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Economics Weekly

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Asian economies lead economic recovery

Mon, Nov 2 2009, 12:00 GMT
by Trevor Williams

Lloyds TSB Financial Markets

It is clear from figures released for Q3 2009 that the Asian economies are leading the global economic recovery. This is despite the fact that last week, the US released data which showed that the economy expanded by an annualised 3.5% in Q3, ending the longest period of recession since the 1930s. Forecasts for 2010 (IMF data in table 1) show that the Asian economies will expand by 5.8% after a rise of 2.8% this year. In the context of the worst global downturn since the 1930s depression, this has to be seen as a very impressive performance. Contrast this with the contraction of 3.4% in the advanced economies this year and an expected rise of just 1.3% in 2010. Growth in the world economy as a whole is also expected to outperform that of the advanced economies, rising by 3.1% in 2010 after falling by 1.1% this year. We look at some of the factors behind these trends in this Weekly.

Asian economies are leading the global economic recovery...
Figures for growth in the Asian economies which have reported for Q3 2009 so far have been very strong, see chart a. Annual Chinese gdp growth in Q3 was 8.9%, which translates into a 20.8% annualised rate. Singapore expanded by an annualised 14.9% in Q3 and South Korea by 11.6%. A rise of 3.5% in the US on an annualised basis and a fall of 1.6% in the UK in Q3 (albeit based on initial data that could be revised) show the large gap in the growth performance of the Asian and developed countries. This recent performance by the Asian economies, however, is a long way from the experience of Q4 2008, see chart b, when a sharp fall in output occurred virtually everywhere (except for China that bucked the trend).

On the surface, the main explanation for the apparently faster recovery in Asia seems to be fairly straightforward: a rebound in global trade appears to be favouring the Asian economies more than any other part of the world, see chart d. Further, the end of the credit crisis that had caused trade finance to collapse in late 2008 and in early 2009 is now working to promote the current trade recovery even more. To some extent, the argument that we are witnessing a sharp rebound in global trade from the equally sharp contraction and not an underlying acceleration in the level of world trade is shown by the Baltic dry index. It does not suggest that the underlying volume of goods being shipped has moved up by as much as the percentage rise in global trade volumes would suggest, see chart c.

...as world trade rebounds in their favour
But it is clear that the correlation of the rise in Asian countries’ industrial production with the rise in their volume of world trade is too close to ignore, see chart d. It is this link that explains why forecasts for gdp growth next year, see chart e, show the recovery being led by the Asian emerging market economies. Another way of putting this would be that the developed countries most encumbered by the financial crisis are recovering slower and at the weakest pace. Whatever the reason, the developed countries are lagging the global economic upturn that is now underway. But this response would be to overlook some other important trends that have been underway for many years that are also playing out more clearly in this global economic crisis.

There are many reasons why this is the case...
One is that China now has a cluster of countries that trade with it that are perhaps as dependent on its growth rate as they used to be on the US. Since it did not undergo recession, these economies are less affected by the global economic downturn than those economies that are still dependant on the US, which did undergo a severe recession. One needs only think about the large emerging commodity exporters and how the demand for their goods is being driven as much by Chinese demand for resources to fuel its growth as by US demand. Yet this explanation is to simplify the significance of China’s position in the world economy, as it could be argued that developed countries like Germany and Japan are equally now dependant on Chinese demand. Rather, it appears that China is now part of the global matrix that makes the global economy tick and has acted as an important counterweight to a slowdown in another major part of the world economy, absorbing some of the shock from the recession.

...but at the heart of it lies better economic management by emerging markets as a group
A final point would also be that to concentrate just on China is to make another mistake. There has been significant progress made in a host of emerging market economies, from Asia to Africa, to Latin America and Eastern Europe. It does appear that corporate governance has improved; fiscal policies are better, foreign official reserves are higher and the collective response of these governments to the economic shock was better than in previous cycles, including the Great Depression of the 1930s. This is good news for the future of the world economy. One immediate conclusion though is that this means that the emerging economies will be amongst the first to reverse the massive loosening of fiscal and monetary policy that has occurred since the crisis took hold. Financial markets are better prepared to deal with that as well.

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Published on  Mon, Nov 2 2009, 12:00 GMT