With US consumer confidence hitting a lull and growing uncertainties over China’s economy
, there are increasing concerns that a slowdown in global growth could derail Asia’s recovery. To gauge the trajectory of Asia’s rebound in the case of a US economic slowdown, a useful starting point is the internal and external drivers behind the region’s growth over the past two years.
Externally, the US consumption boom
, starting in mid-2020, fuelled an unprecedented rise in Asian exports. The internal driver, meanwhile, was kick-started by a relaxation of domestic Covid-19 restrictions, leading to a rise in domestic demand and a resumption of manufacturing activity.
As the saying goes, though, all good things must come to an end. While export growth
in Asia is still above pre-pandemic levels, there are increasing signs that the external driver of Asia’s economic rebound is running out of steam.
This does not necessarily mean Asia’s recovery is coming to an end. The recent 1.9 per cent decline in Taiwan’s July new export orders – a useful indicator of future export demand – does highlight the external risk of a global slowdown. However, the variables affecting the trajectory of Asia’s rebound are much more nuanced and will depend both on the balance between the external and internal growth drivers and how the US economic slowdown unfolds.
While a US recession
is not the expected scenario, Asia will undoubtedly feel the knock-on effects of a downturn in US growth. The most obvious contagion risk is a slowdown in export growth. Exports have been a key driver of Asia’s economic development over the past decade, with trade accounting for around 60 per cent of East Asia’s nominal GDP between 2014 to 2019. As a result, export growth moves reasonably in tandem with regional countries’ earnings.
To navigate this uncertainty, it’s important to understand that the impact on each Asian economy will be different, as the build-up and export exposure varies from country to country. For example, exports from Vietnam and Thailand are the most vulnerable to a US slowdown as they have higher export-to-GDP ratios, with exports to the US accounting for around 28 per cent and 17 per cent of their total exports respectively.
Malaysia and South Korea
also have high export-to-GDP ratios. However, their exposure to the US market is less significant, at 12 per cent and 14 per cent respectively.
Beyond export exposure, it is also important to consider whether the US slowdown is led by investment or consumption. An investment-led slowdown would probably affect South Korea and Japan more because of their larger exports of capital goods such as machinery
, vehicles and equipment, which are largely influenced by corporate capital expenditure. Those with a higher reliance on domestic activity, such as Indonesia, the Philippines and India, are likely to be more resilient.
On the other hand, a consumption-led slowdown will impact consumer goods exporters such as Thailand and Vietnam as they have relatively high export exposure and a stronger correlation with US retail sales. While Malaysia is also exposed, its commodity-exporting nature
means its exports should be supported by high energy prices.
Given the weaker demand and high inflation eroding consumer purchasing power
, a consumption-led slowdown is more likely. This means Asian economies that export more low-end consumer products are likely to be more vulnerable.
For a sustained recovery, domestic demand will be an important buffer to counter the drag on exports. Following the recent reopenings in several countries
, retail sales in Asia have already seen a slight recovery. Thus, Asian domestic demand should embark on a similar consumption recovery path to the US and Europe, with an initial increase in goods demand followed by a more sustained recovery in services.
Intra-Asian trade, which has been strengthening in recent years, will also benefit from domestic reopening. Around a third of total Southeast Asian exports and 25 per cent of total exports from Japan and South Korea are bound for Asian economies other than China. Stronger regionalisation and economic integration will be key to a resilient recovery.
Asia’s recovery will probably slow amid the risks to global growth, but it is unlikely to be derailed, especially with Asia’s decreasing export exposure to the US. Even with a slowdown in goods demand from the US, it’s likely that Asia – excluding China – will be able to offset some of the impact by relying on intraregional trade given the ongoing economic reopening and recovery in domestic consumption.
Marcella Chow is a global market strategist at J.P. Morgan Asset Management