Global Trends by Martin Khor

Monday 27 April 2009

Feeling Asia’s economic pulse

There is now a debate whether the worst of the global economic crisis is over.  Meanwhile, recent reports and data show that the Asian region and particularly South-East Asia is suffering from declining economic and industrial growth and collapsing export earnings.


An interesting debate is taking place:  Has the global economy turned the corner, or are the so-called “green shoots” misleading because we are going to see even worse times ahead? 

Some political leaders in the West are grasping at a few good signs, such as the partial recovery of the stock markets and a pick-up in the housing markets in the United States and Britain, as indicating a bottoming of the slump and the start of a recovery.

But many economists are warning against premature optimism.  They point to the continued existence of serious structural problems, such as the bad state of many big banks, the “deleveraging” that still has to be undertaken by households and financial institutions, and that the effects on the real economy have still a long way to run their course.

For some countries, there are frightening scenarios ahead, particularly in Central and Eastern Europe, which is probably the hardest hit region.  Even a major developed  country like Spain is in a nightmare:  its unemployment rate has hit 17.4%, the number of unemployed rose 800,000 in the first quarter of this year (or 9,000 a day!) to reach 4 million.

Asia, and especially South-East Asia, is also particularly affected, as the latest available data show.

A paper by the UN Economic and Social Commission for Asia and the Pacific (ESCAP) says the crisis in Asia has moved from stage one (financial crisis in developed countries with limited contagion in Asia) to stage two (great recession in developed countries and inevitable contagion in Asia).

In Stage 2, Asian countries are hit by “plummeting exports, from the double-digit growth of the past decade to double-digit declines, declining domestic demand and rising unemployment.”  The ESCAP paper was prepared for its annual session, now taking place in Bangkok.

The depths of the export decline were reached by most countries in January, with falls (compared to 12 months previously) in Malaysia by 34%, Singapore (40%), Philippines (41%), Taiwan (44%), Korea (34%), Thailand (27%), Hong Kong (21%), China (18%), India (16%) and Japan (35%).

In February, the degree of drop was less for most countries including Malaysia (26%), but in China the export decline widened to 26%.

The trend in China is important because many other countries in the region export significantly to China.  If China’s exports to the US, Europe and Japan decline, it will buy less imports of parts (that are used in making the exports) from South-east Asia.

The ESCAP report warns that the decrease in imports is even more alarming, especially the 43% drop in China’s imports in January.  “Given the regionally integrated nature of the production base in South-east and East Asia, these import declines reflect the beginning of an industrial crisis.”

It also warns that a further deepening of the crisis in manufacturing will lead to financial sector stresses through a rise in banks’ non-performing loans. 

It projects unemployment in the region to rise by up to 23 million workers in 2009.  This appears to be on the optimistic side, since there are already reports that over 20 million industrial workers had lost their jobs in the export-oriented coastal regions of China alone.

Economic growth in plunging, and the worst hit is South-east Asia.  Growth in the Asia-Pacific region’s developing countries is estimated by ESCAP to fall from 8.8% in 2007 to 5.8% in 2008 and to 3% in 2009.

But in South-east Asia the fall is from 6.5% in 2007 to 4.3% in 2008 to negative 0.7% in 2009.  It is the only sub-region where the Gross Domestic Product will actually decline.

In East and North-east Asia (which is dominated by China), there will still be 3.3% positive growth, and in South and South-west Asia growth will be 4.3%.

The ESCAP report does not give growth projections for individual countries.  However, The Economist magazine provides its own forecast, and the figures in its latest issue are sobering.

Malaysia is projected to have minus 3% growth, Singapore minus 7.5%, Thailand minus 4.4%, Indonesia minus 1.3%, South Korea minus 5.9% and Taiwan minus 6.5%.  On the other hand China and India will have reduced but still positive growth of 6% and 5% respectively.

The latest data on industrial production show where the source of the problem is – countries that rely on manufacturing exports are worst hit.  Compared to a year ago, industrial production has fallen in Malaysia by 14.6% in February, and by 22% in Singapore, 20% in Thailand, 27% in Taiwan and 10% in South Korea.

In contrast, industrial production rose by 8% in China in March, which reflects that the industrial products in this country cater mainly to its huge domestic market, even though it may also be a major exporter to the world.  And that perhaps its huge fiscal stimulus to pump up domestic demand to offset declining exports is working.

The figures show that in South-east Asia at least the economic crisis is not yet over, and that the recessionary effects will take some time to wind their way through the economy.

Many Asian countries, including Malaysia, are taking counter-cyclical measures including increased government spending and reduced interest rates to blunt the effects of the economic contraction.

The extent to which these policies have a positive effect remains to be seen, and further measures and adjustments will most likely be needed.