany, Japan and others have raised the minimum age at which citizens can accept retirement benefits. The labour-force participation rates for older workers there have risen in lock-step, with a one- to two-year lag. A final factor is the increased number of women in the workforce: about 44% more hold a job now, across 12 developed countries, than in 1995. And, like men, they are working longer. Given that married couples often retire at the same time, this “co-ordination”, which sees men working longer to keep up with Stakhanovite wives, can have profound effects. In Canada, for example, it could explain around half the change in the labour-force participation rates of married men aged 55-64.

This is good news. The “lump of labour” fallacy holds that older workers threaten economic prosperity by crowding out younger workers. (The same argument had been used to exclude women from the workforce.) In fact the economies of many countries with ageing workforces are growing quite quickly. Older workers use their wages to buy goods and services made by other workers. And as Lisa Laun of Sweden’s Institute for Evaluation of Labour Market and Education Policy points out, with more workers, of whatever age, tax revenues and pension contributions rise. That means a larger pie for everyone.

Not much leeway Singaporeans are in the dark about their next prime minister

Not that their views count for much

lee hsien loong

Print edition | Asia

Apr 25th 2018 | SINGAPORE

A PILLAR of stability, Lee Hsien Loong, son of Singapore’s independence leader, Lee Kuan Yew, has run the country since 2004. Despite a decline in his party’s popularity, the manicured electoral system has returned him to office time and again, most recently in 2015. The country is now more than halfway to the next election, which must be held in 2021 at the latest. As it nears, a tricky subject looms: who will replace Mr. Lee? He plans to step down as prime minister ahead of his 70th birthday in 2022. The question has the government on edge.

Mr. Lee will almost certainly win the next election. The ruling People’s Action Party has held power since before independence in 1965. It holds 83 of the 89 elected seats in Singapore’s parliament. Predicting the identity of the next prime minister is trickier. But a cabinet reshuffle this week provided clues. Three older ministers, all in their 60s, stepped down. Younger ones won more responsibility.

Mr. Lee’s possible successors include Heng Swee Keat, the finance minister, Ong Ye Kung, the education minister and Chan Chun Sing, newly promoted from the prime minister’s office to the Ministry of Trade and Industry. Mr. Heng, who has led the education ministry and the Monetary Authority of Singapore, as well as serving as an aide to Mr. Lee’s father, is regarded as the frontrunner. One former official praises him for his growing ease in the public eye, despite not being “a natural politician”. Wonkiness does not tend to hold Singaporean politicians back. His health, however, might: he suffered a stroke in 2016.

Public opinion is unlikely to play much part in the decision. In fact, the government is further crimping freedom of speech in a country not exactly known for it. In March parliament passed a law that allows police to ban the dissemination of videos or pictures of certain events. The sorts of incidents that qualify range from terrorist attacks to demonstrations that block pavements or disrupt business. Plans to put cameras linked to facial-recognition software on more than 100,000 lampposts will further discourage even the most respectable protests. Social media are also being scrutinized by a parliamentary committee which wants to fight “deliberate online falsehoods”. Whoever ends up in charge, the government will be well defended against unruly critics.

This article appeared in the Asia section of the print edition under the headline “Not much leeway

Haiyan Zhang

By Haiyan Zhang

Technical Director, Canada Wood Shanghai

May 30, 2018

 speakers Shanghai.jpg

Fire safety symposiums held in Shanghai and Beijing

Guest speakers at the event venue in Shanghai on April 27th.

Canada Wood China joined European Wood to hold symposiums on fire safety in timber structures. The first was in Shanghai on April 27th while the second was in Beijing on April 28th.

The seminars attracted more than 400 industry professionals including researchers, designers and developers. Five guest speakers from Canada, Europe and China gave presentations on fire safety attributes in modern timber structures. They also shared insight into the history and evolution of fire safety code requirements for timber structures in Canada and Europe. The latest in fire research, alternative solutions in fire safety design, and fire safety codes for timber structures in China were also discussed.

delegates shanghai.png

Audience members listen to a presentation at the event venue in Beijing on April 28th.

Officials from the Canadian Embassy, Canadian Consulate in Shanghai and MOHURD attended the seminars and made opening remarks.


Japan Housing Starts Summary for February & March 2018

By Shawn Lawlor

shawn lawlorDirector, Canada Wood Japan

May 30, 2018

Total February housing starts edged down 2.6% to 69,071 units. Wooden starts fell 3.2% to 38,340 units. Pre-fab housing fell 8% to 10,063 units. Post and beam housing declined 3.2% to 29,070. Platform frame starts fell 3.0% to 8,255 units. The decline in 2×4 starts was primarily attributable to a 5.9% decrease in multi-family rentals. Platform frame custom ordered and built for sale spec housing gained 0.8% and 4.4% respectively.

March housing activity decelerated significantly with an 8.3% drop in total starts. Rental housing fell 12.3% compared to owner occupied single family starts which dropped 4.2%. Total wooden housing retreated 4.3% to 39,736 units. Post and beam starts fell 4.3% to 30,106 units. Wooden pre-fab fell 4% to 911 units. Platform frame starts fell 4.4% to 8,719 units. As with the previous month, results for platform frame were dragged down by weakness in rentals; single family starts showed gains. Platform frame rentals fell 9.1% to 5,385 units, custom ordered single family homes increased 3.0% to 2,226 units and built for sale spec homes increased 7.4% to 1,086 units.

Japan Economic Update

By Shawn Lawlor

Director, Canada Wood Japan

May 30, 2018

According to Cabinet Office date, Japan’s first quarter GDP slipped by 0.2%, thereby ending two consecutive years of continuous growth. The decline was attributable to flat consumer spending and a slight decrease in capital investment. The majority of analysts contend that this decline is a temporary blip and that economic fundamentals remain strong. A tightening labour market resulted in a 1.3% year increase in average wages and inflationary pressures are picking up. Improved capital spending and exports are expected to Japan’s GDP is expected to return into positive territory for the balance of the year.


Leading Architectural Firm and Prefabricator in Korea Join Forces for the Creation of Industrialized Wood Frame House

By Tae Hwang

HwangProgram Manager / Market Development & Market Access, Canada Wood Korea

May 30, 2018

Gansam Architects & Partners, one of the top 10 architectural firms in Korea and Refresh House, the leading prefabricator-builder-developer of energy efficient wood frame houses, have joined their efforts together for the creation of small ready-to-order wood frame structure called “Off-site Domicile Module” or ODM. The ODM, with slogan of “Small but Enough,” has footprint of 7.25-meter x 3 meter rectangular shape with 20 m2 of floor area.

Several types of the module designed by Gansam will be built completely and entirely under the roof of Refresh House’s factory and can be transported to sites. The Nest, pictures shown in this article, is designed as small home consists of sleeping and living area, kitchen and bathroom. And other types for different uses include canteen, pop-up store, exhibition, café,etc. Also, you can order single module or two modules which can be joined at the site for more space.

