Spending Is Back in Style in Much of Asia
Sarah Chan, a thirtysomething insurance consultant, looks over a large white-and-beige $950 handbag at the Louis Vuitton store in Hong Kong’s Central District, examines its ridges, considers the color and texture and then decides to buy it.
“A lot of people I know still aren’t buying much, but I liked this one,” she says as she heads into the street.
On the eve of the Asia Pacific Economic Cooperation summit of Pacific Rim nations that begins this week in New Zealand, government leaders, regional planners and economists are closely watching people such as Chan for signs of renewed confidence after nearly two years of retrenchment.
Among the blizzard of often contradictory indicators used to take East Asia’s economic pulse, consumer spending is right at the top. Not only does it account for more than half of regional economy activity, measured by gross domestic product, it’s also a strong barometer of people’s confidence in the future and a persuasive sign that a sustainable recovery is at hand.
In recent weeks, economists have reported growing evidence from across East Asia that consumers are emerging from their hibernation, dusting off their credit cards and restocking their larders. In many Asian capitals, luxury-brand maniacs are leading the charge, their showy plumage once again bedecked with top-end designer labels.
All of this is good news for Americans. Busy Asian cash registers and the Japanese yen’s recent strength should boost California’s and other states’ export sales, in turn helping to reduce record U.S. trade deficits. An Asian revival also encourages more visitors from that part of the world to destinations like Hollywood, Las Vegas and Hawaii, racking up hotel and entertainment bills.
In Asia, meanwhile, spending seems to be back in style. July car sales rose 81.3% in Malaysia, 76.3% in Thailand and 105% in Indonesia, albeit from a low base. June retail sales rose 10% in South Korea, 22% in Singapore, 13.7% in Taiwan and 5.4% in China.
“I’m very bullish,” said Tim Condon, ING Baring’s chief Asian economist based in Hong Kong.
Renewed optimism also brings Asia closer to what economists call a virtuous cycle, in which foreign trade, government spending, business investment and personal consumption begin to fire like cylinders in a well-tuned engine. Consumer spending is particularly important, generating orders, forcing suppliers to stop hoarding cash and creating new jobs. Bank credit expands, as well, helping pull banks out of their hole.
“It all starts feeding on each other,” says Graham Perry, Southeast Asia analyst with Lehman Bros.
Experts divide the region’s consumers into three broad groups. In the lead are South Koreans, whose economy has bounced back much faster and stronger than expected; the Taiwanese, who sailed through the crisis relatively unscathed; and Singaporeans.
In Seoul’s trendy Myung Dong district, 36-year-old homemaker Lee Sook Ja emerges from designer clothing store Avignon, where she has spent 20 minutes shopping for dresses and slacks. She says those around her seem to have more confidence these days and she’ll probably fork over around $125 this month for clothes. “I hear both the rich and poor are spending more,” she says.
In the middle are Thai, Malaysian and Japanese consumers, who show early but promising signs of loosening their purse strings. Yukie Hirata, a fiftysomething manager at a Tokyo real estate company, says her family is spending steadily now that they’re paying two kids’ college tuitions.
More tentative are the people of Hong Kong, Indonesia, the Philippines and China, although even there optimists see early signs of hope.
One factor driving consumer spending across the region is a sharp decline in interest rates, some of which are now near historical lows. Asia’s prodigious savers are finding less reason to squirrel away their crumpled won, baht and ringgit notes as rates decline to 5% or less.
Pent-up demand is another factor. After making do with leaky refrigerators, dented cars and frayed suits for a couple of years, many consumers are tired of scrimping.
“In Thailand last year, there were more car accidents than new-car sales,” said Adam Clarke, Bangkok-based research director with Nomura International. “Now it’s getting back to equilibrium.”
Also contributing are rising stock markets across the region--South Korea’s is up 68%, Singapore’s 49%, Malaysia’s 33% and Japan’s 27% this year--which makes those lucky enough to hold shares feel more wealthy.
