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Are Asia's exports really less reliant on U.S.?
HONG KONG |
HONG KONG (Reuters) - Asian exports growth has held up much more than expected in the face of a U.S. economic slowdown, suggesting the region is now less reliant on the world's biggest economy as other global demand centers expand.
But that may be an illusion.
Asia can weather the moderation in U.S. economic growth seen so far in 2007 but a tougher test -- if a U.S. slowdown was to sharpen as a result of the subprime mortgage problems for example -- would have a more significant impact.
Not only would Asia's economic staple exports suffer but consumption could be hit as wage growth softens, translating into a slump in regional equity markets, economists say.
HSBC says the correlation between Asia's export growth and U.S. economic growth was close to one for years, but has dropped to 0.6 this year, a sign that Asian exports have de-coupled from the United States.
"Asian de-coupling reflects that other markets in Europe, Japan and China are not slowing in synchronicity with the U.S. market as they might have done previously," said Peter Morgan, HSBC's chief economist for the Asia-Pacific.
Take Hong Kong, a bellwether of international trade that counts the United States as its biggest export market after China.
Its U.S. exports between January and May rose just 2.1 percent by value from a year earlier, lagging a 10.3 percent rise for exports to all destinations.
"We are moving into a multi-engine global economy in which the U.S. economy won't be dominant," said Nicholas Kwan, Asian head of economic research at Standard Chartered Bank.
Where Asian exports have lagged, they have been offset by robust domestic demand and investment, such as in Singapore, where the economy surged by an annualized 12.8 percent rate in the second quarter, its fastest pace in two years.
A Reuters poll suggests U.S. economic growth in 2007 will ease to 2.2 percent from more than 3 percent annually in the past two years.
The resilience of the U.S. economy has surprised markets, fuelling a record breaking run on Wall Street. However, concerns that a deepening crisis in the trillion-dollar subprime mortgage sector could damage the broader U.S. economy is taking the edge off a global rally in stocks.
"Asia will be resilient if we see two quarters of slowdown in the United States. But it would struggle if the U.S. saw a protracted slowdown of say a year or if its economy contracted or slowed sharply," said Ben Simpfendorfer, strategist at Royal Bank of Scotland.
Intra-Asian trade has surged but more than two-thirds of it is raw materials and intermediate goods for use to produce items, many of which ultimately land in the United States, Lehman Brothers says.
The United States is still the final destination for about a third of Asia's exports, economists say.
"We don't believe Asia has de-coupled," said Rob Subbaraman, a senior economist at Lehman. "A sharp global slowdown would most likely originate from the United States."
Credit Suisse says a 1 percent rise in U.S. retail sales translates into a 1.3 percent increase in Asian exports.
But a similar rise in European retail sales would have no significant affect. East European exporters would benefit, rather than Asian exporters, since Asia's production chains feed more into the United States, Credit Suisse says.
China's economic growth of more than 10 percent annually is a catalyst for rising intra-Asian trade but China's economy is also reliant on U.S. demand for about 20 percent of its exports.
Simpfendorfer says a sharp U.S. slowdown would hit demand for electronics exports first, hurting South Korea, Taiwan and Malaysia.
"Hong Kong and Singapore would do better for a while because of their services sectors," he said. "China would also slow although it would do better than the rest of the region."
Domestic demand in Asian economies may not be strong enough to take up the slack, particularly if a U.S. slowdown affects asset prices, economists say.
One reason why Asia has held up well this year, despite slowing U.S. economic growth, is because of the reassurance provided by strong U.S. financial markets, they say.
"If U.S. equities and credit markets take a hit then Asian equity and credit markets will be hit," said Andrew Freris, chief economist for Asia at BNP Paribas.
That could undermine consumer confidence and affect jobs in financial centers like Tokyo, Hong Kong and Singapore.
Stock markets in India, Hong Kong, South Korea and Singapore have reached record levels in the past few weeks, propelled by all-time highs on Wall Street.
But slower Asian export growth prompted by weak U.S. demand would hurt stock markets and potentially put downward pressure on Asian currencies and consumption, economists say.
"Asia is more resilient than it used to be but it is a long way from de-coupling from the United States," said Simpfendorfer.
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