Industrialized construction, off-site construction or prefabrication is gaining momentum in Korea as the weather dependent traditional site building is getting less and less productive due to harsher weather arising from climate change and the shortage of skilled labours combined with rising wages.

Korean Architecture Fair demos

Japanese-style housing projects planned

Update: June, 25/2018 – 14:56

TWGroup Corporation and Japan’s Hinokiya Group Co. on June 22 sign an agreement to develop housing and other projects in Việt Nam. — VNS Photo

Viet Nam News


HCM CITY — TWGroup Corporation and Japan’s Hinokiya Group Co. have signed an agreement to develop housing and other projects in Việt Nam, starting off with a Japanese-style housing project in HCM City next year.

The low-rise residential project will have intelligent solutions enabling residents to live close to nature.

TW said in a press release that the outstanding elements of the project would include a relaxing onsen area – a Japanese hot spring for dipping in the buff — and a Japanese-style park with fresh greenery.

Lê Cao Minh, general director of TWGroup, said: “Hinokiya is a leading corporation of Japan, a pioneer in bringing solutions to improve the quality of life.

“After contacting Hinokiya leaders and visiting their projects in Japan, we are really convinced by their convenience, intelligence, safety, and, especially, the humanity.

“Hinokiya builds not only housing but also pre-schools and nursing homes for old people.”

Hinokiya said it fully believed that the experience of both parties would create projects bearing their own marks, meeting the needs of customers for ideal living spaces.

The company, established in 1988, designs, builds, and sells houses; undertakes renovation, expansion, and reconstruction works; offers real estate brokerage services; leases houses; provides real estate investment and lease management consultancy, and produces and sells thermal insulation materials.

It also operates nursing and childcare facilities.

TWG has interests in property, construction, construction consultancy, education, and healthcare. — VNS

Chinas belt and Road

China’s ambitious Belt and Road Initiative, formally announced in 2013, has revived the country’s ancient concept of the Silk Road.


◾Despite its success in the developing world, Beijing’s approach to the Belt and Road Initiative has raised concerns over corrupt practices and financial sustainability in several recipient countries.

◾Beijing’s ambitious outreach, and its hidden agenda for strategic expansion riding on the initiative, will continue to fuel skepticism, suspicions and resistance among core powers.

◾Ultimately, given the sheer scale of the Belt and Road Initiative, snags, delays and cancellations are to be expected.

Since it began in 2013, the Belt and Road Initiative has become the centerpiece of China’s domestic and foreign policy, jump-starting diplomatic, financial and commercial cooperation between China and more than 70 neighboring countries across the Eurasian landmass. When complete, the massive infrastructure project will increase China’s overland and maritime connectivity to other regions, extending its trade and technology to new markets. The initiative also gives Beijing the opportunity to offload some of its excessive industrial capability, facilitating the necessary domestic industrial reforms it needs to establish a more stable economy.

In the past five years, China has spent at least $34 billion on the Belt and Road Initiative, focusing primarily on connectivity projects such as railways, ports, energy pipelines and grids. And though China has made major progress toward its long-term goals, it has also experienced several delays and setbacks. Given the sheer scale of the Belt and Road Initiative and how many large projects it encompasses, hold-ups, cancellations and failures are to be expected. But the causes of delays, in some cases a result of increased skepticism and resistance to China’s strategic aims, will continue to shape the future development of the Belt and Road Initiative.


The Big Picture

China’s ambitious Belt and Road Initiative, formally announced in 2013, has revived the country’s ancient concept of the Silk Road. Stratfor has closely tracked the development of this continent-spanning project, and in 2017 they published a four-part series discussing the underlying motivations behind this grand initiative — and the challenges it faces. Now that the Belt and Road Initiative has entered its fifth year, Stratfor is taking the time to examine the current state of the project and how its challenges will impact the way we analyze the initiative in the coming year

See China in Transition

Strategic Partnerships

Though one of Beijing’s stated goals is to foster inclusive Eurasian integration with the Belt and Road Initiative, its scheme so far has focused on the developing world, particularly countries in Central and Eastern Europe, South and Southeast Asia and Central Asia. It has achieved only limited success drawing developed states, such as Japan, and core European powers into the Belt and Road project. After all, though they may share business interests with China, they also maintain a strong and growing skepticism about Beijing’s means of increasing its competitiveness and its agenda for strategic expansion on the global stage.

According to a survey covering primarily emerging and transitional economies, Chinese financing — such as the Silk Road Funds and the Asian Infrastructure Investment Bank — provides a more significant boost to the majority of Belt and Road countries than their own domestic financing or even, in many cases, the International Monetary Fund, the World Bank and other international financing institutions.

China has many reasons for focusing on developing nations with strategic positions. And the developing countries themselves, which in many cases have weak economic foundations and governance, have been extremely welcoming to the Belt and Road Initiative. Many of these countries — 11 of which have been identified by the United Nations as the world’s least developed, such as Laos, Tanzania and Djibouti — have major infrastructure deficits but are eager to avoid the kind of restrictive, strings-attached financing offered by Western institutions. Since China’s approach to funding emphasizes non-interference and is generally unconditional and indiscriminate of regime, Beijing has achieved more access and goodwill than is usually given to its Western competitors. China’s methods to draw these smaller countries into its Belt and Road framework also offer them a way to leverage their strategic positions and balance regional powers such as Russia, the European Union and India.

Domestic Complications

China’s aspirations with the Belt and Road Initiative have increasingly been constrained by its own approaches and strategic objectives. Though the Belt and Road gained great success in the developing world, challenges over financing capabilities and political instability in the recipient states have repeatedly caused delays and even cancellations. This has been the case with several transportation and energy projects in countries such as Kazakhstan, Bangladesh, Myanmar and Pakistan. Beijing also had the unlikely hope that it could link several war-torn states, such as Afghanistan and Yemen, but that will certainly not happen in the foreseeable future.

Moreover, China’s partnership and perceived support for partner countries’ ruling regimes have led to domestic political polarization, opposition and international criticism. In some cases, leaders of these states have used the Belt and Road Initiative in service of their domestic political agendas, leveraging Beijing’s international clout to further their own international interests. And more significantly, corrupt governments have used Chinese funds for their own personal and political benefit.

Problem Countries

Problem Countries

problem Countries 2

Political corruption and instability have not only invited judgment but have also put Belt and Road projects at risk of delay. In Malaysia, for example, a game-changing May election turned several China-backed infrastructure projects into centerpieces of the political discourse. The new ruling power in Kuala Lumpur aims to investigate investments to not only delve into the corruption of the former government but to reduce its debt burden. Although Beijing’s policies are mostly to blame for such complications, China has also been frustrated by the liabilities caused by corrupt regimes. For instance, despite early investment, China has had to hold back some of its projects in politically risky countries such as Djibouti and Venezuela.

