Emerging Asia vs. US recession
With the US economy sinking into recession, the question, which arises, is whether Asia is recession immune. Many had thought that the “decoupling” theory would work i.e. the theory that Asian economies are unlikely to be affected by US recession. While it is true that the “decoupling” theory may not have worked as was expected (since the MSCI Emerging Asia Index was down by 25% at one point from its October high, this week), one can still say that this time around the emerging economies would be in a much better position compared to previous US downturns. It is true that exports and profits would be hurt and it is also true that Asia is also exposed to the sub-prime mess. Singapore, Hong Kong and Malaysia have exports to US accounting for 20% or more of their GDPs. Singapore's exports to US fell by 11% and Malaysia's by 16%. Despite all this one can still be optimistic because China's, and India's exports to USA are equivalent to 8% and 2% of their GDPs respectively. And other important factors are that in East Asia, the macroeconomic fundamentals are strong i.e. they have huge foreign exchange reserves, current account surpluses, strong economic growth rates. In addition, their domestic demand is also very strong and governments have more flexibility. And some economies have already decoupled. For instance Malaysia's exports to the USA fell but still their GDP increased from 5.7% to 6.7% in the third quarter of last year. Many analysts now say that in 2001 Asian economies were affected not only due to declining exports, but mainly because investment fell sharply. But today firms are in a much better position; capacity utilisation is high across the region, corporate balance sheets are stronger and real interest-rates are low, thereby indicating that investment is unlikely to fall. They can also implement fiscal stimulus measures to boost growth since they are facing budget surpluses. So, it would be unwise to say that Asian economies will be badly affected. They will be affected but by much less than in the past. That is, the “decoupling” theory may still be alive and well.
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