Will Asia Decouple from the US Slowdown?

♠ Posted by Emmanuel in ,, at 2/13/2008 12:18:00 AM
Is Asia going to decouple from the ongoing slowdown led by United States? The IMF's latest thoughts on the topic suggest it cannot. What becomes the question, then, is to what extent Asia will be struck by "collateral damage." The chart to the left indicates that, if anything else, the dependence of developing Asia on external markets is much higher in 2006 than in 1990. I am of two minds about this. There is no doubt that any number of Asian economies are very much export-driven. Yet, there are also possibilities not alluded to in many analyses such as those for creating domestic demand. Japan certainly won't become the next hot consumer market, but what about China, India, etc.? Ah, enough conjecture. Here is the IMF blurb:

What are the implications of growing interdependence among economies in emerging Asia?
1. Decoupling is unlikely.
Given the increasing share of intra-regional trade, it may be tempting to argue that emerging Asia can decouple from the global economy. However, this is likely not the case. Developed economies outside the region remain the main destination of final good exports by emerging Asia. Indeed, the exposure of Asian economies to inter-regional exports has actually increased over the past 15 years (see Chart 2).

Indeed, it doesn't look like very encouraging stuff. Also, here are a few articles from the reliable Financial Times on the whole decoupling thingamajig. First, it writes that while US demand for Asian exports may be slowing, Europe may be taking up some of the slack (likely due to the increased buying power of the stronger euro and pound):

Asia’s export-dependent economies are hoping that decoupling – the notion that the rest of the world can grow even with the US in recession – will hold true.

There have been signs. Over the past year, Japanese shipments to China have risen by 15 per cent, to Europe and other Asian nations by 11.5 per cent, and to the “rest of world”, including the oil-flush Middle East, by 25 per cent.

Still, exports to the US have been fading fast, down 1.7 per cent on the year, and because Japan’s eagerly awaited recovery in domestic demand has never materialised, its economy has been running on only one (export-led) engine. This fiscal year its economy is expected to grow by what analysts describe as a disappointing 1.3 per cent.

Peter Morgan, chief economist for Asia Pacific at HSBC, says that one of the chinks in decoupling’s armour is Europe.

The region has been happily sucking in Asian imports thanks to its strong currency and reasonably good economic performance. But as Asian currencies appreciate, against the euro as well as the dollar, and European economies slow, that will change. “That is going to take away one of the legs of the stool,” he says.

Second, China may actually be welcoming a respite from so many consecutive years of double-digit export-led growth:

Behind the headline forecasts of decelerating Chinese output in 2008 lies a more significant trend that may mark a long-awaited turning point for the economy and its global impact.

Chinese and World Bank economists have significantly downgraded forecasts for China’s national growth in recent weeks – from 11.4 per cent in 2007 to maybe two percentage points lower this year...

The Chinese government, far from being alarmed at such a turnaround in growth, would largely welcome it.

The slowdown could dovetail with Beijing’s own aims to moderate the contentious trade surplus and, at the same time, recalibrate growth away from heavy industry in favour of consumption and services.

“If China is able to rebalance the economy, making it less intensive in resources and capital, cleaner and more widely shared, growth of 9-10 per cent a year for long periods would be the [outcome] developing countries across the world are looking for,” said Louis Kuijs of the World Bank in Beijing.

The surge of recent years in investment in heavy industry, such as steel, aluminium and cement, has strained energy resources, contributed hugely to greenhouse gas emissions and pollution and created few jobs.

Such a cocktail is anathema to Chinese leaders, who face pressure at home to create more jobs – especially with exports in relative decline – and from abroad to tackle carbon emissions.

“Five of the largest heavy industries account for over 40 per cent of the country’s energy demand yet, combined, they employ fewer people than the service sector in Guangdong province alone, and fewer people than they did a decade ago,” said Trevor Houser, a visiting fellow with the Washington-based Peterson Institute for International Economics.

Last, the Indian economy is also poised for a slowdown after years of breakneck growth:

India’s economy, an increasingly important engine of global growth, is slowing rapidly for the first time in three years, according to government statistics released on Thursday, prompting economists to cut forecasts for the coming year.

India’s growth rate for the year to March 2008 will be 8.7 per cent, down from 9.6 per cent the previous year, the government’s statistics office said on Thursday, reflecting the dual impact of an appreciating rupee and sharp monetary tightening...

Private economists studying India have also become less bullish about its growth prospects. Citigroup, which had forecast 9.3 per cent growth for the country this year, slashed its growth forecast for next year to 8.3 per cent from 9 per cent, blaming a deteriorating global environment and the likelihood of single-digit export growth.

Sonal Varma, an economist at Lehman Brothers in Mumbai, said the bank’s forecast of 8.8 per cent growth next year faced downside risks from “weakening global growth, tight domestic monetary conditions and increased financial turbulence”.

Other banks have been expecting an even sharper tailing off in India’s growth rates, with Morgan Stanley forecasting GDP growth of 7.4 per cent next year and 7.8 per cent in the year to March 2010.