Finally, China’s eagerness to draw in partner countries provides these governments with leverage as they attempt to win investment from China’s rivals. Countries such as Thailand, Indonesia and some South Asian states, in particular, have been able to encourage Japan and India to compete with China over railways and hydropower projects at home, dampening Beijing’s objective of becoming the most influential regional power.

Debt Concern, or Debt Strategy?

China’s approach to debt financing in key strategic projects has also led to pushback, mainly over Beijing’s level of influence. For example, the East Coast Rail Link in Malaysia and the deep-water Kyaukpyu port in southern Myanmar are currently under review by the recipient governments, which are already critical of Beijing’s goal of securing supply routes other than the Strait of Malacca. Like Malaysia, Myanmar is concerned about the possibility of ending up in a “debt trap,” where China holds disproportionate control over the nation’s economy. After all, the $9 billion Kyaukpyu project is equivalent to 14 percent of Myanmar’s gross domestic product. As a result, the country is fearful that China could ultimately exert its influence to gain ownership of the strategically important Kyaukpyu port.

Myanmar’s concern is not unfounded. Both Sri Lanka and Pakistan — governments struggling with debt repayment and financing negotiations — have entered into “debt-for-assets” land-lease agreements with Chinese companies. In Sri Lanka, the Hambantota Port is now leased for 99 years, while areas around the Gwadar Port in Pakistan are leased for 43 years. In other states that already have high external debt or rely excessively on direct Chinese investment — such as Djibouti, Laos, Tajikistan, Kyrgyzstan and Montenegro — Beijing has used different forms of debt relief or forgiveness measures, in some cases resorting to acquiring the recipient country’s natural resources or long-term oil contracts to offset the loans. And speculation is rising over whether China will leverage its financing of strategic deep-water ports in countries like Myanmar and Djibouti to gain an advantage in the Indian Ocean supply routes. Just recently, China established its first overseas naval base in Djibouti.

High debt to GDP Ratio

Confronting the Core Powers

There is a growing wariness of China’s strategic intent and expanding influence with the Belt and Road Initiative. Beyond the concerns of developing states, China’s strategic rivals and powers throughout the developed world maintain a strong, if not growing, resistance to the project. Though core regional powers such as India, Russia and some European countries share business interests with China, they also maintain a strong and growing skepticism about Beijing’s means of increasing its competitiveness. And beyond that, China’s hidden agenda for strategic expansion on the global stage.

Despite India’s tactical recalibration to ease its tense relationship with China, New Delhi remains vehemently opposed to the China-Pakistan Economic Corridor. This is seen by India as part of Beijing’s strategy to encroach on the subcontinent and could potentially undermine New Delhi’s claims to the contested Kashmir region. Indeed, India’s opposition has factored significantly in some South Asian states’ strenuous geopolitical balance. For instance, last year Nepal scrapped a $2.5 billion Budhi Gandaki hydropower project, because of Indian concerns.

In Europe, core EU members such as Germany and France have found Beijing’s outreach in Central and Eastern Europe to be more competitive than cooperative, viewing the project as an attempt to dilute the bloc’s rule and agenda. This led to ongoing criticism and increased scrutiny over Chinese investment and projects in Eastern and Central Europe. The proposed railway between Budapest and Belgrade — a key piece of Beijing’s strategy to link to the Mediterranean port of Piraeus — is under review.

Where China’s outreach has received some success in the developed world is in Russia and, to some extent, Japan. Initially suspicious of the Belt and Road Initiative, Russia has grown more amiable as it recognizes how Chinese investment can benefit its own economy and foster development in Central Asian countries over which it exerts significant control. Moscow has begun supporting and even participating in some Belt and Road projects. Most recently, it entered into a co-financing agreement with China for close to 70 projects under its own Eurasian Economic Union, a move that will greatly ease the barriers to Beijing’s investment in some Eastern European and Central Asian countries as well as the Arctic.

Japan, for its part, continues to refrain from openly endorsing the Belt and Road Initiative. But in more tacit ways, the Japanese government is working to encourage its companies to participate in some of China’s projects. This is especially true in areas such as Central Asia and Africa, where Tokyo hopes to boost Japanese corporations’ waning overseas presence.

Looking Forward

Despite these successes, Beijing’s ambitious outreach will continue to fuel skepticism, suspicion and resistance among the core powers and complicate its agenda, especially as it works to hedge against increased pressure from the United States. And China has even inadvertently encouraged loose regional blocs to counter it. Japan and India, for instance, have begun working on an alternative to the Belt and Road Initiative on the African continent, participating in a U.S.-led proposal to establish a quadrilateral framework for infrastructure investment. Elsewhere, Australia is pledging an extensive campaign of aid, trade and diplomacy in the South Pacific, hoping to regain the position it has lost to China in its traditional backyard.

The reality is that none of these countries’ proposals can outdo China’s enormous and well-funded infrastructure plan. They lack China’s capital, human resources and moral flexibility. For participating countries, the long-term benefits of Chinese investment and infrastructure construction in many ways outweigh the risks. So, while investors should be aware that China will continue to experience setbacks in its Belt and Road projects, the initiative is still moving along relatively successfully, as are Beijing’s expansionary aspirations.


Economic scramble for North Korea picks up pace

Pyongyang appears to favour state-guided Chinese model over unfettered capitalismNorth Korea

Bryan Harris in Seoul, Lucy Hornby in Beijing and Demetri Sevastopulo in Washington JUNE 19, 2018

When Donald Trump outlined his vision for the economic development of North Korea, he played on western ideals of luxurious apartments with sea views.

But just days after a landmark summit with the US president, North Korean leader Kim Jong Un has made clear he has a different model in mind: China.

The 34-old-year dictator was set to depart Beijing on Wednesday after a two-day tour aimed at winning China’s financial backing for what Pyongyang says will be a new era of reduced international tensions and domestic economic development.

Scepticism persists about North Korea’s true ambitions, but the renewed optimism has investors salivating over the country’s untapped markets, including its substantial mineral deposits and inordinately cheap workforce.

As the scramble for North Korea picks up pace, however, it is becoming clear that Pyongyang is veering not towards unfettered capitalism but rather a state-guided model along the lines of its huge neighbour.

Beijing — with its long history of friendship and political affinity with Pyongyang as well as its geographical proximity — appears poised to reap its dividend.

North Korea 2.jpg© AP

“China is eager to encourage the North Koreans to take up the Chinese model because it will bind Pyongyang closer to Beijing and therefore lower the chances of Pyongyang either falling into the US orbit or experiencing a democratic uprising against the Kim regime,” said Dennis Wilder, a former top China analyst at the CIA.

China is holding out the promise of economic development to Mr. Kim if he lowers tensions with the US, Mr. Wilder added.

