Emerging markets’ export problem
Taiwan’s forecast-beating export data today came as a pleasant surprise amid the general emerging markets economic gloom. In a raft of developing countries, from South Korea to Brazil, from Malaysia to the Czech Republic, export data has disappointed. HSBC’s monthly PMI index showed this month that recovery remains subdued.
With Europe still in the doldrums, this is not totally unsurprising. But economists are growing increasingly concerned because the lack of export growth coindides with a nascent U.S. recovery. Clearly EM is failing to ride the US coattails.
Does all this confirm the gloomy prediction made last month by Morgan Stanley’s chief emerging markets economist, Manoj Pradhan. Pradhan reckons that a U.S. economy in recovery would be a competitor rather than a client for emerging markets, as the world’s biggest economy tries to reinvent itself as a manufacturing power and shifts away from consumption-led growth. It is the latter that helped underwrite the export-led emerging market boom of the past decade.
It’s early days yet. Yet the impact of the U.S. rebound this time does appear different from the past.
Typically, a recovery in the United States leads to a rise in demand for all sorts of products – chemicals, home furnishing, clothing, footwear, light manufacturing, electrical appliances, machinery and equipment, transport – and this leads to a broad-based rebound in imports, analysts at UBS say. That has not happened in this cycle, and imports from EM in particular have lagged. The answer, according to UBS, lies in the kind of things the United States has been importing. Look at their chart below - most in demand are heavy machinery and transport equipment because the rebound is centred on construction, autos and infrastructure. UBS says:
The US does not need EM to supply into these sectors – these are the sectors that it can supply to itself, or potentially import from other ‘industrialised’ economies such as Germany…. Our initial analysis suggests that EM may not be able to fully participate in the cyclical upturn in the United States.
The competitive advantages of emerging markets kick in with consumer sectors such as household appliances, phone handsets and clothing. But U.S. demand for these is stagnant, possibly because of deleveraging by households and also due to the relatively weak pace of job creation.
The U.S. recovery could yet broaden out to other sectors as it gathers pace. But until this happens, the economic recovery in emerging markets will be subdued.
There is another hope though — China. Taiwan is a case in point. Its 3.3 percent export improvement last month was down to China. Taiwanese exports to China rose 5.2 percent on the month after a 21 percent jump in February. Taiwanese exports to the U.S., on the other hand, fell 1.9 percent, adding to a 12 percent slump in the previous month.