As much of the world stumbles back to its feet after falling into the worst economic rut in decades, Asia once again has proven its impressive resilience by powering its way to the forefront of the global recovery. Unhitching itself from the receding West, Asia found its own fuel—widespread government stimulus and Chinese demand—to drive growth. Though Asia’s recovery will help revive the global economy, a sustained recovery in other regions must come from within.
An Impressive Bounce Back
Asia responded to a swift downturn at the end of 2008 with an equally swift upturn in the second quarter of 2009, in sharp contrast to the protracted recovery in the rest of the world.
Real GDP Growth
% change over previous period (seasonally adjusted annual rate)
| 2008 Q4 | 2009 Q1 | 2009 Q2 | 2009 Q3 | 2009 Q4 | |
|---|---|---|---|---|---|
| China | 1.9 | 8.3 | 14.9 | 9.5 | 9.0 |
| Japan | -13.5 | -11.7 | 3.7 | 3.0 | 3.0 |
| Asia ex China, Japan | -9.9 | -1.9 | 10.7 | 5.8 | 4.5 |
| Euro area | -6.9 | -9.5 | -0.1 | 3.0 | 2.5 |
| United States | -5.4 | -6.4 | -1.0 | 4.0 | 3.0 |
| Source: JP Morgan Global Economic Outlook, IMF. | |||||
After falling precipitously during the crisis, industrial production and retail sales in Asia have been rapidly improving. Second quarter industrial production rose 7.7 percent (q/q), led by a 10.8 percent year-on-year increase in China. Retail sales, which have yet to stabilize in much of the rest of the world, also gained in Asia, jumping 3.6 percent (q/q) in the second quarter in South Korea and 15.4 percent (y.o.y) in August in China.
Asia once again has proven its impressive resilience by powering its way to the forefront of the global recovery.
Revisions to near-term term projections for growth reflect these improvements. The International Monetary Fund (IMF) and World Bank now predict that Asia, excluding Japan, will grow between 5 and 5.5 percent in 2009 and between 6.6 and 7 percent in 2010.
Weathering the Storm
Swift and forceful government responses, made possible by strong preexisting fiscal and external balance conditions, powered Asia’s rapid rebound. At the onset of the crisis, Asia’s current account and fiscal positions were generally healthy (with Japan and India as notable exceptions of the latter), foreign exchange reserves were ample, and financial sectors had virtually no exposure to toxic assets. Asian consumers, after years of high savings, also had reserves to fall back on. In addition, the profitability of Asian companies was strong. As a result, governments were able to respond with aggressive and sustainable stimulus measures, and the private sector was able to weather the crisis. Consequently, as the global panic receded, investors quickly returned to Asian financial markets and credit conditions eased.
Due to its size and dynamism, China played a central role in the region’s recovery, and continues to do so. A $585 billion spending plan and a large infusion of credit through the banking system spurred a lending expansion of $1.1 trillion in the first half of 2009, nearly triple the lending in all of 2008. The success of China’s recovery effort also reflects the country’s large size: fiscal stimulus packages tend to be more effective in large economies that have the financial capacity to replace dwindling foreign demand.
China’s quick recovery spurred a rush of second quarter imports from Japan (up 30.2 percent q/q), Taiwan (up 41 percent q/q), and South Korea (up 26.6 percent q/q), buoying demand and pushing corporate profits higher across the region.
Substantial stimulus packages elsewhere in Asia helped boost the region as well, with an aggregate stimulus effort in East Asia1 of 3.6 percent of regional GDP. Governments in South Korea, Taiwan, and Singapore each provided support of more than 4 percent of GDP.
Though Asia’s recovery will help revive the global economy, a sustained recovery in other regions must come from within.
Going it Alone?
Asia, and China in particular, can maintain a modest rate of expansion, even if export growth stays well below its rapid pre-recession pace. The IMF predicts only a 1 percent increase in world trade in 2010, but regional growth in Asia of 6.9 percent excluding Japan, and 2.5 percent including Japan.