Long viewed as the last bastion of Stalinist economics, North Korea has undergone a period of quiet but transformative change since Mr. Kim took power in 2011.

The regime introduced agricultural reforms in 2012, legal revisions in 2014 and an overhaul of enterprise laws in 2015 — all of which loosened state control over the market and have contributed to an uptick in wages and the quality of life.

But most of the changes have been spearheaded by ordinary North Koreans, who have found themselves free to eke out a living through private enterprise within the shadows of the state’s hulking institutions.

North Korea 3

Unlike his father and predecessor Kim Jong Il, Mr. Kim has allowed marketisation to flourish and has vowed to pursue economic development. These changes, however, have not been accompanied by political liberalisation.

“He is copying China without admitting it. These are reforms without openness,” said Andrei Lankov, a North Korea expert at Kookmin University in Seoul.

“North Korea wants foreign direct investment. The problem for them now is they don’t know how to get it,” added Prof Lankov, who regularly travels to the reclusive nation.

In this regard, Beijing appears to be willing to offer assistance. Last month, the Chinese Communist party escorted a group of North Korean officials around Beijing to study “reform, opening up and economic development”, according to the Global Times, a Chinese newspaper.

Their trip followed a visit by the Chinese ambassador to Sinuiju, North Korea’s special economic zone near the Chinese border, as part of a broader push by Beijing to promote its model of controlled economic opening.

wage growth North korea.gif

Mr. Kim’s interest in the Chinese model was further highlighted by his inclusion of Pak Pong Ju, a key official spearheading North Korea’s economic reform, in this week’s delegation to Beijing.

“This visit to China was primarily aimed at winning economic support,” said Lee Seong-hyon, researcher at Sejong Institute in Seoul. “China’s economic model is the most viable, realistic option for North Korea and [Chinese President Xi Jinping] must have assured Kim about how North Korea can achieve economic development without risking political stability.”

One part of the model that North Korea has already sought to replicate are the special economic zones (SEZs), which China used effectively in southern cities Shenzhen and Zhuhai.

North Korea operates more than 20 SEZs, mostly in its border regions, although few have attracted foreign investment.

Even before the implementation of international sanctions, the attractiveness of the zones was undercut by entrenched North Korean bureaucracy, a lack of infrastructure — including electricity and roads — and the fear that assets could be expropriated.

av ratio offical_unofficial jobs to total income

“Sometimes they even put these SEZs in the middle of nowhere, so they could not cause a political disturbance,” said Prof Lankov.

“North Korea always wanted investment but on its own conditions. China used to be annoyed by these conditions. But now that Beijing is in a trade war with the US, it may accept.”

Lee Sung-yoon, a Korea expert at Tufts University, cast doubt on the scope of economic reform in North Korea, saying that Mr. Kim only sought “controlled SEZs which are more like enclaves for generating foreign currency”.

“Genuine reform and opening would entail liberalising banking and the private sector [and increasing] transparency in finance and trade — all anathema to long-term regime preservation,” he added.

South Korea is also anticipating economic liberalisation and the lifting of sanctions.


North Korea nuclear tensions


Kim Jong Un visits Beijing after Trump summit

The Moon Jae-in administration has already outlined to Mr. Kim its plans to develop rail routes along North Korea’s east and west coasts, which could integrate the reclusive nation into the wider region.

The country’s dominant conglomerates, meanwhile, have established task forces to probe opportunities in the North amid concerns about the longer-term economic outlook in South Korea.

According to a survey of 167 businesses earlier this month, almost 75 per cent would be prepared to invest in the North if sanctions were lifted. Companies that stand to benefit, such as steel and cement groups, have seen their stock prices soar in recent weeks.

Shares in Hyundai Cement rose more than 500 per cent between March and June as detente unfolded on the Korean peninsula. US-North Korea summit: a win for Kim Jong Un

“There is a lot of enthusiasm. Maybe too much,” said Chung Yeon-wook, a private banker with NH Investment and Securities.×1080.mp4

However, many in Seoul feel that South Korea’s historically adversarial relationship with the North may undermine its prospects.

“The rivalry between China and South Korea [for access to North Korea] has already been there for 10 years. China is now taking advantage of the situation because the North Koreans feel more comfortable dealing with them,” Mr. Chung added. Additional reporting by Song Jung-a

Q3_18 Stratfor forecast

Stratfor Worldview June 7 2018


China Remains in the U.S. Cross-hairs. The United States will impose tariffs, sanctions and blocks on investment and research in a bid to frustrate China’s development of strategic technologies. China not only has the tools to manage the economic blow, but will also accelerate efforts to lessen its reliance on Foreign-sourced technological components.

Trade Battles Fall Short of a Full-Fledged War. Trade frictions will remain high this quarter as the White House continues on an economic warpath in the name of national security. U.S. tariffs will invite countermeasures from trading partners targeting U.S. agricultural and industrial goods. As Congress attempts to reclaim trade authority, the White House will refrain from escalating these trade battles into an all-out trade war.

Taking the First Big Step with North Korea. Drama will inevitably surround the negotiation, but the United States and North Korea have a decent shot at making progress toward a political agreement this quarter, something that will set the stage for much thornier and lengthier technical discussions on denuclearization. Even if talks appear to break down in the coming months, Pyongyang will avoid more aggressive measures in the near term while working to maintain diplomatic and economic momentum with China and South Korea.

Tremors in Europe. The new Eurosceptic government in Rome will hold off on threats to leave the Eurozone for now, but will be seeking allies in southern Europe to battle Brussels on fiscal deficit and debt rules. Divisions within the British government will meanwhile raise the potential for Parliament to take more control of the Brexit process to keep the UK in the customs union.

All Eyes on Riyadh. As Iran’s major European and Asian clients negotiate waivers with the U.S. in return for reducing oil exports from Iran, the United States will be looking to Saudi Arabia to coordinate with major oil producers to make up the supply gap. Riyadh will nonetheless be cautious in planning a market intervention as it aims for a higher price band in anticipation of the Saudi Aramco IPO.

Moscow Tries to Break a Stalemate with Washington. Poland and other borderland states will make appeals for stronger security guarantees from Washington while they still have the United States’ attention. Moscow will try to break a negotiating stalemate with the U.S. to talk sanctions, military build-ups and arms control by promoting its mediation in the Syrian conflict and its potential utility in North Korean denuclearization. Don’t hold your breath for a breakthrough, though.

Polarizing Allies. In harnessing the power of tariffs and extraterritoriality in sanctions, the United States will polarize many of its security allies in Europe and Asia — strategic partners that Washington needs to counterbalance the emerging threat from China and Russia. Attempts to target Russia’s strategic relationships will call into question the long-term reliability of the U.S. as a defense partner and invite heavy push back from Turkey, Vietnam, Germany and India, in particular.

