It’s easy to think of Asia’s financial health as almost decoupled from the West. Some of the region’s largest economies, including India, China and Indonesia, sailed serenely through the 2008-09 global financial crisis without dipping into recession. Even those parts of Asia most exposed to global flux regained economic health rapidly.
However, although the International Monetary Fund still expects 6 percent growth for the Asia-Pacific this year and 6.5 percent in 2013, the fragile global economy exposes Asia “to serious downside risks.”
Analysts, responding to weak U.S. employment figures and declining exports to Europe, are downgrading U.S. growth expectations for this year and 2013.
In Europe, the downside risk appears even greater as the debt crisis further clouds already gloomy economic forecasts.
“It’s very worrying, shippers are not optimistic,” said John Lu, chairman of the Asian Shippers’ Council. “Europe is in trouble, and I don’t know how it will get out of this black hole. The American recovery also doesn’t look quite stable.”
Asia, he said, won’t escape nearly as unscathed as it did in 2008-09. “Asia is not decoupled from the rest of the world,” Lu said. “A global recession will affect Asia, although it might not be as bad here. But Asia’s exporting countries will not be able to avoid being impacted.”
India’s first quarter GDP growth tumbled to 5.3 percent, its lowest rate in seven years and a long way from the near double-digit growth it enjoyed in the five years to 2008.
For shippers and transportation providers, the big question, of course, is China, given its huge importance on major east-west and intra-Asia trade lanes as Asia’s largest producer of goods. A consistent double-digit growth performer in imports and exports, the country this year is falling short of expectations. The country’s exports and imports grew 6.9 and 5.1 percent respectively in the first four months of the year, down from the government’s forecasts for 10 percent year-over-year growth in both, and the commerce ministry warned in May it was facing “a relatively stern trade environment.”
In a bid to boost demand, China is accelerating infrastructure investment and encouraging more private sector involvement in state-controlled sectors such as energy. Still, May figures from China’s official Purchasing Managers’ Index proved disappointing. The new orders sub index fell 4.7 points from April, to 49.8, while new export orders fell to 50.4, down from 52.2 a month earlier. A PMI below 50 generally indicates contraction.
The bearish external environment is heightening fears that China might not be able to manage the so-called soft landing government planners are hoping for. Analysts now expect growth of approximately 8 percent in 2012 but warn this could be downgraded further if European import demand deteriorates.
Lu expects China’s disappointing trade performance so far this year to continue and potentially worsen. “In the Hong Kong area, in certain industries they are not getting the orders. The business outlook is not good,” he said. “The Chinese government is doing two main things: allowing the remnimbi to soften and putting the focus away from manufacturing, which is being affected by recession overseas, and looking instead to domestic consumption.”
There will not be much Chinese export expansion in the short term until U.S. growth solidifies and Europe gets its problems under control, Lu said.
Despite Europe’s many travails, however there has been some, albeit limited, volume growth on Asia-Europe ocean trades. This helped container lines push up rates rapidly earlier this year before the heat came off in May and early June.
“Trade is still growing, Europe hasn’t stopped buying, and the bottom has not fallen out of the market,” said Peter Kjaer Jensen, chief operating officer of Denmark-based global logistics provider Damco. “Demand has not collapsed. It’s there, it’s not growing much, but it is there.”
The latest monthly North Europe Global Port Tracker forecasts Europe’s deep-sea imports will increase 2.3 percent in 2012, with a 2.8 percent gain anticipated in North Europe and a 1.3 percent gain projected in the Mediterranean and Black Sea region. Exports are expected to increase 4.7 percent in 2012, with a 6.7 percent gain anticipated in North Europe and a 0.5 percent dip projected in the Mediterranean and Black Sea region.
Highlighting the two-way connectivity between Europe and Asia, the report said, “If China’s economy continues to weaken, exports will be hit hard.”
