Thursday 22 February 2018

Dan O'Brien: Opportunity knocks in Asia and Down Under

Dan O'Brien

Dan O'Brien

Over the past couple of weeks I have been in Asia and Australia and have had lots of interesting meetings and conversations. Here are some issues raised which may be of relevance to an Irish business readership.

The relentless rise of China

China is becoming ever more relevant to everyone. Across the Asia-Australia-Pacific region which, with half of the planet's population, is increasingly the centre of the global economy, it is increasingly dominant.

A number of people noted that Beijing has become increasingly assertive in its dealings with other countries. If there was an inflection point, it was the elevation of Xi Jinping in 2012, widely seen as the most powerful Chinese leader in decades.

A centrepiece of China's efforts to extend its influence is its "One Belt One Road" initiative (you won't go far in Asia before the "OBOR" comes up in conversation). Nobody knows exactly what it entails ­- and that seems to be intentional - but the broad idea is to develop infrastructure along the ancient Silk Road through central Asia to Europe (the "one road" part) and via sea routes to western Eurasia (the maritime "one belt"), with the Indian Ocean Basin of particular interest to the Chinese.

This will involve vast amounts of investment. It will partly be funded by China's new Asian Infrastructure Investment Bank (AIIB), a development-financing institution similar to the World Bank. Ireland has only recently, and belatedly, signed up to it, having been one of only two of the long-established EU members not to have done so from its inception.

The OBOR, the growth of the Chinese economy and the increased role of Chinese companies in the region presents an opportunity for many individuals, companies and countries. But these developments are also causing some unease, to say the least. While some countries are trying to push back against a more assertive China, more see which way the wind is blowing. Many accept its hegemonic role and are moving closer to it.

Little Red Dot

From the Chinese superpower to the city-state of Singapore, or "the little red dot", as it has been disparagingly called by its neighbour Indonesia, the world's fourth-most populous country.

Singapore is managed like a well-run business, thanks to its ultra-technocratic and (mildish) authoritarian regime. It's "an economist's dream", said one wag. But that is only partly true - people have needs beyond the material. The suppression of public debate about the issues the island-nation faces cannot be healthy. Among other things it may stifle the sort of critical thinking that drives creativity and innovation.

But perhaps even that problem has a solution. There is a huge foreign-born population on the island, many of whom are involved in setting up and running businesses. I met a number of them when giving a talk at an Irish chamber of commerce event. The diaspora there is thriving and involved in a diverse range of sectors. They show how the thrusting can get ahead in Singapore, and how the island is a good place to access the wider region.

At a big regional security conference held there last weekend, the rise of China was much in evidence. So was the decline of the US. Donald Trump's withdrawal from the painstakingly negotiated Trans Pacific Partnership (TPP) is not only seen as a missed opportunity to boost economic integration, but, after the withdrawal from the Paris Accords, is the clearest sign of American isolationism and ceding of the leadership role that that country has played in the world for 70 years. I didn't speak to any Chinese officials, but from what others say, Beijing is the big beneficiary. A pull back by the US leaves a vacuum which China is only too happy to fill.

Free trade agreements and Brexit

The EU is negotiating free trade agreements, or planning to do so, with a number of countries in the region. If the US has left the pitch by its withdrawal from TPP, Europe done itself a serious (and self-inflicted) injury owing to the manner in which the EU-Canada deal almost came a cropper last year (a regional Belgian parliament threatened to block its ratification). This has raised questions in other countries about committing time and energy to deals with Europe when they may never come into force.

Brexit has also affected the calculus on free trade agreements with Europe. At a conference in Sydney last Monday I asked the Australian finance minister about the challenges of simultaneously negotiating free trade agreements with the EU (talks are due to start later this year) and the UK. As is the wont of politicians, he was breezily optimistic. Others are less so. Many people I spoke to from globalised companies and their representatives acknowledged the uncertainty about Brexit for their business links with Europe.

At the same event, there was no shortage of talk from Europeans who see an opportunity from Brexit. Far more Australian foreign direct investment in Europe is located in the UK than in any other country. Luring it into the EU27 is on the minds of many.

The Australian economy, Irish exports and the property obsession

Last Wednesday, Australian GDP data for the first quarter of 2017 showed an economy still in expansion mode after 26 years of uninterrupted growth. Fears of a recession were calmed by the figures. There is life in the long boom yet.

Ireland has benefited from the Aussie growth miracle. Last year Irish companies exported €1.5bn worth of goods to Australia, making it our 12th biggest market globally. But, as with Irish-foreign sales more generally, the long term growth action is coming from the services sector. As the accompanying chart shows, Irish services exports to the land down under have soared over the past decade and now far exceed goods exports.

We Irish share a certain interest in property with our Australian cousins. House prices in Sydney are now among the highest in the world. They have been rising strongly across Australia country since 2010.

A range of indicators related to the overheated property sector - price developments, housing output and employment, private sector debt developments and others - suggest that regionalised declines are possible, if not likely. Where prices have risen most rapidly, the reversals could easily be into double digits.

But even a worst-case scenario wouldn't be disastrous. The economy hasn't become overly dependent on construction. Credit growth has been high but not unusually so. And the government has lots of fiscal space to stimulate the economy in the event of a downturn. If there are bad times ahead for Australia, they are unlikely to be too bad.

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