Iran’s Return to the ‘Resistance Economy.’ As the limits of EU economic safeguards are exposed, Tehran will cautiously walk back its commitments to the JCPOA while seeking out willing partners to circumvent sanctions. Russia will take advantage of Iran’s rising vulnerability to deepen its military ties with Tehran while mediating between Iran and Israel in Syria.

The Big Turkish Gamble. Turkey will be a big feature of the third quarter following a precarious electoral gamble by Turkish President Recep Tayyip Erdogan. Erdogan has the tools to eke out a win and whip up a nationalist reaction to any outside questioning of the vote, but the highly polarized country will remain on shaky economic ground amid worsening relations with the West.

Votes against the Status Quo. Mexico’s populist candidate stands a chance of winning big in July elections, which could pose a threat energy and education reforms while further complicating NAFTA talks. A strong anti-establishment current will also be on display in Colombia, where the FARC peace deal is under threat, and in Brazil and Argentina, where the appetite for economic reform will plummet.

Key Trends

The Constant Battle Against Unpredictability

As the United States enters the long summer stretch before midterm congressional elections in the fall, the midpoint of Donald Trump’s presidency will also come into sight this quarter. And after a particularly suspenseful spring of sanctions, tariffs, Cabinet changes and summit surprises, the U.S. president has only reaffirmed to the world his reputation for bending constraints toward a particular policy end — even if the means to that end cause considerable collateral damage at home and abroad.

And so, with several negotiations still pending — including discussions over the fate of the Korean Peninsula and high-stakes trade talks — a world weary from grappling with the fitful superpower is bracing itself for another quarter of whiplash from White House maneuvers.

The world is muddling through a blurry transition from the post-Cold War world to an emerging era of great power competition.

 But while Trump thrives on unpredictability as his chief negotiating tactic, many of his moves fit quite neatly— Even predictably — in the context of the United States’ great power rivalry with China and Russia. The United States’ intensifying economic pressure on China, its harder-hitting sanctions on Russia and its growing support for critical borderland states, such as Taiwan, Ukraine and Poland, are all a part of this budding competition. Even the U.S. search for a way to reunify and denuclearize the Korean Peninsula is a piece of a broader long-term strategy to balance against China.

Yet the United States is creating bigger distractions for itself in the Middle East with Iran while putting stress on the very alliances it needs in its global competition with China and Russia. Although the contradictions in U.S. policy are taxing much of the world, this prolonged state of confusion is par for the course as the world muddles through a blurry transition from the post-Cold War world to an emerging era of great power competition.

U.S.-China Competition Builds

Narratives casting China as an economic imitator, as opposed to an innovator, are out of date. As the country grows more economically advanced, focusing its attention on game-changing technologies, the United States will heighten its economic scrutiny on China — and squeeze numerous companies along U.S.-Asian supply chains in the process. This dynamic will endure well beyond the quarter and the Trump presidency. In the name of national security, the executive and legislative branches of the U.S. government will continue to target China’s Made in China 2025 strategic development program through various means, including tariffs, sanctions and restrictions on investment and research. U.S. companies, particularly those involved in sensitive technology sectors, will face growing risk and uncertainty over the potential for export controls and for closer monitoring of foreign investments.

Specific measures to watch for in the third quarter include a special investment regime for Chinese companies designed to block investment into sensitive areas like robotics, telecommunications, semiconductors, artificial intelligence (AI), virtual and augmented reality, and new energy. The White House already has announced its intention to impose tariffs on up to $50 billion worth of Chinese industrial technology goods under a Section 301 investigation into Chinese intellectual property and technology theft. (More details are expected June 15.) The United States will apply tight scrutiny to outbound investment to or informal collaboration with Chinese companies, especially in high-tech sectors. Telecommunications firms Huawei and ZTE are already feeling the pressure; the U.S. Commerce Department has slapped hefty penalties on ZTE, while Huawei is under investigation by the Justice Department. In addition to those companies, the United States could expand its net to ensnare tech giants like Baidu, Alibaba and Tencent, launching investigations into web services they provide. Washington is also likely to impose visa restrictions on Chinese researchers and students in the United States.

U.S. pressure will only make China more determined to accelerate its drive to forge its own supply chains for sensitive technologies.

 Deepening U.S.-China economic competition, however, does not guarantee a trade war, in which tit-for-tat trade measures escalate with no clear end in sight. China, along with the European Union,

Japan and other major U.S. trade partners, is trying to avoid destabilizing the global economy more severely. The United States, meanwhile, despite an apparent penchant for picking trade spats, will run into political constraints that will avert a worst-case scenario. Washington and Beijing alike will eventually make concessions to justify dialing back their more extreme tariff threats. Still, the negotiations will be bumpy.

There are hard limits to what each side can concede, and Chinese compliance is not assured, leaving the door open for some tariffs, and retaliatory measures, to shake out this quarter.

Internal White House dynamics will also be key to watch in tracking the progress (or lack thereof) in trade negotiations. Treasury Secretary Steven Munchkin and White House economic adviser Larry Kudlow will push for a compromise that minimizes collateral damage, while economic adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer drive a much harder, and perhaps impossible, bargain with China. In the lead-up to U.S. midterm elections, the White House will probably be more sensitive to retaliatory tariffs targeting the U.S. farm belt, where support for Trump was strong during the 2016 presidential race. Tariffs on smaller crops such as cranberries and ginseng, for example, could hit a political nerve in Wisconsin, a state in which the farming vote could make a big difference.

Even as the negotiation inches ahead, the United States won’t prevent China from providing heavy, focused support to Made in China 2025 sectors. The U.S. pressure will only make China more determined to accelerate its drive to forge its own supply chains for sensitive technologies. China will, however, be willing to negotiate ways to increase U.S. imports, including of energy, semiconductors, vehicles and agricultural products; to partially liberalize certain sectors, such as the financial sector; to reduce some trade barriers for imported vehicles; to enhance intellectual property protection rights; and to restructure state-owned enterprises as part of its reform drive. Even if the United States hits it with tariffs this quarter, China has the political and economic means to withstand the blow at home [10]. A growing number of maturing corporate bonds will add to the financial strain on local state-owned and private enterprises, but Beijing will inject liquidity selectively to ease the pain, particularly in central and northeastern China, and to manage any fallout.

A Framework for North Korean Denuclearization

Trump and North Korean leader Kim Jong UN will meet face-to-face June 12 for a much-anticipated summit in Singapore]. While there will be moments throughout the process where it appears as if the whole     dialogue is collapsing, there is reason to believe that the negotiation will still have legs by the end of the quarter. Our focus will not be so much on the drama to come — the typical walk-outs,

Name-calling and muscle-flexing — as Trump and Kim battle to prove who can play the unpredictability card most effectively in the talks. Setting aside the theater of the negotiation, the fundamental question for the quarter is whether both sides will muster enough political will to develop a framework for denuclearization. If a dialogue advances, it will likely start with freezing nuclear development, leaving room to tighten the screws on denuclearization over time. Just as the United States is unwilling to offer North Korea instant regime security, North Korea will negotiate denuclearization only over a long period of time.

