Decoupling was always a misnomer if it implied that an American recession would have no impact in the East. Exports and hence profits would certainly be squeezed; some fear Japan may even be tipping back into recession. Instead, the real argument in the rest of Asia was that it would suffer less than in previous American downturns.
As well as hitting exports, Americas troubles could also affect emerging Asia through financial channels. Its exposure to the subprime mess is thought to be smaller than that of American or European banks. Even so,
Chinese bank shares tumbled this week on reports that they would have to make bigger write-downs on their holdings of American subprime securities. And if shares slide further as global investors flee from risky assets, this could dampen business and consumer confidence in the region.
Some Asian economies are more vulnerable than others. Singapore, Hong Kong and Malaysia are the most exposed, with exports to America equivalent to 20% or more of their GDPs, compared with only 8% in China and 2% in India. There are already some ominous signs. Singapores exports to America are down by 11% over the past year, whereas Malaysias fell by 16%. Exports to other emerging economies and to the European Union surged, so total exports still grew by 6% in both economies. But that was much slower than at the start of 2007, and the worry now is that demand from Europe has started to flag.
The growth in Chinas exports to America slowed to only 1% (in yuan terms) in the year to December from over 20% in late 2006. So far the impact on GDP has been modest. Figures published on January 24th showed that Chinas GDP grew by a sizzling 11.2% in the year to the fourth quarter, down from 11.5% in the previous three months. Most economists expect growth to slow to a still-healthy 9-10% this year, but there are growing concerns that new government limits on bank lending risk choking the economy.
Chinas economy would probably still expand by around 8-9% even if export growth dried up. During the 2001 American recession Chinas GDP growth barely slowed. In contrast, Hong Kong, Singapore, Taiwan and Malaysia suffered full-blown recessions, with growth rates falling by more than ten percentage points from peak to trough. Americas slump is likely to be deeper than in 2001 and Asia is now more integrated into the global economy than it used to be. Doomsters conclude, therefore, that these economies could be hit even harder this time.
The main reasons to be more optimistic are that domestic demand (consumer spending and investment) is likely to remain stronger and that governments have more flexibility to offset Americas malaise. Last year, despite a slowdown in Americas imports, most Asian economies grew faster as domestic demand sped up everywhere except Thailand. Robert Prior-Wandesforde, an economist at HSBC, says that those who argue that Asia cannot decouple from America are ignoring the fact that they already have. Take Malaysia: its exports to America plunged, yet its GDP growth quickened from 5.7% at the end of 2006 to 6.7% in the third quarter of last year.
Contrary to the popular view that Asias meltdown during the 2001 recession was entirely due to a slump in exports, Peter Redward, at Barclays
Capital, argues that a fall in investment played a bigger role. Too much debt and excess capacity weighed down firms, particularly in the electronics industry, which was at the heart of the American recession. Today firms are in much better shape. Capacity utilisation is high across the region; outside China, investment as a share of GDP is historically low; company balance-sheets are stronger and real interest rates are low. Firms are therefore less likely to slash investment than in 2001.
Slowing exports will affect domestic spending. But macroeconomic fundamentals are much healthier in East Asia these days. Large foreign-exchange reserves make countries less vulnerable to shocks. Budgets are in surplus or close to balance, providing more scope for fiscal stimulus to support growth.
For all these reasons, even if Asias exports clearly have not decoupled from America, its economies will be less hurt by a recession there than in the past. Standard Chartered forecasts that emerging Asia will grow by an average of 6.4% in 2008, down from 7.8% in 2007. In 2001 growth dropped by three percentage points, to 4.2%. Financial markets were slow to realise that growth and hence profits in some countries in emerging Asia will be dented by an American downturn. But now they risk exaggerating the potential damage.
The Economist Newspaper Limited 2008