Asia Enters the Storm

BERKELEY – As 2011 draws to a close, there are growing signs that Asia is becoming caught up in the global slowdown, dashing hopes that the region’s economies would “decouple” from the prolonged recession in Europe and America’s lackluster recovery. China’s export growth is slipping, owing to faltering demand in Europe, which has surpassed the United States as China’s largest foreign market. Indeed, China’s manufacturing activity is contracting for the first time in almost three years. Reverberations are already evident in other emerging Asian economies that depend on exports both to China-based manufacturers and to the US and Europe.

Decoupling did not occur in 2008, when exports accounted for about 45% of pan-Asian GDP (excluding Japan) and every emerging country in the region experienced a sharp contraction in growth as world trade plummeted. Nor is decoupling likely today, because exports still account for about the same share of the region’s GDP, and about 50% of these exports are still headed to developed countries.

So the idea of decoupling appears to be a chimera. Even if the euro crisis is resolved, austerity in Europe, along with anemic growth or worse in the US, will mean a slowdown in export-dependent Asia. But Asia’s economies can still grow much faster than the developed West if they respond to prolonged stagnation by rebalancing their growth toward internal demand, especially household consumption. The good news is that these economies have substantial room for such rebalancing, as well as the policy flexibility to accomplish it.

The share of consumption in GDP in these economies fell from more than 60% in the early 1980’s to less than 50% today. In China, it is less than 40% – far below the norm for the world’s major economies and for other Asian economies at a comparable stage of development – despite nearly 7% annual average growth in China’s per capita consumption in recent years.