International | Nov 20 2009
By Andrew Nelson
The world’s economy might be gradually rebalancing, but it’s nothing to get excited about yet if you’re in one of the Group of 7 “advanced” economies. It’s actually Asian growth that is dragging the world forward as the region accelerates back to normal, taking the western world with it.
Positive signs in the west are at least emerging, with financial systems in most of the G7 countries and economies stabilising, if not improving meaningfully just yet. One of the biggest problems that Commonwealth Bank economist Joseph Capurso sees is the fact that banks still aren’t lending yet. And it’s this reluctance to lend that is at the heart of the slow speed of the G7’s recovery.
While businesses indicators like as purchasing managers’ indices are starting to show some signs of life, cash strapped consumers appear to be stuck in the doldrums. Given consumer spending outweighs business spending by at least two to one in the advanced economies, this is where improvement is really needed if the recovery is to gain some meaningful traction. CBA’s forecast for economic growth in the Group of 7 is just 2% for 2010, which is well below average.
Meanwhile, commodity exporters like Australia and New Zealand are emerging more quickly given they have not suffered the same scale of problems that Europe and North America have. Capurso notes that good management by the banks and effective supervision by regulators have played a big part in the early Australasian recovery. The quick recovery in commodity prices has also helped, although to be honest, Capurso thinks that there has also been an element of good luck.
This early strength in commodity markets that Australia is undoubtedly benefiting from is one of the key indicators of the current strength in the emerging economies of Asia. The region’s financial systems have come through the GFC fairly unscathed, with bank lending growing, especially in China. The boost from some well aimed government spending has also been largely successful, notes Capurso.
However, just as important a factor, believes Capurso, is that Asia isn’t as dependent on exports as most economist in the northern and western part of the world seem to believe. He notes that much of Asia’s exports are merely imports in other parts of Asia. If one were to strip out the import component of Asian exports one would see a significant reduction in the perceived export dependency. In fact, Capurso believes that China is no more dependent on exports than Australia or Germany.
That’s why most of the pain in the current push for global rebalancing will still be felt in Europe and the US, where debt ridden households and governments contend with an impaired financial systems as they struggle back to growth.
Yet the emerging economies of Asia and the Middle East still have a couple of trump cards that are waiting to be played in the aid of rebalancing the global economy. First, current growth rates need to be maintained. Second, Asian nations, especially China, need to let their currencies appreciate against European currencies and the USD. This would stimulate exports from Europe and the US, thus speeding the economic recovery of these regions.
A stronger exchange rate will also increase the purchasing power of Asian incomes, stimulating even higher domestic spending and an even speedier recovery in the region. Capurso notes there are already some positive signs on this front, with authorities in China last week hinting they are considering a rise in the yuan. With CBA pencilling in a gradual rise in yuan from the June quarter, maybe the Chinese cavalry is on the way.
