Asian economies should stand on their own
The recent decline in global manufacturing orders has caused markets to lean more on China for support. Policymakers in Beijing have started to act. In July, the People’s Bank of China delivered its second interest rate cut since the European debt crisis escalated almost a year ago. There is more to come. Our China economists expect further easing on both monetary and fiscal fronts to support growth over the rest of this year. A Chinese recovery will eventually lift regional growth.
China is evolving. No longer is it the low cost center whose growth is a mere reflection of Western economies. Today, it is the second largest economy in the world with a growing appetite for luxury. Domestic demand has a tighter grip on the steering wheel of the country’s growth engine. Therefore, stimulus will have a greater effect on Chinese growth than before, once it feeds through to the real economy.
A rebound in Chinese growth is set to improve the trade balances of local economies, raising net exports and hence overall GDP. In this respect, Taiwan may be best positioned to directly benefit from a stronger China. Last year, the island’s trade surplus with the Mainland alone amounted to almost 10 percent of its GDP.
High exports themselves matter as well because greater demand for a country’s goods supports employment. In turn, household consumption will receive a boost. China’s capacity to influence local economies has increased as it becomes, if it is not already, their largest export market. The rest of Asia now sends 21 percent of its exports to the Mainland, up from 11 percent a decade ago.
However, the risk for the rest of Asia is not whether China can recover in the second half of 2012. Policymakers in Beijing have the ability, and room, to kick-start the economy. Rather, neighboring economies should question how long it takes for easing to filter into higher demand for their own goods. Indeed, help may need to arrive soon as signs point toward a slowdown in the electronics industry, which makes up roughly 40 percent of Asian manufacturing output.
Production growth in Asia ex-China tends to lag the Chinese equivalent by around two months. This means that if the Chinese economy starts to recover now, the full benefits from effective Chinese stimulus will only be filtered into the rest of Asia just before the start of the fourth quarter. Local economies are on their own for now.
Luckily, many Asian governments currently have a strong fiscal position. Government debt-to-GDP levels do not pose significant financial pressures and are generally below their long-term trends. This has been recognized by key rating agencies, and prompted the recent upgrade in the Philippines’ sovereign credit rating by Standard and Poor’s. Years of responsible budgeting now provide space for local governments to support domestic demand by flexing their fiscal muscle.
In Korea, support for low-income earners and small businesses was recently announced. This is timely because the latest rise in delinquency rates was driven by households and small- and medium-sized enterprises. That said, should external conditions remain persistently weak, the South Korean government has plenty of space to further boost domestic demand if deemed necessary. Fiscal stimulus will be more effective than monetary easing not only because policy rates are still low, but also because government stimulus can be targeted to lift pressures off the most vulnerable groups.
Taken together, ongoing volatile global economic conditions may prompt local governments to utilize their strong fiscal positions to sustain growth in their economy before the red knight rises.