The US slowdown: Impact on Asia Pacific

Author: Countries and Consumers

Date published: 5 Mar 2008

The US economy slowed in 2007 to 1.9% year-on-year growth from 2.9% in 2006, which will have an impact on Asia Pacific. This was due to a series of credit problems in the housing sector, which then spread to become a more general credit crisis, with a negative impact on consumer confidence. This trend is forecast to continue in 2008. The slowdown in demand for imports in the USA will have an impact on Asian economies, particularly those which are heavily dependent on exporting goods to the USA.

Key points

Asia has positioned itself as a major supplier of exports and location for company outsourcing, owing to a combination of low labour costs and skilled technical knowledge;

It is now a major exporter of manufactured goods, technical products and textiles, as well as commodities such as grain, oil and gas, and rubber;

The USA is a major destination for these exports, owing to strong consumer demand, as well as the ongoing requirement for raw commodities;

A slowdown in the USA will have a negative impact on those Asian economies that depend heavily on exports to the USA, although more diversified economies will prove more resilient;

However, rising demand from other countries, particularly China, may help to compensate for slower demand in the USA and minimise the economic impact on Asia;

In addition, rising domestic demand in countries such as China and India will help to offset the impact of fewer exports to the USA.

Background

The status of the USA as the world's biggest economy has meant that it is a major attraction for exports from Asia. Exports are of three general types: raw commodities, manufactured goods and high-level technical goods. Demand for these exports will be affected differently by the slowdown in the USA, particularly as contracts (usually set at one year) for business supplies to the USA fall due for renewal or renegotiation.

Many countries such as Cambodia and Bangladesh have come to rely on the USA as an export destination and have failed to diversify their export base sufficiently to insulate themselves against a sudden drop in US demand. Those countries which are less dependent on exports to the USA, such as Singapore and Malaysia, will experience less of an economic shock, although some negative effects will be felt. As such, the general effect of the US slowdown will be negative for business profits and hence for potential consumer spending growth, although this negative effect will be mitigated in some countries.

Asian exports

Asia is the world's primary supplier of electronic and manufactured goods to developed countries:

Countries such as China, Japan, South Korea and India have positioned themselves as major exporters of electronic goods to developed economies;

This is also the case for economies such as Hong Kong, Taiwan and Singapore, although these also possess highly developed financial services industries which are utilised by developed economies;

These countries have been able to develop this export industry owing to relatively high levels of technical knowledge among the general population, as well as low labour costs;

For example, Singapore has amongst the highest GDP per capita in 2007 in the region at I$35,710 in PPP terms (Purchasing Power Parity is a method of measuring the relative purchasing power of different countries' currencies over the same types of goods and service: PPP). Amongst the lowest was Myanmar with I$2,873 (PPP), owing largely to its underdeveloped economy and poor trade links. Countries such as China and India had GDP per capita (PPP) of I$8,824 and I$4,144 respectively;

Countries such as Bangladesh, Cambodia, Indonesia, Vietnam and the Philippines are major textiles exporters. This industry requires fewer technical skills and can therefore be located in countries with a lower technical base and cheap labour costs;

Countries such as Malaysia, Indonesia, Kazakhstan, and Tajikistan are suppliers of energy products, such as oil, gas and biofuels. In addition, Bangladesh, China, Pakistan and India are suppliers of food commodities, such as rice and grain.

This wide variety of exports means that Asian goods are heavily integrated into the US economy, supplying both consumer and business demand.

Destination USA

Asian economies depend on exports to the USA to a varying extent:

In 2007 the USA received 34.6% of its imports from the Asia Pacific region;

US imports by region: 2007

Source: Euromonitor International from International Monetary Fund/Direction of Trade Statistics/trade sources/national statistics.

Of those countries that send primarily high-end electronic goods to the USA, Japan exports most to the USA, with 22.7% of its exports going to the USA in 2006;

Of those that send relatively high-end manufactured goods to the USA, Pakistan sent the most in 2006, at 21.3% of total exports, with China just behind on 21.0% of exports;

Textile and commodity reliant countries tend to be more reliant on exports to the USA, owing in part to favourable trade quotas in the USA, designed to prevent unfair competition with the Chinese textiles industry. In 2006, Bangladesh sent 27.8% of its exports to the USA, while Cambodia sent 53.3% of its exports to the USA.