As a region, Asia is not as export-dependent as is often thought. Exports from Asia to the rest of the world accounted for only 15 percent of regional GDP in 2008, with this figure projected to decline to around 11 percent in 2009.2 Trade balances represent a much smaller fraction, supporting the view that Asia is capable of perpetuating its own economic recovery as long as exports do not collapse.
Plentiful foreign exchange reserves, space for fiscal expansion, heavy political pressure to encourage growth, and falling consumer prices (down 1.2 percent in August compared to the same month in 2008) provide the means for Chinese leaders to continue stimulus programs without stoking inflation worries at this stage. The IMF predicts China will grow by 7.5 percent in 2009 and 8.5 percent in 2010, while Goldman Sachs projects growth of 9.4 percent in 2009 and 11.9 percent in 2010.
While surging second quarter growth in the rest of Asia is expected to slow, economic prospects there remain strong, even if still overly dependent on China. Though declining, current account surpluses have stayed high and government finances remain in good shape, providing leaders with the flexibility to support consumer demand through fiscal spending. For 2009, the Economist Intelligence Unit predicts current account surpluses as a percentage of GDP of 7.4 percent in China, 10.4 percent in Hong Kong, 9.6 percent in Taiwan, and 14.9 percent in Singapore.
As a region, Asia is not as export-dependent as is often thought.
Asia’s private sector is showing improvement. Unemployment, which continues to approach 10 percent in the United States and Europe, has leveled in Singapore at 3.3 percent and in Hong Kong at 5.4 percent. In South Korea, unemployment fell to 3.8 percent. Additionally, despite continued declines of net capital inflows into emerging markets worldwide, the International Institute of Finance predicts emerging Asia will see a small increase in 2009.
Risks
Asia’s prospects face downside risks. Government stimulus efforts are largely responsible for China’s resiliency; eventually, consumers and private investors will have to step in to fuel growth, but only tentative signs of this transition have emerged thus far.
The retreating western consumer has made the rest of Asia heavily reliant on China, an unproven import market, for demand. Korea, Taiwan, and Thailand now ship nearly three times the exports to China that they do to the United States.
The potential dangers of dependence on China are already evident in Japan. Since January, Japanese exports to China increased by 77 percent but total exports fell a seasonally adjusted 1.3 percent (m/m) in July. Deep structural problems, such as inadequate competition and inefficiency in the non-tradables sector, are made worse by record unemployment and deflation. The incoming Japanese government is also shouldering the largest public debt to GDP ratio in the world, which restricts spending options.
From Asian Recovery to Global Recovery?
Other struggling economies should not expect Asia’s strong emergence to carry them out of the recession. To help replace receding domestic demand, Western countries with large trade deficits, most notably the United States, expect to expand exports to Asia. China—which owns Asia’s biggest trade surplus in absolute terms and has already shown the capacity to import more—is the principal target.
Asia simply lacks the size to jumpstart the rest of the world.
Unfortunately, these expectations are unfounded for several reasons. First, huge increases in imports are doubtful, especially in the near term. Asian economies, long dependent on exports, are not likely to quickly break their saving habits in favor of import consumption.
Additionally, trade volumes to China from the developed world are often overstated. Second quarter Chinese imports are up 23 percent (q/q) from the European Union and 11.5 percent (q/q) from the United States. But, even if this trend continues, these surges represent absolute annual increases of only $30 billion and $9 billion in economies that registered GDPs of over $18 trillion and $14 trillion, respectively, in 2008. Furthermore, since 2005, over 40 percent (and rising) of China’s imports have come from Asia, with only 11 percent originating in the European Union and a mere 7 percent in the United States, limiting the global benefits of China’s import increase.
Finally, Asia simply lacks the size to jumpstart the rest of the world. The Asian trade surplus stood at $335 billion in 2008, less than 3 percent of U.S. GDP and less than 1 percent of world GDP. Considering the heated debate on the effectiveness of the U.S. government’s $787 billion effort, slowly distributing half of that sum around the $60 trillion world economy would have a minimal effect on growth.
1 Cambodia, China, Fiji, Indonesia, Lao PDR, Malaysia, Papua New Guinea, Philippines, Thailand, Vanuatu, and Vietnam.
2 Constructed using Direction of Trade Statistics, IMF and World Economic Outlook, IMF.
