An expected slowdown in the US economy, coupled with weak growth in Europe and a disappointing recovery in China, will have significant implications for economies across the rest of Asia. The headwinds of slowing growth will primarily manifest through a decline in consumer and business spending in the West.
In every US recession after 1948 (excluding the pandemic recession), private investment and consumption, on average, were the two negative contributors to gross domestic product. While history doesn’t repeat itself, it often rhymes. Given the high interest rate environment, it may be a matter of time before capital expenditure and household spending slows. This will lead to a fall in export growth in Asian economies.
The export exposure of the six largest Asean economies (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) to the United States, European Union and China ranges from 34-57 per cent, while that of North Asian economies such as Japan and South Korea sits at 49 per cent. Australia has an export exposure of around 42 per cent.
But it is also important to consider the contribution of exports towards economic growth. Economies with a high export-to-GDP ratio and substantial exposure to the US, EU and China are likely to experience a material drag from a slowdown in external demand.
For example, Vietnam’s export-to-GDP ratio of 87 per cent with a 28 per cent export exposure to the US suggests it is particularly vulnerable to a slowdown in global goods demand. Given Vietnam’s role as a major exporter of electronic goods, the expected lull in demand for technological hardware will weigh on its export growth.
The softening in capital expenditure will also hurt exports from economies such as Taiwan, Japan and South Korea, given their reliance on exports of capital goods such as machinery, vehicles and semiconductors.
Although Australia’s exposure to the US and export-to-GDP ratio is less significant, its exposure to China, which accounts for 36 per cent of its exports, and the importance of the mining industry to its economy mean that if China’s growth remains disappointing, it may weigh on Australia’s near-term economic trajectory.
While the effects of a softening in global growth are likely to be felt by most Asian economies, there are some mitigating factors.
Indonesia, the Philippines and India may be less sensitive to a fall in external demand. Their exports as a percentage of GDP are less significant compared to the rest of Asia, and their domestic household consumption contributes a larger share to economic growth. The Philippines, for example, has an export-to-GDP ratio of 27 per cent, but a household consumption-to-GDP ratio of 75 per cent.
With domestic consumption having recovered significantly this year, it’s unlikely to provide a huge boost to future economic growth. But it will still be an important component in offsetting any economic slowdown stemming from weakness in export growth.
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Tourism is also an important contributor to economic activity in the region. The Philippines, Thailand and Vietnam are more geared towards tourism, with an average tourism revenue-to-GDP ratio of 11.4 per cent, 7.1 per cent and 7.8 per cent respectively between 2015 and 2019.
For most Asian economies, tourists arrivals have returned to around 70 per cent of pre-Covid levels. That said, the number of Chinese tourists, a major contributor to tourist spending in the region, has yet to fully recover. For the Philippines and Vietnam, while Chinese tourists accounted for 21 per cent and 28 per cent of total tourist arrivals in 2019, that figure has only reached 4 per cent and 7 per cent respectively this year.
For Japan and South Korea, the number of Chinese tourist arrivals are more than 20 percentage points below pre-Covid levels. Further stimulus in China and a potential rebound in consumer confidence will therefore be supportive of the tourism industry in Asia, in turn, offsetting some of the weakness in export demand.
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The rise in artificial intelligence (AI) and continued proliferation of computing intensive processes across regions will also help to mitigate some of the pullback in Asian exports.
With Asian economies accounting for more than half of the world’s semiconductor shipments, the near-term boom in AI will help to boost demand for related hardware and semiconductor chips. That said, demand for smartphones, personal computers and non-AI servers could remain quite sluggish as capital expenditure in Western economies continues to slow.
But while the AI trend is unlikely to completely offset the fall in demand for technological hardware, it should soften the downside to export growth, particularly for South Korea and Taiwan.
As the US Federal Reserve approaches the end of its interest rate raising cycle, Asian central banks will also be able to cut rates to support their economies without the overhanging concern of a strengthening US dollar.
With markets expecting an interest-rate increase of just a quarter percentage point between now and the end of the year, dollar strength is likely to be limited. This gives Asian central banks more leeway to cut rates should their economies require more support. In addition, should China’s deployment of economic stimulus gathers pace, this would give the region a boost.
Marcella Chow is a global market strategist at J.P. Morgan Asset Management
