The Myth of Asian Profitability - May 1996
Intuitively, if consumer prices are rising faster than unit labour costs, then income is being redistributed from the consumer to the producer and the corporate profit share should be rising. Unfortunately, the experience of much of Asia has tended towards the opposite.
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It can be argued that many of the asset price movements seen in recent years that have boosted headline EPS growth in Asia are not sustainable. They have been in part a function of the Fed's exceptionally loose monetary policy from 1989-93 conducted in order to recapitalise the US banking system. The result has been structurally low or even negative real interest rates which have changed corporate and household portfolio preferences towards consumption of assets rather than goods.This should net out in terms of GNP-based savings shares but the structure of the listed economy in Asia has probably served, perhaps near term, to magnify the headline quoted profit share of GNP.
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The ASEAN economies (ex-Singapore) and China probably face the greatest challenge though. Most are for the moment choosing to maintain their 'cheap' currency policies since in a number of cases, the ability of their industries to deliver the productivity gains required by a stronger currency still appears limited, or the political environment does not allow the economy to enter a period of weaker growth that the transition requires. However, especially in those economies where the labour market for even semi-skilled workers is tight, the offset is that unit labour cost pressures are building strongly. Moreover they are in a number of cases rising relative to consumer prices (which in turn have a tendency to be constrained artificially). As a result, the corporate profit share in GNP is probably falling and could further hamper the ability of the corporate sector to deliver profit growth in line with economic growth.