Asia Economics Comment: Decoupling, still
Last week brought several painful reminders that stronger growth in the West isn't providing much of a lift to Asia.
Over the coming days, expect the data to reinforce that message. Asian exports, including Japan's, have so far failed to
respond convincingly to improving demand in the US and the EU. With consumption and investment looking a little tired in
most markets, the expected pick-up in growth will be decidedly muted. Fortunately, stable interest rates and resilient
capital flows will help keep things on an even keel for the time being. At least that's something.
Start with the recent flow of data. In Asia, there was more evidence of wobbly exports. Japan saw a sharp dip in
shipments in March, down over 3% sa on the month in volume terms. Taiwan's new export orders, a useful leading indicator
for the region, contracted by a similar amount. Meanwhile, new export orders as measured by HSBC's China flash
manufacturing PMI dropped back below 50. In all, hardly signs that the regional trade cycle is firing up.
At first glance, that's puzzling. After all, last week brought yet more encouraging data for the US and Europe. For
example, in the former, durable goods orders jumped impressively in March, something that should benefit Asian exports
given their sensitivity to the US capital expenditure cycle (new orders in the US flash manufacturing PMI also rose). In
the Eurozone, last week's flash PMIs all pointed to accelerating growth, while Germany's IFO index bounced as well.
What gives? A couple of things. First, as we have long argued, growth in the West appears to be less import intensive
than in the past. This reflects to an extent a decline in Asian competitiveness, with wages soaring across the region in
recent years, while remaining more or less unchanged in advanced countries. In addition, growth in the US and EU may
have shifted away from import intensive sectors, such as housing construction (improving but from a rather depressed
level). Second, Asian exporters are also suffering from a pull-back in demand among other emerging markets, including
China, that supported trade since the Global Financial Crisis.
This week, there's plenty of data to keep an eye on that should broadly point in the same direction. In Asia, apart from
the PMIs, Korea will release export data for April (always the first print of the month), with Thailand and Indonesia
publishing numbers for March. Korea and Japan will also release industrial production for the month, with important
clues about expectations among manufacturers. In the US, non-farm payrolls are expected to be robust (HSBC: 195k,
consensus: 210k), with factory orders and consumer confidence also likely strong. In Europe, the European Commission
surveys, Eurozone inflation, and the final PMI readings should broadly reinforce a relatively upbeat tone.
In short, a remarkable divergence in growth trends. Alas, it's decoupling of the wrong kind. As local demand decelerates
across emerging Asia, a bounce in exports would have provided welcome relief. Fortunately, interest rates remain low and
capital flows remarkably resilient. That should be enough to keep things ticking along for a while, but not enough boost
growth to more customary levels.
Ends