The lesson from recent economic data and policy moves in Asia is this: Hubris still has its costs.
In recent years, Asia believed its own press a little too much. The way it steered around the financial crisis of 2008, the dizzying stock gains, the migration of bankers from New York to Hong Kong and the region’s mergers-and-acquisitions binge were all interpreted as immutable signs of Asia’s economic arrival.
Decoupling-from-the-West euphoria flooded emerging markets in general. The BRIC economies ― Brazil, Russia, India and China ― thought their rapid growth rates would pick up the slack as America and Europe reeled. Debt markets in developing nations reveled in their new roles as sanctuaries.
Disappointing data and interest-rate cuts in Beijing, Hanoi and Seoul last week show the extent to which Asia got ahead of itself. Asia isn’t re-coupling; it never decoupled much in the first place. That leaves us with two stark realities for the second half of 2012: Emerging markets aren’t ready for prime time globally, and Asian policy makers need to get more aggressive about finding new avenues for growth.
China tells the first story. News that the economy slowed to a three-year low of 7.6 percent last quarter demonstrated how Europe’s debt crisis is curbing demand for Asian goods.
What’s more, investors fear China’s slowdown is bigger than we know. The innovation missing from Chinese companies has long been found in the nation’s data. At times, they are rounded down to allay fears of overheating; sometimes they are fudged to make the second-biggest economy look healthier than it was.
Economists sense the latter is happening now, pointing to things such as electricity consumption that are at odds with official gross domestic product readings. None of this should be a surprise, but it raises the possibility that Asia’s only big growth engine is sputtering more than the data suggest.
India is slowing, too, as developed economies drag down the developing ones that were supposed to save them. Asian Development Bank President Haruhiko Kuroda predicts Asia’s third-biggest economy will grow 6.5 percent this year, compared with a previous estimate of 7 percent. He sees China expanding at an 8.2 percent pace, down from 8.5 percent.
This isn’t to make light of the emerging-market growth story. The transfer of wealth and power from the West to developing nations is a megatrend that will transform the world in the decades ahead. Joseph Quinlan, the New York-based chief market strategist at U.S. Trust, calls it the “Colossal Shift.”
Yet in the first half of 2012, a number of forces converged to delay the transfer. Europe’s debt troubles are the most immediate hitch. It is leading to a drop in bank lending by European institutions forced to deleverage as funding costs rise, asset-quality deteriorates and counterparty risk increases. A drop in trade financing by European banks is causing a small-scale credit crunch for export-led economies.
Europe’s bank deleveraging is partly responsible for an almost 40 percent drop in syndicated lending to developing economies from October 2011 to March of this year. It also is affecting capital flows to developing nations; Quinlan says gross flows plunged 33 percent in the first five months of 2012.
Falling demand is another worry, and it speaks to Asia’s economic model. This story is best told by Singapore, which ground to a halt last quarter. Growth in the latest quarter contracted 1.1 percent from the previous quarter, when it climbed a revised 9.4 percent. Asia’s manufacturing businesses are plunging along with European credit ratings and policy makers should be worrying as much about deflation as inflation.
In China, pressure is building on Premier Wen Jiabao to boost stimulus to secure a second-half rebound. South Korea had its own moment of reckoning last week. The central bank unexpectedly cut rates for the first time in three years and signaled there’s more where that came from. A day later, the Bank of Korea slashed its 2012 growth forecast for the second time this year ― to 3 percent from earlier estimates of 3.5 percent in April and 3.7 percent in December.
Taiwan’s exports fell for the fifth time in six months. Shipments abroad fell 3.2 percent from a year earlier in June, compared with a 6.3 percent drop in May. The news increased pressure on the government and central bank to do more to boost growth.
Even Australia, the Asia-Pacific region’s bulletproof economy, got into the act of surprising markets. The number of people employed fell by 27,000 in June. Nor has Japan’s post-earthquake rebound gone as planned. Its central bank is being nudged anew to add stimulus to an economy undermined by a strong yen and weak consumer confidence.
Asia’s stellar job surviving the global meltdown helped reanimate a hubris laid low 15 years ago by the region’s own crash. Asia deserves a victory lap, but its developing economies can’t live without the West just yet. After all, destined for prime time means not quite ready for it.
By William Pesek
William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.
