Hong Kong: For a while, when the economic crisis was at its worst, it was a dirty word that only the most provocative of analysts dared to use. Now, the D-word—decoupling—is making a comeback, and nowhere more so than in Asia.
Put simply, the term refers to the theory that emerging markets will become less dependent on the US as their economies become stronger and more sophisticated.
For much of last year, the theory held up. Many emerging economies had steered clear of investments that dragged down banking behemoths in the West, and saw nothing like the turmoil that began to engulf the US and Europe in 2007. But then, last autumn, when the collapse of Lehman Brothers Inc. caused the financial system to convulse, emerging economies around the world got caught in the downdraft, and the D-word became mud.
Gaining importance: Pedestrians in a market in Hong Kong. In Asia’s developing countries, consumers are expected to spend more as incomes rise gradually and savings rates fall with improving welfare systems. Timothy O’Rourke / Bloomberg
Now, the tables are turning, especially in Asia, where many emerging economies are showing signs of a stronger recovery than in the West. And economists here have begun to talk of the decoupling once again.
“Decoupling is happening for real,” the chief Asia-Pacific economist at Goldman Sachs in Hong Kong, Michael Buchanan, said recently.
To be sure, the once sizzling pace of Asian economic growth has slowed sharply as exports to and investments from outside the region slumped. Across Asia, millions of people have lost their jobs as business dropped off and firms cut costs and output. Asia is heavily dependent on exports to the US and Europe, and many executives still say a strong US economy is a prerequisite for a return to the boom of years past.
But for the past couple of months, data has revealed a growing divergence between Western economies and those in much of Asia, notably China and India. The World Bank last week forecast that the economies of the countries that use the euro and the US would contract 4.5% and 3%, respectively, this year—compared with 7.2% and 5.1% growth forecast for China and India.
Major statistics for June, due Wednesday, are expected to show manufacturing activity in China and India are on the mend. By contrast, purchasing managers indexes for Europe and the US are forecast to be merely less grim than before but still show contractions.
Why this diverging picture?
The crisis hit Asia much later. While the US economy began languishing in 2007, Asian economies were doing well until the collapse of Lehman Brothers in September. What followed was a rush of stimulus measures—rate cuts and government spending programmes. In Asia’s case, these came soon after things soured for the region; in the US, they came much later.
Moreover, developing Asian economies were in pretty good shape when the crisis struck. The last major crisis to hit the region—the financial turmoil of 1997-98—forced governments in Asia to introduce overhauls that ultimately left them with lower debt levels, more resilient banking and regulatory systems and often large foreign exchange reserves. Another crucial difference is that Asia, unlike the US and Europe, has not had a banking crisis.
Add to that the fact that companies and households in Asia are typically not burdened with the kind of debt that is forcing Americans and Europeans to cut back consumption and investment plans.
All this is benefiting Asian asset markets—from stocks to property—and is leading to a gradual “financial decoupling” from the US and Europe.
Of course, none of this means Asia has become completely independent from the rest of the world. Asia remains heavily reliant on exports for economic growth. The result, despite increased “decoupling”, is that growth in Asia has slowed down, in some cases sharply.
The Indonesian economy, for example, is expected to grow 3.6% this year, the Asian Development Bank forecasts. This compares to at least 6% in 2008 and 2007. The Indian economy is expected to grow 5% this year, and the Chinese economy 7%—down from 7.1% and 9%, respectively, in 2008.
However, developed Asian economies such as Japan, Singapore and Hong Kong, which are much more tightly tied into the world economy and financial system. All three are in recessions.
“The US has deep structural problems that are coming home to roost—Asia hasn’t got those, and that has been very, very important,” says Garner of Morgan Stanley.
©2009/THE NEW YORK TIMES