Asian Economy won't decouple from US & European      downturn

By Simon Hunt

May 2008 :- The concept that Asia has decoupled from the USA and the rest of the “Old World” is a myth.

Globalisation implies greater interdependence between countries, as multinational companies seek to optimise their supply chain costs. This is proven by two sets of statistics.

• First, 80% of Asia’s intra-regional trade is destined for exports outside the region, of which 69% is destined to the “Old World” (N America, W Europe and Japan), as the Asian Development Bank (ADB) shows in its last annual report.
• Second, nearly all Asian countries’ dependence on exports has increased since 2001 and earlier years.

For instance, excluding China, the six major countries’ average GDP dependence on exports rose from 40% in 2001 to 51% over the last 12 months.  India’s exports grew from 13% to 23%. Far from domestic demand being the principal driver to economic expansion, it has been Asia’s traditional exports which have given them such strong growth.

Almost 80% of Asia’s intra-regional trade is destined for markets outside the region ,of which 69% goes to the “Old World”, according to the ADB. Just over 50% of China’s exports are reprocessed imports, mostly from Asia. But, Asian counties have become more, not less, dependent on exports for growing their economies. Take the six major countries in the region, outside China and Japan, and the ratio of exports to GDP has risen from an average of 40% in 2001 to around 50% currently.

China's economy will slow down in 2008 and 2009 - perhaps sharply

China's downthurn will hurt regional & Western economies. The global equation as it affects China is quite simple. The US consumer has been accounting for some 20% of global GDP, which is twice the size of the entire Japanese economy.

Some 23% of China’s exports go to N America, which alone account for about 10% of China’s GDP. Around 28% of the country’s exports go to Europe and 44% to other Asian countries. China’s exports, which account for about 37% of its GDP, should fall in a series of three steps. Exports to North America are already down by some 6%. Exports to Europe will fall as the region’s economy slows and finally the impact of the“Old World” slowing will hit Asian exports. In volume terms, a better guide to real exports than dollar values, can be seen in container exports. These have almost halved from a 23% rise in the first four months of last year to a growth of 12% so far in 2008.

Anyone who has an optimistic view on China’s economy for this year is fooling themselves! China is hoping for a soft landing for its economy. It is hunkering down to withstand the storms that its government believes will blow through the rest of the world.  It has its own issues to face: a rising and embedded inflation risk that could threaten macro stability. Navigating the dynamics for controlling inflation and maintaining economic stability in the face of a deteriorating external environment will tax the country’s policy makers to the full. GDP growth should fall from 11.5% in 2007 to around 9.5% this year and 8.5% in 2009, but the downturn could be worse.

China's Stockmarket slide illustrates the uncertainty:

The impact of Asian inflation on monetary policy, currencies & economies

Whilst most Asian countries have sizeable current account surpluses and foreign exchange reserves, most allowed their currencies to remain largely pegged to the US dollar. The result has been rising money supply growth which is now being reflected in rising inflation. Food prices, and especially for staple items like wheat and rice, have led to severe shortages in some countries and even riots. (see: energy & food inflation). This is something which is unlikely to go away quickly, because of weather patterns, disease, government policies and Washington’s insistence on subsidising corn for ethanol together with greater demand in the region as incomes rise. It is not abnormal for 60% of rural incomes to be spent on food. That is why what happens to food prices is so important.

Asian Inflation Accelerates

Looking across the Asian spectrum the inflation picture is not a happy one.
Action will need to be taken. The monetary authorities will be forced to tighten. This will have two major affects: domestic demand should weaken and their currencies will appreciate. Currency appreciation will make exporting less profitable in a global market which is destined to slow.

This is becoming very apparent in the consumer appliance sector, for which Asia has become the principal manufacturing hub. For instance, some ACR tube manufacturers – tube for air-conditioners and refrigerators – that we have spoken with in the region tell us that this is the weakest ‘high season’ in some 20 years.

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