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Riders on the storm
Nov 19th 2008
From The World in 2009 print edition
By Pam Woodall, HONG KONG
Asia will enjoy moderate growth and lower inflation in 2009
Asia’s emerging economies have long been the world’s most dynamic, with GDP growing at an annual rate of 7.5% over the past decade, two-and-a-half times as fast as in the rest of the world. Over the past year, however, Asia has been hit by a series of typhoons: an economic downturn and credit crunch in the rich world, dearer energy and a surge in inflation. These are particularly troublesome for the world’s most export- and energy-dependent economies, and many people worry that they will badly damage Asia’s growth prospects. In 2009 the pessimists will prove to be wrong.
Asia’s export-driven economies had benefited more than any other region from America’s consumer boom. Its manufacturers have therefore been hit hard by the slump in American demand. Exports to America will weaken further in 2009, and European markets will also be squeezed. But America and western Europe together buy less than 30% of emerging Asia’s total exports. Over half of China’s exports go to other emerging economies, where demand remains stronger.＜script src="/JavaScript/adcode1.js" type="text/javascript"＞＜/script＞＜script language="JavaScript" type="text/javascript"＞＜/script＞＜script language="JavaScript" src="http://ad.doubleclick.net/adj/web.economist.com/;nav=null;audience_topic=nationaleconomy;audience_channel=commerce;pos=mpu_left;tile=4;sz=350x300,336x236,300x250,250x250;subs=n;ord=6155010670178359?" type="text/javascript"＞＜/script＞
Some of the smaller economies, such as Singapore and Hong Kong, are more vulnerable, with exports to America amounting to 20-30% of GDP (compared with only 8% for China) and will therefore slow more sharply. Almost everywhere, however, consumer spending and infrastructure investment will remain robust and so help to offset weaker exports. China’s retail-sales volume, for example, could increase by around 15% in 2009.
Stockmarkets in the region have tumbled recently, yet Asian countries have largely avoided the financial excesses undermining so many Western economies. Private-sector debts are low, banks’ holdings of risky assets are small, and economies are less dependent on foreign capital than they used to be. The main exception is South Korea, where banks borrowed heavily abroad to fund a surge in lending to households and firms. Unlike most other Asian economies, it also has a current-account deficit. As a result, its economy will be hit harder by the global credit crunch.
In general, however, the Asian economies are not only in much better shape than a decade ago, but also when compared with other emerging economies in eastern Europe or Latin America. China, which has accounted for about one-third of global growth in 2008, will continue to support the region.
Growth in emerging Asia as a whole will slow, but not slump, in 2009, with GDP increasing by an average of just under 7%. That is well below growth of over 9% in 2007, but that was unsustainable. Slower growth, more dependent on domestic demand rather than exports, will be the pause that refreshes. If the global downturn forces Asian governments to shift the mix of growth from exports to consumption, this will help to make future growth more sustainable.
If domestic demand falters, several countries, including China, Hong Kong and Singapore, have budget surpluses which will allow them to support their economies with higher spending or lower taxes. However, India’s budget deficit of 8% of GDP (including off-budget subsidies) leaves it with no such cushion.
Emerging Asia’s inflation rate reached 8% in mid-2008, up from an average of only 2.8% since 2000. China hit its highest rate for 12 years, Singapore and Malaysia their highest for around 25 years. But the good news is that inflation will ease in 2009.
Most of the jump in inflation was caused by a surge in the price of food, and to a lesser extent oil. Food makes up a much bigger slice of consumer spending in these countries than in the rich world. Inflation has also been fuelled by over-rapid growth in some economies, which pushed up wages.
Two forces will therefore help to reduce inflation in 2009. First, if food and energy prices stabilise at their current lower levels, this will produce a sharp fall in the year-on–year rate of inflation. Second, slower growth will also help to dampen wage demands. Emerging Asia’s average inflation rate will drop below 4% in 2009, which will give central banks more room to cut interest rates. And since Asia uses more energy to generate a dollar of GDP than other parts of the world, it will also enjoy the biggest boost from lower oil prices.
A longer-term concern is whether more expensive labour could wipe out Asia’s competitive edge. Labour costs are rising much faster than in the developed world, forcing some Chinese firms to close down. But Chinese manufacturing wages are still less than 10% of those in America.
More factories in southern China will go bust in 2009 because the country is starting to lose its competitiveness in some low-value products, such as toys, shoes and textiles. This is forcing Chinese manufacturers to move up the value chain, just as those in South Korea and Taiwan did years ago. But this is evidence of success as countries grow richer, not a sign of dwindling competitiveness.
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