Can Asia grow without the West?

The Federal Reserve reported widespread signs last week that the US 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 Organisation for Economic Cooperation 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 slowdown in quarter-on-quarter growth in Asia, excluding Japan and China.

Growth in the region will slow from 11.1 per cent and 7.3 per cent in the first and second quarters, expressed as a seasonally adjusted annualised rate, to just 3.5 per cent this quarter and 3.2 per cent next quarter, according to a Goldman report on September 2.Singapore-based Credit Suisse economist Robert Prior-Wandesforde estimated that industrial output in Asia, excluding Japan, would register annualized growth of just 5 percent in the second half of this year, about half its long-term average.

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 US downturn, Prior-Wandesforde argued.

“To get that degree of decoupling in Asia if the US 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 per cent of the gross domestic product of Asia, excluding Japan, Credit Suisse calculated. Yet household spending in China is less than 36 per cent of gross domestic product, by far the lowest level for any major economy.“The key is whether the Chinese consumer starts spending. It’s happening, but very slowly,” Prior-Wandesforde said.

Still, statistics suggest that intra-Asian trade flows are steadily growing, thereby lessening Asia’s dependence on the rest of the world, especially the United States, the European Union and Japan — also known as the Group of 3. Nomura’s chief Asian economist Rob Subbaraman calculated that Asia excluding Japan had sent 62 per cent of its exports to countries outside the Group of 3 in 2010 so far, up from 54 per cent in 2003, when full data first became available. Imports tell the same story. Over the same period, Asian imports from countries outside the Group of 3 rose to 68 percent of the region’s total, from 60 per cent.

Lackluster growth in the West, which saps Group of 3 demand for Asian goods, is one reason for this trend, but Subbaraman also cited the sheer speed of the development of Asia and other emerging economies. The bigger homes that the swelling Asian middle class can afford are built with raw materials from the likes of Latin America, Africa and Australia, not the Group of 3. The appliances that furnish those homes are mainly made in Asia, not the Group of 3. Asia imports its oil from the Middle East and Africa, not from the Group of 3. It is telling, Subbaraman said, that combined imports to China from Africa, Latin America and Saudi Arabia were on track to exceed its total purchases from the United States and Germany this year.

Economic ties
“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 Group of 3 economies,” he said in a recent report.

Royal Bank of Scotland emerging markets strategist Dominique Dwor-Frecaut agreed that Asia was generating more homegrown demand to cushion a Group of 3 slowdown.  So, while the Bank of Korea kept interest rates unchanged last week, citing a US slowdown and fiscal strains in Europe as downside risks, Dwor-Frecaut said she expected Thailand, for instance, to keep raising borrowing costs back to more normal, precrisis 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 having the world’s second largest economy, after that of the United States.

The implications of a deluge of economic data for August released late last week were encouraging. Exports fell from the previous month 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 jumped 59.3 per cent last month from the level of a year earlier, to 977,300.

The Chinese economy had been weakening for several months as the government has reeled in credit growth and deterred speculative property investment, while companies ran down inventories.

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