Falling exports in Asia and slowing China economy trumps tumbling oil prices

Low oil prices provide oil-importing countries with current account surpluses that typically fuel growth in non-oil imports, but around Asia the gain is being offset by falling exports as the slowing Chinese economy exerts a gravitational pull on the region.

Oil prices have fallen around 45 per cent in the past year and will stay low for another six months, before stabilising around 20 per cent higher in 2017-18, Goldman Sachs analysts wrote in a research report this week.

Low prices have slashed the oil trade deficit of Asian emerging market countries, which are heavy oil importers, generating a windfall gain for their current accounts of nearly US$100 billion in the first quarter of 2015 alone.

“A typical adjustment pattern is for oil importers to save most windfalls initially and then gradually spend them if savings continue to accumulate on sustained low oil prices,” said the analysts.

The windfall effect can be undone when a negative feedback loop develops between countries or economic regions – one an oil exporter, say Canada, and the other an oil importer, say Korea. Canada gets less for its oil from Korea, so it imports less from Korea in return, shrinking Korea’s current account so it too imports less.

But this time around, there’s another problem: China. Asian emerging markets are heavily exposed to China – to the extent of 23 per cent of exports – making the drop in Chinese demand for imports, in analysts’ terms, an idiosyncratic adverse shock.