Saturday 9 February 2008

Asian interdependence and the US recession

After writing the previous "Has China's growth peaked" I hinted at the interdependence of Asian countries and their subsequent relationship with the US and EU.

When one looks at the raw numbers, e.g. the % of exports to the US it might not appear to be that high. However, when one takes its account the exports of intermediate goods to other Asian countries that are then exported to the US and EU you can see that the problem goes a lot deeper. There are many academic papers that are looking at production networks and fragmentation in Asia and I may even have written one of two of them.

This is the important quote with numbers. Intuitively they appear to be about right.

Asian exports to the US appear to be just 18 per cent. But, the real amount, including all the “goods in process”, might be more than 30 per cent, he calculates.

I do not believe the de-coupling story. This is one of those pre-recession stories of hope that "the world has changed" when it hasn't. A US recesission will bite hard let there be no doubt.

Asia economies hope for happy divorce [FT]

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.

Exports to the Middle East, which accounts for a fairly modest but rapidly growing portion of Asian exports, should hold up assuming demand for oil stays firm. But the foundations of intra-Asian trade, on which much of the argument about export diversification rests, could be more rickety than they appear.

One thing to remember is that a lot of exports to China are just passing through,” says Mr Morgan, referring to China’s role as an assembly plant for Asian components.

Asian exports to the US appear to be just 18 per cent. But, the real amount, including all the “goods in process”, might be more than 30 per cent, he calculates.

Thailand is a good example. Recent economic growth has been powered primarily by exports, about 12.5 per cent of which went directly to the US last year, down from about 20 per cent when the previous US recession struck in 2001.

Yet Thailand is not as insulated as this might suggest. Sethaput Suthiwart-Narueput, chief economist at SCB Securities, says Bangkok remains vulnerable to a US slowdown since most of its exports to China – about 9.5 per cent of total shipments, up from 4.4 per cent in 2001 – are components used to make goods bound for the US.

The picture is not black and white and decoupling is not an “either/or phenomenon”, says Paul Sheard, global chief economist at Lehman Brothers. Asia emerged relatively unscathed from the 1991 US recession but was much harder hit by the “tech recession” of 2001. Similarly, this time, depending on the precise nature of any downturn, commodity-rich Australia, Indonesia and Malaysia might fare better than, say, countries specialising in electronics, such as Taiwan or South Korea.

Indonesia, for example, has already noticed its non-oil and gas exports slowing to the US. Mari Pangestu, trade minister, told the Financial Times: “Our strategy now is to diversify markets and diversify products. We think the growth market is still Asia, although if the US does fall into recession it will have an impact on the high-growth economies.”

The US remains India’s largest export market, reducing the country’s chances of surviving a US downturn unscathed. The Reserve Bank of India says it has already seen a slowdown in the crucial software and services exports.

By contrast, Australia’s reliance on US exports has substantially diminished. Tim Harcourt, chief economist at the Australian Trade Commission, points out that the US share of Australia’s exports has fallen from 10 per cent to just 6 per cent as “Australia has benefited from the global economy firing on more cylinders than usual.”

China and the health of its economy could be a key factor for many others in Asia. If China’s role as the world’s assembly plant is vulnerable to a US downturn, its infrastructure-led demand is less so. Barring the truly unexpected, even a US recession is not likely to push Chinese growth much below 9 per cent, against 11.4 per cent last year.

Depending on the components of that growth, there could be more demand for, say, raw materials and construction equipment and less for components and factory machinery.

That could slow, but not throttle, growth in some Asian economies. For example, both Singapore and Malaysia have seen a slowdown in their biggest export category, electronics.

But, according to Kit Wei Zheng, a Citigroup economist, Singapore is unlikely to suffer as big a slump as in 2001 because it has diversified into other export areas, including pharmaceuticals. Likewise, Malaysia is partly cushioned by the global demand for palm oil.

Diversification will only go so far, however, particularly if US consumption nosedives, says Mr Sheard. “Asia, centred on China, has become even more interlinked into the global economy, the driving impetus of which has been the US,” he said. It is hard to be global and decoupled at the same time.