Global growth: Can Asia make it alone

TO be precise, my analysis excludes Japan, which is in a situation (disastrous) of its own.

The decoupling growth story between Asia ex-Japan and the West (USA and Europe) has been among the favorite topics of analysts for many years now. The difference in growth performance since the 2008 global meltdown has intensified that debate.

The economic rebound in Asia since early 2009 has been much stronger than in the West. And that happened with both blocs applying the same medicine (massive monetary creation, big spending on infrastructure, etc.). Moreover, in the past few months, with the US growth sharply slowing, the European growth giving signs of weakness and the renewed talk of double-dip recession, Asia is continuing to grow at a very strong pace (though the pace has recently slowed down). Since last year, Asia recorded its fastest cumulative gain in production in history.  Asian economies are now much bigger than before the crisis.

We are now at the crossroads: Can Asia continue to grow even if the West doesn’t, or worse, falls back into recession?

Most analysts answer “no” based on the following factors: The World economy is globalized and therefore a situation where one region performs very differently from the others can only be temporary. Asian economies are very export-oriented and a new recession in the West would definitely hurt Asian economies badly. Asian growth is very China-dependent and China is in a global bubble with an artificial growth relying on huge government spending, over-industrial investment and reckless buildup in the construction and housing sector. Once that bubble bursts, Asian economies will experience a serious contraction and their growth rate will edge closer to the West. With exports down, restocking done and the effects of the massive stimulus starting to fade, Asia will have to face the music.

My answer is “yes.” If that wasn’t the case, why did Asia outpace the West in the past 18 months?

Asian economies are now much less dependent on the US or Europe than before. Intra-Asian trade has been growing (and is growing) much faster than the Asia-West trade. Unlike the West, Asia still has ample room for infrastructure investments. Unlike the West, Asia’s drive toward a domestic demand and consumer oriented growth model is only starting and given its massive population, the potential is huge. Unlike in the West, growth is shifting from the public to the private sector. Unlike in the West, Asia’s debt levels are low, both public debt and private debt. Unlike in the West, the savings rate is still high in Asia. Banks are not overstretched. Loan to deposit ratios are low. All these factors leave a large space for the next leg of growth in Asia to be driven by credit (like in the 1990’s). Capacity utilization levels in Asia (manufacturing sector) are very high and need credit to increase capacity.

A key challenge is to increase domestic private consumption: wages are rising, but consumer credit is very low and has a lot of room for expansion. In addition, the surprisingly accommodative monetary policies have left the real interest rates at a very low level, favoring a credit boom. Of course, these observations are at a global Asian level and tend to hide some very specific situations in some countries. For instance, Taiwan, Singapore or Hong Kong cannot rely on domestic demand and will always be very dependent on exports, and therefore more vulnerable.

Once again, the big question mark on my scenario is China. The regional economy is evermore dependant on China, most countries being already de facto satellite economies of China. If China collapses, my whole scenario can be thrown in the garbage bin. Most economic indicators in China have been slowing in the past few months (even though it was mostly an orchestrated slowdown). But half of the current levels would still be a dream for the US and Europe.

Compared to the West, the Chinese debt situation is still excellent. The debt-to-GDP ratio is around 45 percent (80 percent in the EU and the US); the Chinese government’s debt is at only 20 percent of GDP. China’s banking system is one of the most underleveraged: Loan-to-deposit ratio below 70 percent, Capital Adequacy Ratio above 11 percent.

Chinese consumers debt is very small (35 percent of the total household deposits). According to HSBC, the number of urban households with mortgage debt is only 6 percent, so there is plenty of room to boost consumption. In fact, consumer loans are starting already to pick up strongly: in the past 12 months, the number of credit cards increased by 40 percent, the loans on credit cards by 50 percent (HSBC also). Consumption should also be boosted by the big increase in social spending by the Chinese government and the negative real-interest rates.

So YES, I believe Asia can make it alone. –Jean d’Orival / Free Enterprise