Wednesday 4 March 2009
Tight belts in America squeeze Asia
All eyes inevitably turn to China, with its huge population, high savings rate, low debt and fantastic headroom for growth. An independent economist, Andy Xie, estimates that current income of $3,300 per capita could triple within two decades through a combination of growth and currency appreciation. But two decades is a long time, and in the meantime we have to survive the next two years.
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Tight belts in America squeeze Asia
By James Saft, Reuters
4 March 2009
LONDON: Asia’s calamity is that Americans are imitating frugal Asians a lot faster than Asians can become free-spending Americans.
The old economic model - that Asia exports to the United States, saves its earnings and lends the money back to Americans to buy more stuff - is broken and no one can say what will rise in its place.
Americans are not willingly becoming savers: Cultural change is being forced on them by the credit crunch and their own busted balance sheets. The hope for Asia, which has seen a stunning cliff-dive in its economies, is that domestic demand can grow to replace U.S. consumption. But there are huge hurdles: Asia’s social safety nets are threadbare to nonexistent, and its people see frugality and the storing up of wealth as a virtue.
The idea of Asia’s replacing U.S. consumption with domestic demand is a bit like Las Vegas trying to make up for plunging gambling revenue by charging more for prime-rib dinners: It might help a bit, but it’s not a serious business model.
In the meantime, economies in Asia are seeing stunning falls in activity and exports.
“Live by exports, die by exports,” Gabriel Stein, chief international economist at Lombard Street Research, told a conference in Singapore last week.
Singapore’s highly trade-dependent economy shrank by more than 16 percent in the fourth quarter on an annualized, seasonally adjusted basis. Prime Minister Lee Hsien Loong said last week that another 8 percent might disappear this year.
January exports by Indonesia fell 36 percent, the biggest annual decline in more than 22 years, while factories in South Korea left almost 40 percent of production idle in the same month.
South Korean exports fell 17.1 percent in February from the year before. In Taiwan, export orders fell a record 42 percent in January. Japanese exports fell 45 percent that month. China has gotten off relatively lightly in comparison, with exports falling 17.5 percent from a year ago in January.
On the positive side, the government response has been reasonably prompt in many places, ranging from front-loaded stimulus spending plans that should make a difference this year to plans for propping up stock markets with government buying, which are wasteful, unfair and probably bound to fail.
Shares across Asia are falling and so are some currencies, notably the won, which touched an 11-year low Monday before the South Korean government spent an estimated $1 billion propping it up. Competitive currency devaluations cannot be ruled out.
So should Asia just try to ride out the storm and wait for U.S. demand to pick up?
It might be a long wait. For one thing, the U.S. population is aging, which will pinch consumption in two important ways. First, consumption tends to revert to core needs as people get older. Second, retirement plans that were built on high property and share prices lie in ruins and will prompt higher rates of savings, as people try to catch up.
A recovery in U.S. consumption will come eventually, but it’s not likely to bring the kind of heady growth in consumption seen from 2000 to 2007, when personal consumption grew at a heady 4.7 percent rate annually.
So either close a lot of those Asian factories or build up consumption at home.
All eyes inevitably turn to China, with its huge population, high savings rate, low debt and fantastic headroom for growth. An independent economist, Andy Xie, estimates that current income of $3,300 per capita could triple within two decades through a combination of growth and currency appreciation. But two decades is a long time, and in the meantime we have to survive the next two years.
It seems almost delusional to hope that Chinese and other Asian consumers will somehow throw off the habits of a lifetime - habits reinforced by the real risks they face if they lose their jobs and by their self-evident correlation with growing wealth - to start to spend more. These consumers see the same headlines about the stock market and plunging exports that the rest of us do.
It is also hard to imagine Asians looking at U.S. profligacy as a model to emulate. Even now, efforts at stimulus in Asia seem to focus more on keeping people in jobs than insuring them against income loss.
Maybe, over time, consumption in Asia will grow as its economies mature, but in the meantime, pouring concrete into public works plans seems a better bet for keeping the economies afloat while we wait for the next world economic order to be invented.
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