Weakness in the developing world has had an ugly recent effect: vibrant Asian economies wilted over the summer months, and now face a less certain path in the months ahead. Vaunted as a key engine of the world economy, Asian economic powerhouses are now contributing to the pervasive sense of global gloom. Will Asia self-start, or will re-ignition require a boost from another battery?
Asia’s recent success has been built on trade. Torrid growth in Southeast Asia, China, North Asia and the countries that trade with them are all reminiscent of Japan’s post-war growth charge. Trade as a share of GDP for these regional blocs is collectively 61 per cent. Trade was as much as 61 per cent of China’s GDP before the 2008 recession hit. Afterward, it sunk fast, levelling out at just 42 per cent. Clearly, the region’s dependence on the rest of the world is obvious. What has kept these markets going in the interim is massive public stimulus. But even for this cash-rich region, public spending has its limits. Thus, the global summer slowdown in GDP growth weighed heavily on Asian economies.
Chinese trade slowed markedly in the summer, due primarily to a 17 per cent drop in exports to the European Union. Weaker exports to Japan were also to blame, as were softer sales to the US. Although China’s exports within the region seemed to fare much better, those countries were smarting. Singapore, the regional trade bellwether, saw August non-oil exports sink to almost 11 per cent below year-ago levels, and other indications of shipping activity there were equally gloomy.
Many were expecting that intra-Asia trade – the bulk of all trade in the region – would prop up its own economic activity, and pull along the rest of the world with it. However, if the facts in a 2006 World Bank study still hold, 80 per cent of the final goods produced in Asia are headed for developed markets. Small wonder that Europe’s double-dip – and America’s negative reaction to the fallout from the botched early-summer Greek election – has pummelled Asian export markets.
Asia’s overall trade dependence is seen in the attention it pays to shipping networks. UNCTAD data show clearly that five Asian economies – China, Hong Kong, Singapore, South Korea and Malaysia – are the economies that have the best connections to global liner shipping networks, as of this year. Asia’s prominence in this market space is partly due to a shift to larger vessels, and creation of new capacity region-wide to handle them. However, being careful to create sufficient capacity to accommodate explosive regional growth has its problems – the world is dealing with overcapacity in shipping, and the region is still cranking out new vessels as if demand remained strong. While the resulting lower freight rates are generally good news for those with significant transportation costs, the glut of vessels and port space has near-term cash flow consequences for the region.
The good news is that growth will resume, and that for the moment, the US economy is the source. September trade data brightened in Asia, and US demand seemed to be a factor. If this is indeed the beginning of the next growth cycle, then Asia stands to benefit. It may take awhile to use up the capacity, but at the very least, Asia will be open to accommodate business immediately.
The bottom line?
Asian growth hit a rare snag in the summer, demonstrating its continued trade dependence. But its capacity to leverage revived world growth means it won’t be down for long.