These smaller economies that send a large proportion of their exports to the USA will suffer more from slowing US demand.

Economic impact

The economic impact of the US slowdown will vary according to the diversification of the export base:

For countries reliant on sending a large amount of low-level manufactured or textile goods to the USA, the effect of a slowdown will be highly detrimental. For example, since Cambodia sends over half its exports to the USA, the direct effect of lower sales in the USA will be to reduce immediate business profits, with negative connotations for jobs and wages;

This impact will be felt all the more acutely since social conditions are poor, with GDP per capita being only US$544 in 2007. This means that a potential drop in income will be felt to a disproportionately high effect, indicating a knock-on negative impact on consumer spending in Cambodia.

This effect will be felt to a varying degree in all countries reliant on exports to the USA, although poorer countries will experience a greater negative effect in both social and economic terms.

Diversified economies

The economic shock will be felt to a lesser extent in countries that possess more diversified economies, both in terms of export partners and types of goods exported:

For example, Singapore sends only 10.3% of its exports to the USA, with other main export destinations being the EU and regional trade partners. Ongoing demand from these areas will help to mitigate the impact of falling demand from the USA. This means that the negative effect on jobs and wage growth will not be so great, although some drag effect on consumer confidence and related spending will still be apparent;

Although China sends 21% of its exports to the USA, it is also relatively well insulated from the effects of the slowdown. This is because demand for its goods in other areas remains high, especially since trade restrictions on Chinese exports to the EU have been lifted;

In addition, China's rapid economic growth is feeding through to boost domestic demand, with private final consumption expenditure totalling 36.4% of GDP in 2007. Domestic demand will help to mitigate the negative impact of lower demand from the USA;

Countries such as Malaysia, which have a well-diversified export base, will also be relatively well insulated. Malaysia exports textiles, rubber, manufactured goods and some oil, ensuring that demand for the majority of its exports will remain strong even if demand for one in particular dips;

Countries supplying key commodities will be less affected by the US slowdown. This is since these commodities may be regarded as key to US industries or consumers (particularly oil) and therefore demand for these exports will not fall as greatly as demand for consumer goods, or perceived luxury items;

Like China, other countries will benefit from rising domestic demand acting to provide some insulation from lower US demand, including the fast-growing economies of India, Hong Kong and Taiwan.

The economic impact of the US slowdown will be felt in all countries exporting goods to the USA, but will be mitigated in many owing to economic diversification.

Future scenarios

Despite a slowdown in the USA, overall demand for Asian goods may not drop dramatically:

Economic growth in Western Europe is forecast to slow only slightly in 2008, to 2.3% year-on-year from 2.7% in 2007;

Real GDP growth in Asia-Pacific, Western Europe and the USA: 2002-2008

Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics

Note: 2008 figures are forecasts.

Moreover, China's economic growth is set to maintain momentum, forecast at 10.0% in 2008, down from 11.5% in 2007. Strong demand from China, particularly from its urban middle class consumers, should help to provide a new or expanded export destination for those countries suffering from lower US demand;

In addition, government measures in the USA may help to ease the demand slowdown. In February 2008, the US government approved a US$167 billion emergency economic package including tax rebates and one-off payments for low-income families. This is designed to support consumer spending, which would also support demand for imported goods;

The US Federal Reserve cut rates dramatically in 2008 to 3.0% in February 2008 from 5.25% in September 2007. This will help to improve consumer access to credit and bolster consumer spending in the USA.

The US slowdown will have an overall negative impact for business profits and consumer spending in Asia, although this will be mitigated to some extent by demand from other regions, as well as China, and efforts to support consumer demand in the USA. As such, economic growth in the Asia Pacific region is forecast to slow only slightly in 2008 to 5.7%, from 6.2% in 2007.

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