Compared with previous efforts at negotiation, the stakes are much higher this time around. North Korea is closer than ever to its nuclear deterrent, and if the talks fail, the United States will have invalidated the diplomatic route. The United States would find it difficult to build international consensus to reinstate crippling sanctions on North Korea, much less a consensus to pursue a military option.

If the United States can manage to avoid a military conflict with North Korea, it will be able to apply more resources and attention to reinforcing countries in China’s borderlands.

 But a breakdown in talks with the United States would not necessarily lead North Korea to resume its nuclear testing immediately. Even if the United States walks away, China and South Korea would keep up the diplomatic momentum with North Korea, giving Pyongyang an opportunity to press its neighbors to ease up on their own economic sanctions.

Japan will remain largely on the sidelines of the negotiation], given its frosty ties with South Korea and even frostier ties with North Korea. As trade tensions mount between the United States and Japan over the threat of auto tariffs, Tokyo will do its best to keep them separate from its security partnership with the United States. Japan’s biggest concerns lie in North Korea’s short- and medium-range ballistic missile threats and any short-term shifts to the U.S. force presence on the Korean Peninsula that could also lead to a draw down in Okinawa before it is politically and militarily ready to compete with China. Japanese Prime Minister Shinzo Abe will try to keep a high diplomatic profile this quarter both to try to insert Japan’s security interests into the U.S.-North Korea dialogue and to distract his own constituency from a scandal that threatens his six-year tenure. Should Abe lose the critical contest for the ruling party’s leadership in September, Japan could enter another period in which prime ministers come and go more frequently, creating more uncertainty as the great power competition in the Pacific heats up.

If the United States can manage to avoid a military conflict with North Korea, it will be able to apply more resources and attention to reinforcing countries in China’s borderlands [19]. Though China has managed to ease tensions with the states in its periphery, its continued militarization in the South China Sea will draw the United States into a more active military role in the region to balance it. The United States will increase naval deployments and patrols in the South and East China seas this quarter while working to expand military exercises with members of the Association of Southeast Asian Nations (ASEAN). An increase in U.S. deployments will lead to a period of heightened tension between Chinese and U.S. forces in these waters, and instances of harassment could become more frequent as the rate of close encounters and interceptions increases.

Friction Points in the U.S.-Russia Relationship

Russia’s influence over North Korea will remain limited so long as Washington sustains its diplomatic engagement with Pyongyang through the quarter. If the talks make progress, Russia will try to secure a role in the denuclearization process to make sure it has a seat at the table. And should the talks collapse, Russia will align itself closely with China to resist the United States in the U.N. Security Council on sanctions and military action.

The push and pull between the U.S. Congress and the president on Russia policy [20] can be messy and contradictory at times, but the result tends to be a harder U.S. line on the country. Congress will lean on the Treasury Department to sharpen its aim in targeting Russian elites with an eye toward sowing divisions in the Kremlin without creating the kind of significant global economic blowback that sanctions against Russian aluminum producer Rusal caused in the second quarter [21]. At the same time, U.S. lawmakers will be working to implement the Russia-related provisions of the Countering America’s Adversaries through Sanctions Act [22] (CAATSA) to coerce other countries to reduce their defense, intelligence and energy ties with Russia.

Though the White House has been more reluctant in the past to confront Moscow, secondary sanctions targeting Russia’s defense and energy sales appeal to its business sense by creating more export opportunities for U.S. liquefied natural gas producers. They will also appeal to the United States’ business sense by potentially creating more export opportunities for U.S. defense firms and for U.S. liquefied natural gas producers. Commercial interests, along with a growing U.S. strategic focus on Central and Eastern Europe in its competition with Russia and China, will give Poland, Ukraine and the Baltic states an opportunity to appeal to the White House for stronger security commitments. Warsaw, in particular, will try to advance talks with Washington over a permanent U.S. military presence in Poland, which will in turn cause Russia to up the pressure on Belarus to host a Russian airbase in its borders.

A potential military buildup in Russia’s periphery is one of several factors that could prompt a high-level dialogue, or at least preparations for one, between Washington and Moscow this quarter. Russian President Vladimir Putin has a long list of items ready for when he sits down with Trump, including sanctions, military buildups and stymied arms control talks. Russia will try to use its mediation in the Syrian conflict and offers to help with North Korea’s prospective denuclearization to present itself as a more constructive force. But the White House will engage with Moscow at a high level only if it feels that it has made enough progress on North Korea that it can deflect negative attention from the Russia-related investigations underway. Even if Trump and Putin manage to set up a meeting, the geopolitical environment will not be conducive to a grand bargain.

It will be important to watch how Putin handles the various challenges facing him this coming quarter.

 Having made it to a fourth term in office in elections in March, Putin will have to maneuver carefully among the government, his inner circle and Russia’s powerful oligarchs as the United States dangles the threat of heavy sanctions over them. Efforts to consolidate the assets of Russia’s elite will continue in the third quarter, as the Kremlin works to maintain economic stability and political loyalty. Higher oil prices will help ease some of the strain that honoring social pledges made during the campaign season, increasing security spending and hosting the World Cup have put on the Kremlin’s finances. Competition among the security services remains a key area to watch as Putin balances among rival factions. We’ll also be watching carefully for further signs that the longtime president is elevating younger members of the elite in search of a successor.

The more immediate priority in the quarter will be for Putin to try to take more steam out of opposition protests. In the second quarter, a wave of opposition protests in Armenia that swept longtime leader Serzh Sargsyan from power was another wake-up call for the Russian government and the heads of other former Soviet states: Once a protest movement has gathered enough momentum, not even brute force tactics can quell it. Determined to avoid a similar fate, the Kremlin will work on co-opting opposition leaders into government positions. Opposition leaders like Alexei Navalny are unlikely to fall for this strategy. But figures from other prominent dissident parties — especially those that stand to do well in September’s regional elections, including Yabloko and the Communist Party — may yield to the Kremlin.

Doubling Down on Iran

A big element of the U.S.-Russia competition will also play out in the Middle East. In walking away from the Iran nuclear deal and reinstating hard-hitting sanctions, the White House is hoping against all odds to foment enough economic frustration in Iran to set regime change in motion. Israel, meanwhile, is seizing a rare opportunity to escalate its military campaign against Iranian and Hezbollah assets in Syria, knowing that it has firmer security guarantees from the United States to manage the fallout of a cycle of attacks and retaliatory attacks that risks drawing in Russia. Moscow will plan its next steps carefully with the aim of avoiding a direct collision with the United States while exploiting U.S. and Israeli needs to disengage on the Syrian battlefield. Despite its attempts to mediate between Israel and Iran — in hopes of bargaining on a more strategic level with the United States — Russia’s limited influence on the Syrian battlefield will prevent a lasting truce. Russia also will try to take advantage of Iran’s vulnerability with the United States to deepen its own military footprint in the region. Watch for discussions between Iran and Russia over boosting Iranian air defenses and appeals from Moscow for access to Iranian bases.

