A growing US economy and low oil prices are not translating into growing trading volumes for Asia’s tiger economies, according to Paul Gruenwald, regional chief economist at Standard & Poor’s.
China’s slowdown therefore adds greater pressure on Hong Kong, Taiwan, Korea, Singapore and Thailand, he said.
“This change looks structural, not cyclical,” Gruenwald said, speaking at a seminar in Hong Kong on 8 September organised by S&P Capital IQ. East Asia has traditionally been dependent on trade, but since the global financial crisis, trade has not contributed to GDP expansion.
Whereas before the crisis, about 20% of tiger economies’ growth came from trade, that contribution has been zero since. All growth has come from domestic drivers – and from debt.
“This region has discovered credit,” Gruenwald said. Across the region, bank credit as a proportion of GDP has risen since 2007, especially in China, Hong Kong, Singapore, Malaysia and Thailand. “These are the countries most at risk when the Fed raises rates,” he said, referring to the widely expected move by the US Federal Reserve.
Gruenwald predicted the Fed will raise the federal funds rate in December.
He added that in terms of debt, Indonesia and India, countries more often flagged as fragile, have not indulged in a credit binge.
Why has the US recovery not boosted Asian fortunes? Spending by US households and consumer durables – electronics, automobiles – has been robust for the past three years, growing at around 6% per annum.
But the pattern of trade has changed, probably permanently. In the US, manufacturing has been on-shored. The US economy is relatively more competitive than before the global financial crisis, and its companies can produce goods they used to import.
The dramatic fall in the price of oil should be like a shot in the arm for energy-intensive Asian economies. But the savings have not gone to more consumption of investment. “Firms and households have just banked that income,” Gruenwald said.
China is also no longer supporting its neighbours like it used to. China is at the heart of Asian supply chains, but its companies have learned how to manufacture many inputs that it previously bought from other Asian markets.
For Asian tiger economies reliant upon exports, “The party’s over,” Gruenwald said. This trend actually predates the global financial crisis but since 2008 this shift has accelerated to the point that he believes the change is structural, and not a short-term reflection of economic turmoil.
This is especially true for manufacturers; the picture is mixed for trade involving commodities and services. But broadly speaking, the adage that manufacturing is what gives countries a sustainable competitive edge may no longer hold true, Gruenwald said.
China’s economic slowdown therefore comes at a terrible moment for its regional trading partners. Hong Kong, Taiwan, Korea, Singapore and Australia are the most exposed to this: just as US GDP growth is no longer contributing to their own economies, a slowing China can have an outsized impact on its major trading partners.
(In contrast, Gruenwald says when the US begins to raise interest rates, this will be a net positive for the region, because it does signal confidence in what remains the biggest buyer of Asia-produced goods and services; moreover, aside from the Hong Kong Monetary Authority, given the Hong Kong dollar’s peg to the greenback, local central banks needn’t slavishly follow the Fed’s lead on rate hikes.)
The bottom line: growth in Asia Pacific will remain weak. Countries need to be more realistic about this, and stop pumping their economies with debt to maintain GDP growth rates that are no longer sustainable.