Finally, there’s a growing sense that the worst is over. This is being fueled by rising foreign reserves, robust government spending and newfound confidence among people that they’ll still have a job tomorrow.
“Employment has stopped falling and in many cases is improving,” said Dong Tao, Hong Kong-based regional economist with Credit Suisse First Boston. “Those with jobs are starting to spend more.”
That said, much is still rotten in the state of East Asia. Some economists fear the regional revival could be shot down if the U.S. economy were to tank, Japan were to falter or some unexpected negative event were to blindside the region.
Furthermore, even if American consumers continue buying Asian TV sets, cars, shoes and furniture at a torrid pace, the region’s companies still need to cut tens of thousands of jobs and streamline bloated industries if they want to be competitive.
Finally, many banks remain in terrible shape, with nonperforming loans approaching 75% in Indonesia, 44% in Thailand and 19% in Malaysia, even as the region’s poorest people barely scrape by. The long economic malaise has, in fact, widened the gap between Asia’s rich and poor.
Still, most indicators are lined up in the right direction, with sales of luxury items leading the way in some of Asia’s more affluent countries. Those who thought Asia’s near-death economic experience might end its long love affair with ostentatious living were sorely mistaken, the experts say.
“In many Asian cities, there are still enough Gucci and Chanel shops to almost seem like there’s one for every five people,” said Bill Belchere, Singapore-based regional economist with Merrill Lynch. “Conspicuous consumption is part of the nouveau riche consumer pattern.”
Strong luxury sales, even as many Asians struggle for food, reflect the fact that the upper crust can afford to spend in good times and bad.
“Even during a recession, first-class seats on Japan Airlines and the top hotels are full,” said Mikeaki Saito, president of Hermes Japon. “The privileged still buy and travel.”
Status and “face” remain important concepts for Asians, says David Au, Louis Vuitton’s marketing director for Asia outside of Japan.
Hermes, Louis Vuitton, Gucci, Cartier and others have seen single- and double-digit sales growth this year in Japan, Taiwan, Hong Kong, South Korea and Singapore.
Still, Japan is the sumo wrestler of Asian luxury goods. “The Japanese account for more than 50% of our worldwide sales,” said Makoto Baba, marketing director with Louis Vuitton Japan.
Some luxury-brand purveyors never saw much of a downturn, even at the bottom of the Japanese recession, thanks to young Japanese women such as 30-year-old flight attendant Keiko Nakazawa. Emerging from a Chanel boutique in the Ginza district recently, she was carrying a brown Gucci bag in one hand, a mobile phone in the other, her wrists and fingers adorned with Cartier rings and bracelets.
“I haven’t been affected by the recession that much,” Nakazawa said, estimating that she spends about $2,000 a month on name-brand merchandise. “I’m a bit of a shopping freak. I buy what I want, when I want it.”
Hermes is planning to open a new showcase center next year in the Ginza. Just last month, Gucci opened a new Tokyo store, its largest anywhere. Louis Vuitton opened a new store in Hong Kong in February.
In still another sign that the spending shackles are off, retail sales of diamonds are up 8% in Japan so far this year and 15% for the rest of Asia, says Allan Cooke, an analyst in Johannesburg with South Africa’s Rice Rinaldi Securities.
Sales of expensive cars are also on the rebound. “The Mercedes brand is the car of choice in a business community bouncing back from recession,” writes ABN Amro economist Enzio von Pfiel.
And, apparently, you need to look good to shop.
Japanese cosmetics maker Shiseido says sales for its high-end line of beauty products are up 68% in Japan and up sharply in China and Taiwan.
“From our perspective, Asia has already recovered,” says Yutaka Goto, a Shiseido deputy general manager.
Chi Jung Nam in the Seoul bureau contributed to this report.
* U.S.-VIETNAM TRADE PACT
Secretary of State Madeleine Albright, in Hanoi, says a key agreement is back on track. A12
