Asia tries, yet again, to shrug off downturn in West

By Alan Wheatley, China Economics Editor – Analysis

BEIJING (BestGrowthStock) – As sure as night follows day, a flurry of warnings that the global recovery is faltering is reviving the great debate whether Asia’s economy can decouple from the West’s.

Asia was in rude health in the first half of the year, but a loss of momentum seems assured as economies that are major buyers of the region’s exports run into headwinds.

The Federal Reserve last week reported widespread signs that the U.S. economy had cooled in recent weeks. The European Central Bank said that, with uncertainty prevalent, growth in the euro zone was likely to moderate in the second half of 2010.

For its part, the Organization for Economic Co-operation and Development said the unfolding slowdown in major economies was more pronounced than it had anticipated.

Against this background, Goldman Sachs is forecasting a marked slow down in quarter-on-quarter growth in Asia excluding Japan and China.

Growth will slow from 11.1 percent and 7.3 percent in the first and second quarters — expressed as a seasonally adjusted annualized rate — to just 3.5 percent this quarter and 3.2 percent next quarter, according to a September 2 Goldman report.

Robert Prior-Wandesforde, an economist with Credit Suisse in Singapore, reckons industrial output in non-Japan Asia (NJA) will register annualized growth of just 5 percent in the second half of this year, roughly half its long-term average.

He sees risks to the downside for Asian growth over the next 9-12 months.

Whereas the West barely flinched when the 1997/98 Asian financial crisis drove many countries in the region into recession, Asia still cannot isolate itself from a U.S. downturn, Prior-Wandesforde argues.

“To get that degree of decoupling in Asia if the U.S. economy dives, we would need far more dramatic developments to come from the Chinese consumer,” he said.


China is critical because it accounts for 55 percent of NJA’s gross domestic product, Credit Suisse calculates. Yet household spending in China is less than 36 percent of gross domestic product, by far the lowest of any major economy.

“The key is whether the Chinese consumer starts spending. It’s happening, but very slowly,” Prior-Wandesforde said. “The potential is massive, but it’s a long process.”

Still, statistics suggest that intra-Asian trade flows are steadily growing, thereby lessening NJA’s dependence on the rest of the world, especially the United States, the European Union and Japan — the “Group of Three.”

Rob Subbaraman, Nomura’s chief Asian economist, calculates that NJA sent 62 percent of its exports to non-G3 countries in 2010, up from 54 percent in 2003 — when full data first became available.

Imports tell the same story. Over the same period, NJA’s goods imports from non-G3 countries rose to 68 percent of the region’s total from 60 percent.

Lackluster growth in the West that saps G3 demand for Asian goods is one reason for this trend, but Subbaraman also cites the sheer speed of the development of Asia and other emerging economies.

The bigger homes that Asia’s swelling middle class can afford are built with raw materials from the likes of Latin America, Africa and Australia, not the G3. The appliances that furnish those homes are mainly made in Asia, not the G3. Asia imports its oil from the Middle East and Africa, not from the G3.

It is telling, Subbaraman said, that China’s combined imports from Africa, Latin America and Saudi Arabia are on track to easily exceed its total purchases from the United States and Germany this year.

“We see these strengthening economic ties within Asia and with other emerging market countries as prima facie evidence that Asia has begun the process of gradually decoupling from the G3 economies,” he said in a recent report.


Dominique Dwor-Frecaut, an emerging markets strategist with Royal Bank of Scotland in Singapore, agreed that Asia is generating more home-grown demand to cushion a G3 slowdown.

“It’s a long-term project, but in general, yes, absolutely, there is more domestic resilience, more growth dynamics coming from the domestic side than even five years ago,” she said.

Countries that are relatively less dependent on exports and have lower private-sector leverage will have more scope to decouple than others, Dwor-Frecaut said.

So, whereas the Bank of Korea kept interest rates on hold last week, citing a U.S. slowdown and Europe’s fiscal strains as downside risks, she expects Thailand, for instance, to keep raising borrowing costs back to more normal, pre-crisis levels.

“Decoupling is not an all-or-nothing proposition,” she said.

How China fares in its quest to quit its addiction to exports is critical for the region, given that it is now overtaking Japan as the world’s largest economy after the United States.

The implications of a deluge of economic data for August released late last week were encouraging.

Exports fell from a month earlier for the first time in half a year, consistent with softness in shipments from Taiwan and South Korea.

But imports surged way beyond expectations and retail sales handily beat forecasts, pointing to buoyant domestic demand. Car sales last month jumped 59.3 percent from a year earlier to 977,300.

China’s economy (Read more about the fastest growing economy.) had been weakening for several months as the government reeled in credit growth and deterred speculative property investment, while companies ran down inventories.

But the latest data suggested that the economy had touched bottom, said Wang Hu, an economist with Guotai & Junan Securities in Shanghai.

“As European and U.S. economic growth has slowed since the second quarter, China may again lead the global recovery,” Wang said.

And that, in a word, would be decoupling.

(Editing by Mathew Veedon)

Asia tries, yet again, to shrug off downturn in West