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Customers look at clothing, some of which is produced in China, at a Costco store in Washington on July 6. Consumers are likely to shift spending back to services from goods and there are already signs of export growth decelerating in Asia. Photo: EPA-EFE
Opinion
Macroscope
by Sylvia Sheng
Macroscope
by Sylvia Sheng

Asia’s exports under pressure as US, EU economies slow amid inflation

  • Both the US and Europe are likely to face a prolonged period of sluggish growth, creating a challenging environment for Asia
  • Economies more oriented towards domestic demand, such as China and India, may be in a better position to withstand the trade shock
Sylvia Sheng
Sylvia Sheng
Why you can trust SCMP
In recent weeks, there have been increasing signs that the global economy is losing momentum, while major central banks take decisive action in raising interest rates to contain elevated inflation.
Last week, data showed the US economy had shrunk for a second quarter in a row, meeting a common definition of a “technical recession”. Although the US economy was probably not genuinely in recession during the first half of the year, in part due to the tight labour market, the second-quarter figures point to a notable slowdown in growth into the middle of the year.
Meanwhile, the US Federal Reserve has more work to do to tackle inflation, which is still running hot. The core personal consumption expenditures price index, the primary inflation gauge that the Fed monitors, increased in June by 4.8 per cent from a year ago, significantly above the central bank’s 2 per cent inflation target.

Moreover, pressure from wage inflation remains high with the US Employment Cost Index running at an annualised pace of about 5 per cent in the second quarter. To slow inflation, the Fed needs to generate a period of weak growth and looser labour market conditions through further monetary tightening.

The euro-zone economy is also showing signs of an abrupt loss of momentum around midyear. Despite better-than-expected second-quarter growth, recent sentiment surveys have all weakened significantly with the European Union’s consumer confidence reaching a record low and the S&P Global Flash purchasing managers’ index for the euro zone falling into contraction territory last month.

01:18

Russia-Europe gas pipeline temporarily closed for maintenance amid EU fuel shortage

Russia-Europe gas pipeline temporarily closed for maintenance amid EU fuel shortage
As a deepening gas crisis looms, the euro zone’s growth outlook has become gloomier. Gas is an important energy source for Europe, making up 22 per cent of consumption. With little local gas production, Europe relies on imports to meet its needs and Russia supplied 40 per cent to the region last year.

In recent months, the Ukraine conflict has resulted in decreased supplies from Russia, creating serious shortage concerns in Europe. A further curtailment of imports poses a major economic risk to the region.

The outlook is worrying. Nord Stream I, the biggest pipeline bringing Russian gas into Europe, recently resumed operations after a maintenance-related halt. Gas flows from Russia were cut to 20 per cent capacity last week after initially resuming at 40 per cent.
Europe is boosting gas supply in other ways, including increasing liquefied natural gas (LNG) imports from the US and shifting demand for energy to coal plants. However, these alternative sources already seem exhausted.
Thus, rationing is a very real prospect to ensure Europe has sufficient gas for the winter months. EU officials are preparing for a worst-case scenario of a total Russian gas cut-off, with plans in progress aimed at reducing gas demand by 15 per cent.

Germany’s demand for coal from Asia won’t last

Gas rationing is likely to hit industrial output and weigh on European growth. At the same time, European natural gas prices continue to rise amid tight supply, which will in turn push up inflation.

Monetary policy is still accommodative in Europe as the European Central Bank has only raised interest rates to zero. But the ECB is in a tight spot as the economy is already slowing but inflation may remain elevated, given the gas supply shock.

It seems both the US and Europe are likely to face a prolonged period of sluggish growth, creating a challenging demand environment for Asia. Asian exports benefited from the strong goods demand during the pandemic.

01:08

South Korean bakeries shut down ovens as Ukraine war sends wheat prices soaring

South Korean bakeries shut down ovens as Ukraine war sends wheat prices soaring

Emerging Asia has gained more than 1 percentage point in global export market share compared to pre-pandemic levels. However, as economies reopen, consumers are likely to shift spending back to services from goods. There are already signs of export growth decelerating in Asia since the start of the year, which is likely to reflect a normalisation of goods demand.

One mitigating factor is that the economic downturn in the US is unlikely to be very deep. In the late stage of an economic cycle, there is usually excessive leverage on household or corporate balance sheets, which would come under pressure as the Fed raises rates further. This time, however, the lack of a significant increase in private-sector leverage in the US is likely to limit the growth slowdown.

Slower growth in major developed-market economies is likely to weigh on Asia’s outlook as it leads to weaker export performance in the region. However, economies that are more oriented towards domestic demand, such as China and India, may be in a better position to withstand the trade shock.

Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management

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