Urbis Think Tank
Out of the box – IMF bullish on Asia, so it’s business as usual for retail
Much of the talk around the global economy throughout August and September has been about the growing likelihood of a double-dip recession in the US and Europe, which in turn has led to convulsions on international stock markets. Hardly the backdrop to an almost glowing appraisal by the International Monetary Fund of Asia’s economic prospects over the next few years.
The IMF’s most recent update on the global economy is ominously entitled “Slowing Growth, Rising Risks” but if your regional focus is Asia then take a chill pill – the news is a good deal more cheerful than it is for the mature markets.
The IMF’s new forecasts for GDP growth in key Asian countries are shown in Figure 4. With the sole exception of earthquake- and tsunami-affected Japan, countries across the region are expected to post moderate-to-strong growth rates this year. They are also forecast to continue expanding at a steady pace through to the middle of the decade, with China, India, Indonesia and Vietnam the regional pace-setters.
The bigger point from the standpoint of the retail and retail real estate sectors is not so much the forecast headline growth rates but the ongoing transition in the principal drivers of growth. Specifically, weak growth in North America and Europe – developing Asia’s largest export markets – will reaffirm the need for many Asian governments to nudge their economic policy initiatives away from reliance on export-led growth to growth through domestic consumption and investment.
China is a good example. Higher domestic consumption has been a constant theme of China government policy over the past couple of years and a key component of its stimulus initiatives during the financial crisis. As its export markets sagged and excess factory capacity grew in 2008-9, China’s policies aimed at reducing its dependency on the external sector went into overdrive. This included tax reform, consumer spending incentives, infrastructure investment, easy monetary policy and initiatives to close the gap between the nation’s haves and have-nots. (It stopped short of a meaningful relaxation in exchange rates.)
Lately, the China government has worked to wind down the stimulus but in China, India and other emerging markets of Asia with huge and aspirational populations the writing is on the wall — domestic consumption will have to receive a lot more attention in policies to promote future economic growth. And this should be a good thing for retail.
What are the main takeaways from the retail and retail real estate sectors from the IMF report?
1. The Asia region will generally experience slower top-line economic growth during the next few years than it has in the past decade, but the magnitude of the slowdown will be fairly moderate and as economies become more domestic demand-driven any adverse impacts on retail may be at least partly cushioned.
2. Asia, from the standpoint of the retail sector, is essentially still a positive demographic story. The underlying demographic changes underway, such as urbanisation and rising incomes, will continue, and are likely to support robust retail sales growth in all market segments from entry-level up through luxury.
3. The demand for high-quality retail space will continue to grow across the region, even as the popularity of e-commerce increases at the same time.
4. Should the US and Europe enter another period of stagnation then the “push” factors causing mature retail chains to explore emerging market options will become even more compelling. One of the legacies of the GFC was the rationalisation of domestic real estate portfolios by US and European retailers in the fashion category particularly. This pruning back of marginal domestic real estate (still an ongoing process) has been accompanied by huge investments in e-commerce and the establishment of flagships in new markets around the world. Again, developing Asia will be one of the biggest beneficiaries of this process if it accelerates.
Much of the commentary on the global economy is quite gloomy at the moment. Although there are downside risks to the outlook in Asia, it is one place where the economic sun is still shining brightly.
 International Monetary Fund, World Economic Outlook – Slowing Growth, Rising Risks, September 2011