International | Sep 17 2007
By Chris Shaw
The US is the world’s largest economy and runs significant current account deficits, which implies it buys more goods and services from abroad than it sells to other countries.
With much of Asian growth in recent years put down to surging exports in general and to the US in particular it stands to reason a slowdown in the American economy, which would mean less buying of overseas goods by American consumers, would be a negative for Asian growth rates.
Wrong, says DBS Group, as the world has not yet fully realised the US is becoming less and less important to Asian and therefore global growth rates, to the point where by the end of the decade the group expects Asia will actually be a bigger driver of global growth than will the US.
Growth figures for the past two years back up DBS’s view, as it points out over the past eight quarters the US economy has only grown on average by 2.2% while Asian growth has accelerated at the same time. Much of this is due to stronger domestic demand in the region, the group estimating Asia is now contributing about 90% as much incremental domestic demand as is the US, which provides something of a cushion for the global growth outlook even allowing for a further slowing in the US economy.
With such a background the group remains confident Asian growth will remain solid, forecasting the region will expand by 6.6% this year and 6.5% in 2008. This is not all due to China, though growth there has remained at around 11% annually both last year and this year, but a slight easing to around 10% is expected in 2008.
India too is contributing, DBS expecting figures will confirm average growth of 9% from 2005-2008, an outcome that will be better than the market expects. All told, the growth in the region means the Asian economy is now twice as big as it was a decade ago, indicative of not a cyclical change but a structural change.
As this structural change continues to take hold DBS suggests throwing out the old economic theories that now no longer apply. The most important one to let go of in the group’s view is the two-for-one rule, which implies a 1% change in US growth impacts on Asia by 2%.
The growth data of the past couple of years means this rule no longer holds, as the relationship between US and Asian growth is simply not what it was even a few years ago. Over the past two years Asian growth as measures by the ASEAN nations (Indonesia, Malaysia, Singapore, Thailand and the Philippines) has accelerated to 6.3% from 5.3%, while US growth has fallen from 3.2% to 1.7%.
Since 2001 ASEAN exports to China have increased by almost five times, while exports to the US have been flat. Asia now exports more to China than it does to the US.
In simple terms this means Asia is driving more of its own growth than ever before and contributing more to global growth than ever before. While this doesn’t mean if the US went into recession Asia would not feel some impact, it does mean the impact from a US slowdown would be far less than was previously the case.
With a positive outlook for the region DBS recommends Hong Kong and Chinese equities for liquidity, Singapore stocks for valuations and earnings quality and the Thailand market for an acceleration of growth in 2008. It is now less bullish on the Korean market and recommends avoiding Taiwan given that market remains exposed to the US consumer.
In currency terms the weaker US economy signals further weakness in the US dollar, but DBS sees different reactions from different countries in Asia as they face the prospects of their own currencies strengthening.
Korea, India and Thailand are likely to oppose any significant strengthening of their domestic currencies, while Taiwan is likely to welcome any US dollar weakness. China is likely to continue to allow its currency to strengthen at a pace that suits itself, while the group doesn’t expect any rush in the short-term to put the carry trade back.