Tehran’s focus for the third quarter will be to buy itself as much room to maneuver as possible with those trading partners willing to risk U.S. secondary sanctions. In the immediate term, Iran will take care to avoid aggressive actions that could push the European position closer to that of the United States. But as the limits of the European Union’s economic guarantees become more evident in the coming months, Iran’s internal debate over how to proceed will intensify. Iran will probably still confine retaliatory attacks against Israeli strikes in Syria to the Golan and potentially the Palestinian territories as it tries to avoid a bigger conflagration. It will also test the limits of the nuclear deal and its cooperation with Europe, for instance by threatening to increase enrichment, to limit access to International Atomic Energy Agency inspectors or to withdraw from the Nuclear Non-Proliferation Treaty.


Philippine infrastructure push is unlikely to boost wages as lack of high-paying jobs hinders government’s poverty reduction plan FT Confidential Research JUNE 18, 2018

As living costs in the Philippines rise, neither the government nor the private sector can provide Filipinos with higher-paying jobs. Dissatisfied workers demanding more work, more money and better career options threaten President Rodrigo Duterte’s poverty reduction agenda. In our first-quarter survey of 1,000 urban Filipinos, 55 per cent of respondents said they had a “secure” or “very secure” job. The figure is in line with the average for the other ASEAN-5 economies included in the Economist survey. Although the majority enjoy job security, people looking for a new job are having a hard time. Forty per cent of our respondents said they found it difficult to get hired, while only 11 per cent said it was easy. Among job seekers, 34 per cent said they wanted a higher salary, while 28 per cent wanted career growth.

filipnos want hiher wages.jpg

The survey corroborates government data showing that while unemployment is down, underemployment is high. The underemployment rate — defined as those wanting to work longer hours or get an additional job to earn more — rose to 17 per cent in April, from 16.1 per cent the year before.

underemployment remains high.jpg

The Economist sees underemployment as a more formidable challenge than unemployment. In the public sector, Mr. Duterte’s promise to spend up to 8.44tn pesos ($158bn) to fix the country’s dilapidated infrastructure is producing low-paid, temporary construction jobs, incapable of sustaining a typical Filipino family. Private companies, meanwhile, are bracing for wage rises this year that could increase labour costs. This, in turn, is making the Philippines unattractive to private investors, who are critical to the creation of competitive jobs.

Low pay, temporary work

The government’s ambitious “Build, Build, Build” programme aims to generate 6.4m jobs by 2022, mostly by employing low-skilled workers in construction. We think the programme is a good way to absorb poor rural agricultural workers into higher-paying jobs, especially since some of the projects are in regions outside Metro Manila.


This is all part of Mr. Duterte’s plan to spread wealth beyond Manila. But while the infrastructure push will indeed reduce unemployment, it is unlikely to offer the competitive salaries and permanent positions available in the private sector, or overseas. In fact, government data show that 96 per cent of current vacancies would pay only a minimum wage, below the amount needed for a decent living. In Manila, the minimum wage amounts to 15,360 pesos a month, but wages in poorer areas tend to be lower and fall near the 2015 poverty line of 9,064 pesos.  Although there is no official definition, Ernesto Pernia, the socio-economic planning secretary, recently said that a “decent income” for a family of five would be at least 42,000 pesos a month. This is achievable if two family members are earning 21,000 pesos each, near the average entry-level salary in the booming business process outsourcing industry. Construction jobs are also temporary. Since none of the 75 big-ticket infrastructure projects are under way yet, government contractors concentrate on smaller projects that require fewer workers and are completed in a shorter time. Some bigger projects funded by China are also likely to employ Chinese workers, leaving fewer opportunities for Filipinos. The lack of job security and decent pay make local construction jobs unattractive compared with employment overseas. There is no incentive for skilled Filipino engineers and architects currently working abroad to heed Mr. Duterte’s call to come home and contribute to his nation-building project. This could partly explain why construction jobs remain open, and state projects delayed.

Tough times all round

Poverty also affects households with permanent jobs. The World Bank, in a recent report on the Philippines, found that 54 per cent of poor households are headed by wage earners (as opposed to those who are self-employed). These include university graduates who work for private companies that typically pay more than the government.

Businesses are also operating in a more difficult environment. Accelerating consumer prices and a weaker peso, which hit a 12-year-low against the dollar this month, are increasing operational costs. Central bank data show fewer companies are planning to hire workers in the next quarter and we believe this will only get worse in succeeding months, especially as the government is pushing for a higher minimum wage. The minimum wage level in the Philippines in certain regions is already higher than in more developed Malaysia.

The private sector picture is not encouraging. Infrastructure projects have been delayed and the government plans to reduce tax incentives for investors under its proposed tax reform. As a result, foreign investment in the economic zones where these incentives are offered has fallen to its lowest level since 2010. Never mind tackling underemployment; even sustaining the recent drop in unemployment could be challenging. — Prinz Magtulis, Philippines Researcher,


Economic Snapshot for ASEAN

June 21, 2018

Economic momentum remains solid in Q2 after a positive Q1

The latest indicators suggest that ASEAN’s economy continues to perform well in the second quarter despite swirling global trade tensions, with growth forecast to come in at 5.2% year-on-year. With the exception of Malaysia, manufacturing PMIs for April and May were firmly in expansionary territory across the region, supported by strong domestic demand. In May, Indonesia’s PMI reached a near two-year high, while readings also improved in the Philippines and Vietnam. In Singapore, the indicator has moderated slightly so far in Q2 despite remaining firm, while in April Myanmar’s PMI reached its highest level in the survey’s history before a correction in May.

Other signs corroborate the ongoing momentum, with internal dynamics buttressed by strong labor markets and wage gains. In April, Indonesia saw healthy retail sales growth, while industrial production grew at a robust pace throughout the region. In contrast, the external sector appears to be softening. Import growth is outpacing export growth in many countries, on strong private consumption, higher international oil prices and tough prior-year comparisons for export growth.

The latest GDP readings for the first quarter confirmed regional growth at 5.4%. Comprehensive data for Singapore saw GDP growth revised up, on the back of an expansion in the services sector that was stronger than previously estimated. In addition, the figures point to a broadening of economic momentum towards more domestic-oriented sectors, as well as an incipient recovery in the construction sector. In Thailand, growth was clocked at 4.8% year-on-year in Q1, marking a five-year high and in line with FocusEconomics panelists’ forecasts. The reading was underpinned by higher farming and non-farming incomes, and a recovery in public investment.

