Too Soon To Call For Asian Decoupling

Forbes ^ | 9/23/2010 | Arpitha Bykere

[bruinbirdman]

Until Asia expands its domestic demand and internal trade, the region's economic fate will remain tied to the U.S. and E.U.

With the September update to our 2010 Global Economic Outlook hot off the presses, we've been examining the broader implications of our latest U.S. forecasts. In light of bleak data released since our July update, we have increased the probability we assign to a U.S. double dip to 40%, which requires us to consider how such an eventuality might impact Asia.

We still see emerging Asia outperforming other regions in 2010-11, but with exports accounting for around 46% of Asia's GDP, the region is unlikely to "decouple" from weaker-than-expected recoveries and deleveraging in the U.S. and E.U. In most Asian countries, consumption and capex--key growth drivers in 2009-'10--as well as labor markets, manufacturing and services, remain structurally tied to exports destined for the U.S. and E.U. As a result, domestic consumption and regional and emerging market (EM) trade will only deflect the blow from a global slowdown in the coming months, while failing to shield Asian growth entirely.

A U.S. double-dip would result in larger-than-expected declines in Asian capex and exports, dampening momentum in labor markets and consumer spending (though cautious hiring during 2009-'10 would prevent drastic layoffs and wage cuts). Though the consequent fiscal and monetary stimulus across the Asia/Pacific region would depend on the extent of each country's trade and financial linkages, the size and effectiveness of such measures would likely be smaller than in 2008.

Intra-regional trade and exports to other EMs have contributed a greater share of Asia's exports in recent years, yet the U.S. and E.U. together still make up more than 30% of the export market. Plus, around 40% to 50% of intra-Asia trade is meant for re-export outside the region, and more