Can Asia withstand a US slowdown?

Thursday, May 10, 2007

Can Asia withstand a US slowdown?

Asia has come a long way, but it is too soon to talk of decoupling from the US economy

William Pesek


Ten years after the Asian crisis, the region is revelling in strong growth and booming markets.

The exuberance was palpable over the weekend in Kyoto, Japan, where the Asian Development Bank held its annual meeting. Politicians, bankers and economists from every financial centre chewed over the vast opportunities in a region many fled a decade ago and, until recently, pointedly avoided.

The spotlight on Asia's growth rates is also spawning hubris about how far the region has come since 1997. Perhaps the best example is the argument that China and India are doing so well that Asia no longer needs the United States economy.

"This idea of Asia decoupling is a complete myth," Mr Ifzal Ali, chief economist at the Manila-based Asian Development Bank, said. "It's simply not supported by the facts."

Other economists, including those at Merrill Lynch, have a very different view.

"We're increasingly confident that Asia can withstand a US slowdown," Merrill's Asia-based economists argued in an April 24 report.

"New export markets (Japan, Europe, and the developing world), new export products (services and labour), domestic demand (especially investment) and supportive macro policies all should help cushion regional growth as the US slows."

To economists such as Mr Ali, however, the emphasis should be on the word "cushion".

Asia's Boom

Asia is booming and has more growth locomotives than it did a decade ago. Japan, which was sliding into deflation in 1997, is growing again. And as Merrill Lynch points out, China and India combined now account for more than 20 per cent of global gross domestic product in purchasing-power-parity terms, greater than the US economy's 19.7-per-cent share.

Looked at that way, Asia would appear to be immune from a US slowdown.

Yet in a new report, Mr Ali says the forces of globalisation and changes in the nature of trade are merely masking Asia's vulnerability to the US.

Take China, the largest driver of regional exports in Asia.

For all the excitement about China's 11-per-cent growth and 1.3 billion-person market, its final demand — essentially, goods purchased in China — accounts for only 6.4 per cent of total Asian trade. That's only half the contribution of Japan.

When you dissect Asia's trade data, more than the 70 per cent of trade within the region consists of so-called intermediate goods that are used in production, according to Mr Ali.

Of this, half is created by demand outside Asia. And roughly 61.3 per cent of total Asian exports are eventually consumed in the US, Europe and Japan.

If the US sneezes

"It's still the case that if G3 economies — particularly the US — sneeze, Asia catches a cold, too," Mr Ali says. "Weak demand in the US will hit the current drivers of Asian growth, which then will hurt the rest of Asia."

None of this is to downplay the important changes that swept Asia after the 1997 crisis. Financial systems are healthier, living standards are generally higher and enough currency reserves have been amassed to shield economies from volatility in markets.

"But investors shouldn't get ahead of themselves in thinking that what happens in the U.S. doesn't matter in Asia," Mr Caio Koch-Weser, vice-chairman at Frankfurt-based Deutsche Bank, said.

Decoupling doubts

Another reason Asia isn't as independent from the US as believed is the action taken in Beijing and New Delhi to cool growth.

A key presumption of the Asia-decoupling argument, after all, is for China and India to keep zooming along. Japan's economy, meanwhile, remains an export-driven one. Robust domestic demand in Asia's biggest economy remains elusive.

Driving the Asia-can-stand-alone theory is the region's success in withstanding slower US growth in 2006, a period characterised by a plunging housing market.

Yet, the housing bust didn't send the US into recession, as many predicted, said Mr Abby Joseph Cohen, New York-based chief US investment strategist at Goldman Sachs Group Inc.

In other words, the Asia-decoupling view has yet to be tested. If it were, more than a few investors betting on strong Asian growth in the years ahead might be sorely disappointed.

"Asia has come a long, long way since the crisis," Mr Ali said.

"But let's not exaggerate how much it is ready to stand on its own. This region will get there — it's hardly there yet."

William Pesek is a Bloomberg News columnist. The opinions expressed are his own.

at the moment, DJIA -111.25

I personally do not subscribe to the argument "Asia is decoupling from the US". Everybody points to inter-regional trade and China + India as engines of growth that will ensure Asia remains on its feet despite a US slowddown or recession. I believe not for the following reasons:

(1) The point a lot of people miss is that much of inter-regional trade is driven by China indirectly e.g. because resources have been directed to export oriented activities in Asian countries (increasing exports to China), domestic consumption is being satisfied by imports (from other Asian countries).

(2) Then there is India - where domestic consumption is 70% of GDP, which means growth is generated internally and will not benefit Asia very much unless the majority of one's exports are headed that way...which is not the case for many Asian countries.

(3) Finally, China. All we have to see it the humongous trade imbalance that China has with the US. If US consumers stop buying Chinese goods, it's very likely that China's growth will be affected - who else can absorb such goods and take the US' place? No one. And judging from data we have seen recently, the US consumer is getting weaker and weaker in terms of their purchasing power.

Hello!
Stop talking about US, China and India.
Press the left paddle and drop to your 3rd gear.
It's time to surge ahead.
Charge!
Up up up!

OMG! i'd better find out where the city circuit will be - hopefully it runs past my cheap hong lim hdb apartment - i am sure prices of apartment where the circuit runs through will double in value as a result! :spliff: