International | Oct 08 2009
By Andrew Nelson
The biggest visible hit Asia took during the GFC was sharply lower exports. In just a few short months the year-on-year growth rate for exports across emerging Asia went from double-digit positive rates to double-digit negative rates. However, economists from ANZ Bank note that as the effects of the financial crisis broadened over the last year, investment, not exports became the major contributor to Asian GDP growth, especially over recent quarters.
Many thought that Asian economies would be able to at least partially decouple from the world’s more developed economies, believing that domestic demand across the region was now strong enough to support regional export levels. However, the resulting decline in investment across the region as an offshoot of the GFC is now casting doubts on the assumption that Asia will be able to look after itself.
ANZ notes a key driver of the recent volatility in Asian investment is due to the interplay between the inventory-shipment ratio and industrial production. As demand for Asian products began to fall about 12 months ago, Asian companies found themselves with too much inventory relative to shipments. Given holding inventory and producing goods are both costly, Asian firms were forced to cut production in order to rein in a quickly diverging inventory- shipment ratio.
The cut in production ended up causing an over-adjustment on the downside in industrial production that manifested itself in late 2008 and early 2009, which ANZ notes amplified the slowdown in GDP. The opposite is occurring in the subsequent upturn, thus the over-adjustment of IP in recent quarters has contributed to the sharp recovery in GDP in many economies in the region. But ANZ has doubts this situation will be able to persist.
The team notes that recent data are suggesting that the inventory-shipment ratio has returned to normal or at least equilibrium levels, which means the short-term adjustment process and the upside to GDP that it brought is now mostly complete.
Given ANZ sees few other sources of new growth, the recent boost to activity from increasing industrial production that was needed to bring the inventory-shipment ratio back into line will fade and thus investment and GDP growth will now begin to fade as well.
While the bank notes that other expenditure components such as consumption and domestic-led investment may help pick up some of the slack, indicators remain mixed. On top of this, the team points out that government spending plans, which include some heavy infrastructure components, could well exacerbate any forthcoming slowdown in industrial production.
So looking forward, ANZ feels the only help Asian industrial production, and by extension investment and thus the combined contribution these components have on GDP growth, will be driven largely by the expectation of future shipments. And the key component of this expectation is foreign demand, which is still soft across much of Asia and the rest of the developed world.
ANZ believes that a good indicator of foreign demand that Asia can look to is durable consumption goods shipments in the United States. It is this indicator that the team thinks is a good sign of demand for the types of discretionary consumption goods that much of Asia produces and exports. And the most recent data for US durable consumption goods shipments show ongoing weakness into the second half of this year.
All of this has the bank doubting the continuation of a V-shaped recovery for the region. Sure, admits the team, recent growth in emerging Asia has surprised on the upside and there has been a strong contribution from domestic demand, including industrial production and investment. However, demand from outside the region has been weak and is expected to remain so given the need for extensive household, bank and government balance sheet repair, especially in the more economically the advanced countries.
As such, the team concludes that without any offsetting new sources of growth in emerging Asia, IP, investment and GDP growth will come under increasing downward pressure in the near term.