Although container shipping rates appear to have peaked, demand on the trans-Pacific also looks solid. Thomas E. Hickey, who heads the New York office of non-vessel-operating common carrier Encompass Global Logistics, said he was cautiously optimistic about trans-Pacific volumes over the balance of 2012 and expects modest economic growth to be reflected in increases in orders and manufacturing.
For Hickey, the biggest risks to trade growth on major lanes to and from Asia this year are macroeconomic. Any major upward movement in oil prices, he said, “could have a dramatic, negative impact on consumer demand, which would further curtail production and subsequently impact demand.”
“Also, the U.S. economy is the bellwether in forecasting future demand,” Hickey said. “If unemployment continues to stall, and businesses feel that government intrusion is hampering their ability to expand, and thus begin hiring, unemployment will continue to have a large impact on consumer demand, in the U.S. and Europe alike.”
Despite the importance of European and U.S. export markets, however, those markets in recent years have declined as a percentage of many Asian countries’ overall containerized traffic. The U.S. and Europe accounted for just 28.7 percent of exports from Asia’s 11 largest economies in 2010, down from more than 40 percent a decade earlier and 34 percent as recently as 2006.
In part, this is because the trend of outsourcing production to Asia reached a plateau in 2007 and, according to Macquarie Research, has now matured and could limit container volume growth on east-west trades in the years ahead. But intra-Asia trade also has gradually assumed greater significance for many economies and traders, accelerated by the global financial crisis and more complex supply chains prior to export.
Europe and the U.S. now only account for 35 percent of China’s containerized exports, for example, while intra-Asia movements make up some 45 percent and another 10 percent goes to the Mideast and India subcontinent region.
This is due in part to a restructuring of trade in Asia as China has been incorporated into an integrated supply chain. Japan and South Korea, for example, export significantly fewer televisions now than they did in 2002. But while China and to a lesser extent Malaysia have taken their place as the leading exporters, both countries now are home to major assembly operations for Japanese and Korean multinationals, and production is fed by high-value intermediate components made in Japan and South Korea.
“Final assembly in China combines commodities from the ASEAN (Association of Southeast Asian Nations) countries with high value-added intermediate components from Northeast Asia,” said Peter Eadon-Clarke, a strategist at Macquarie.
Free trade agreements across the continent have further spurred the growth of these complex import and export relationships. “Asian countries’ export destinations are now predominantly intra-Asia with the exceptions of China, the final assembly point before shipment to the U.S. and Europe; India, which is hindered by infrastructure costs and distance; and to some extent Taiwan,” Eadon-Clarke said.
Tim Wickmann, CEO of A.P. Moller-Maersk’s intra-Asia container shipping subsidiary MCC Transport, said one of the prime demand drivers of regional trade was the movement of raw materials and semi-processed products between Asian countries prior to the final product being shipped to the U.S. or Europe.
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The upshot is that although some intra-Asia trades are sheltered from the wider global economy, growth prospects are highly susceptible to demand fluctuations outside Asia. “People say that problems in Europe won’t affect intra-Asia services, but they will,” Wickmann said. “For example, we send unfinished materials and garments from China and Taiwan to Bangladesh. Bangladesh then makes this into clothes for Europe and the U.S., so if purchases in those markets go down, then of course the purchase of unfinished garments will also be reduced.
“It’s the same with electronics,” he said. “There are multiple component movements within Asia before export to the major consumer markets.”
The Armageddon scenario for all trades by all transportation modes, therefore, is a worsening of the European economy. If the euro were to disintegrate, economists generally agree this would have a catastrophic impact on global trade, with no respite even for intra-Asia commerce.
“The partial collapse of the euro will lead to a recession that may take years to come out of unless new economic policies can be introduced that will generate trade,” said Ben Hackett, head of Hackett Associates, which produces the Global Port Tracker. “That is extremely hard to do in an environment of high sovereign debt and an unstable banking system.”
Contact Mike King at email@example.com.