Exit the year of the unpredictable Rat; enter the year of the earthy Ox, hopefully bringing with it its characteristic stability, conservatism and harmony.
The changeover in the lunar almanac aptly reflects the mood in the world economy. For the first time since World War II the US, Europe and Japan are simultaneously in recession. After the turmoil of last year, the world is now yearning for a period of relative calm, trying to avoid a drastic downturn.
Yet, amidst all the gloom, the dourest estimates for China and India indicate that the two fastest growing major economies of the 21st century expanded by more than 7 percent last year and are expected to grow by 5 percent to 7 percent this year. While a shock that will present challenges for these high-flying economies, it’s still good growth.
This is instructive because, while investors have focused on the sharp global downturn following the bursting of the housing bubbles in the West and the resulting financial upheaval, they have largely overlooked the relative resilience of the growth engines of recent years in the East.
The year of the Ox could well turn out to be the year when the world wakes up to the changing balance of economic power between West and East.
Without doubt China, India and other developing markets of Asia, Africa and the Middle East are witnessing a marked slowdown. Exports of manufactured goods, raw materials and services, major drivers for these economies, are slowing significantly as Western consumers cut down their debt levels and start saving again. By the end of last year, every country in Asia had seen its exports contract. Unlike previous financial setbacks, Asia can’t rely this time on exports to the West.
The abrupt reversal in the growth momentum, which will particularly impact Asia’s more open economies such as Hong Kong, Singapore, Taiwan and Malaysia, is a reminder that the region has not decoupled from the West. How could it when almost a third of developing Asia’s US$3.3 trillion of export orders originated from the US and the EU in 2007?
Capital markets from Mumbai to Seoul depend significantly — sometimes up to 40 percent of their total capitalization — on Western institutional investors for continued liquidity. No wonder then that stocks and currencies across Asia plummeted through the second half of last year — with the South Korean won and Indian rupee suffering some of the biggest reversals — as US and European portfolio investors pulled out from the region.
The sudden contraction in US dollar liquidity, together with the freezing of trade finance and heightened risk aversion among local banks, has caused severe distress among many small and medium-sized enterprises.
But the best way to describe the reversal in fortunes would be by using the economists’ lexicon and term it as a cyclical downturn as opposed to the West’s ongoing structural slowdown which is likely to last for several quarters if not years.
Calculations by Standard Chartered’s economist Nicholas Kwan show that even if developing Asia’s exports to the US, Europe and Japan drop by 30 percent this year, a bigger decline than that seen during the 2001 to 2002 downturn, it would shave off about 1.5 percent from the region’s combined GDP. That is nowhere near the GDP slide seen in the Asian financial crisis of 1997 to 1998.