On the political front, Malaysia reduced the Goods and Services Tax (GST)—an important source of revenue for the government—to 0% effective 1 June. This should give private consumption a shot in the arm in the short term, at least until a substitute Sales and Services Tax (SST) takes effect from September. However, the move creates fiscal uncertainty. Until the SST is introduced there will likely be a fiscal shortfall, despite the breathing space provided by higher oil prices. In addition, it is unclear whether, once introduced, the SST will raise as much revenue as the GST. To convince investors that it is serious about fiscal discipline, the new administration has moved to reduce infrastructure spending—including scrapping a planned high-speed rail link to Singapore—and trim ministries’ spending and the public sector wage bill.

Thailand is also trying to present a fiscally responsible image; the Junta recently presented a draft budget for FY 2019 aimed at reigning in the budget deficit. Proposed spending is slightly below the FY 2018 budget, although defense spending will receive a notable boost. In contrast, several areas important for future economic development will see spending cuts, including education, agriculture and social development.

 See the full FocusEconomics Consensus Forecast ASEAN report

Economic outlook looks rosy, but trade concerns are rising

Economic growth should remain solid going forward, as the region continues to benefit from resilient domestic demand. Public infrastructure investment in key economies such as Indonesia and Philippines will support growth, while strong labor markets bode well for private consumption. On the downside, external sectors will likely continue to weaken, as export growth eases after a stellar performance in 2017 and higher crude prices raise the import bill. In addition, tighter financial conditions could weigh on activity, while a further escalation of trade tensions between the U.S. and China would hit the generally open economies of ASEAN hard, particularly given the importance of both countries as key export markets. GDP growth for the region is expected to come in at 5.2% this year, which is up 0.1 percentage points from last month’s estimate and matches last year’s expansion.

This month’s upgrade comes on the back of higher 2018 growth projections for Thailand—following a strong Q1 outturn—and the Philippines. In contrast, growth forecasts for the rest of the economies surveyed in the ASEAN region—including heavyweights Indonesia, Malaysia and Singapore—were unchanged from the prior month. For 2019, our panel sees growth at 5.1%.

Our panel projects that Myanmar will be the fastest-growing economy in the region, with a 7.1% increase expected in 2018. Conversely, Brunei is foreseen logging the weakest expansion this year, at 1.4%. Among the major economies in the region, the Philippines will record the fastest increase, followed by Indonesia and Malaysia.

INDONESIA | Economic growth appears firm in the second quarter

The most recent indicators from Q2 suggest that economic activity is picking up from Q1’s muted performance. Retail sales growth accelerated to a ten-month high in April and should remain elevated, as consumer confidence in May improved markedly. The manufacturing PMI increased in May to the best print in almost two years, underscoring the improving health of the sector. Against this positive backdrop in the domestic economy, S&P Global Ratings affirmed the country’s BBB- rating and stable outlook on 31 May. The ratings agency applauded the government’s prudent handling of fiscal accounts and the recent reform that has increased tax collection. Nevertheless, it warned that increasing external financing costs because of faster-than-expected monetary tightening in the United States and modest increases in the prices of Indonesian key exports could cause external buffers to deteriorate and expose the country to economic shocks.

The economy is expected to accelerate slightly compared to last year on faster growth in government consumption and fixed investment. Higher crude oil prices and a modest price outlook for Indonesian commodities, however, are weighing down growth prospects. FocusEconomics panelists see GDP growth of 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%. 

THAILAND | Growth hits a multi-year high in Q1, data for Q2 suggests continuing momentum

National accounts data showed the economy continued to enjoy a strong run in the first quarter, growing at the quickest pace in five years. This was largely due to strong activity in the domestic economy as private consumption benefitted from an increase in non-farming income. In addition, the external sector remained solid despite a moderation in export growth and a pick-up in import growth on the back of a strong domestic economy. Data for Q2 continues to suggest that the domestic economy is gaining traction, while the external sector is softening slightly. In April, manufacturing growth accelerated, while the country recorded its second trade deficit of the year, owing to strong import growth outpacing double-digit export growth.

Although growth is expected to moderate in the coming quarters, economic growth should remain robust this year due to healthy domestic demand. Export growth is, however, likely to ease due to a large base effect. Looking to 2019, a tight fiscal stance as outlined in the recent draft budget could drag on growth. Risks to the outlook stem from rising trade tensions, mostly coming out of the United States. Furthermore, high household indebtedness and political uncertainty in the lead up to elections to be held no later than February 2019 could drag on economic prospects. FocusEconomics panelists expect the economy to grow 4.2% in 2018, which is up 0.3 percentage points from last month’s forecast. The panel projects growth of 3.8% in 2019.

See the full FocusEconomics Consensus Forecast ASEAN report

MALAYSIA | Economic signs are positive, although fiscal concerns emerge following tax change

Following a robust Q1, the economy appears to have gotten off to a solid start to Q2: Exports jumped and industrial production growth accelerated in April. On the downside, the manufacturing PMI moved further south of the neutral 50-point threshold in May due to weakening domestic demand. The new government reduced the Goods and Services Tax (GST) to 0% effective 1 June. This should provide a boost to private consumption in the short term until the Sales and Services Tax (SST) is introduced on 1 September. However, slashing the GST creates a sizable gap in the budget, raising questions about the government’s finances and whether it will be able to stick to the 2.8% deficit target for 2018. To rein in spending, Prime Minister Mahathir Bin Mohamad has cancelled big infrastructure projects and told ministers to implement austerity measures.

GDP should remain resilient this year on the back of strong private consumption growth, although government consumption is likely to suffer in the near term from the cancellation of previously approved projects and expenditure cuts. Risks are, however, titled to the downside: High household debt servicing costs could drag on private consumption, while uncertainty over government policy and the fiscal situation could dent private sector activity and investment. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.3% this year, unchanged from last month’s forecast, and 5.0% in 2019.

MONETARY SECTOR | Inflation picks up marginally in May

A preliminary estimate by FocusEconomics shows regional inflation accelerated to 2.6% in May from 2.5% in April, on the back of stronger inflation in Laos, the Philippines, Thailand and Vietnam. Price pressures dipped in Indonesia and are still outstanding for the remaining countries in the region. In an unscheduled meeting on 30 May, Indonesia’s Central Bank raised its policy rate from 4.50% to 4.75%, mere weeks after a similar rate hike to 4.50%. The move was designed to support the depreciating currency, particularly given the prospect of the Federal Reserve raising interest rates in mid-June.

Inflation will be supported this year by higher global oil prices and solid domestic activity, although price pressures will remain relatively muted. Our panelists expect inflation to average 2.9% this year, which is unchanged from last month’s estimate and marginally above the 2.8% inflation figure recorded for 2017. Our panel foresees inflation ticking up and averaging 3.1% in 2019.

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Oliver Reynolds