Don’t bet on Asians imitating Americans
The old economic model — that Asia exports to the U.S., saves its earnings and lends the money back to Americans to buy more stuff — is broken and no one can say what will arise in its place.
Americans are not willingly becoming savers, cultural change is being forced on them by the credit crunch and their own busted balance sheets.
The hope for Asia, which has seen an absolutely stunning cliff dive in its economies, is that domestic demand can grow to replace U.S. consumption. This faces huge hurdles; a social safety net that is threadbare to non-existent and a population that just doesn’t understand the risks of living closer to your means but sees frugality and the storing up of wealth as a virtue.
Asia banking on consumption at home replacing that from the U.S. is a bit like Las Vegas trying to make up for plunging gambling revenue by charging more for prime rib dinners; it might help a bit but it’s not a serious business model. In the meantime, economies across the region are seeing really stunning falls in activity and exports.
“Live by exports, die by exports,” Gabriel Stein, chief international economist at Lombard Street Research told a conference in Singapore last week.
Singapore’s own highly trade-dependent economy shrunk by more than 16 percent in the fourth quarter on an annualized, seasonally adjusted basis. Prime Minister Lee Hsien Loong said last week another 8 percent may disappear this year.
Indonesia’s January exports fell by 36 percent, the biggest annual decline in more than 22 years while factories in Korea left almost 40 percent of production idle in the same month. Korean exports fell 17.1 percent in February from the year before, having fallen by a third in January alone. In Taiwan export orders fell a record 42 percent in January. Japanese exports fell by almost half in January, down 45 percent.
China has gotten off relatively lightly in comparison, with exports falling 17.5 percent from a year ago in January.
On the positive side, the government policy response has been reasonably prompt in many places, ranging from admirably front loaded stimulus spending plans that really should make a difference this year to plans to prop up stock markets via government buying which are wasteful, unfair and probably bound to fail.
Shares across the region are falling and so too are some currencies, notably Korea’s won which touched an 11-year low on Monday before the government spent an estimated $1 billion propping it up. Competitive currency devaluations cannot be ruled out.
WHO BUYS WHAT FROM WHOM?
So should Asia just try to ride out the storm and wait for U.S. demand to pick up again?
It may be a long wait. For one thing, the U.S. population is aging, which will pinch consumption in two important ways. Firstly consumption tends to revert to core needs as people get older and secondly retirement plans that were built on high property and share prices lie more or less in ruins and will prompt higher rates of savings to try and catch up.
A recovery in U.S. consumption will come eventually, but it’s not likely to bring the kind of heady growth in consumption we saw from 2000 to 2007, when personal consumption grew at a heady 4.7 percent rate.
So either shutter a lot of those Asian factories or build up consumption at home.
All eyes inevitably turn to China, with its huge population, high savings rate, low debt and fantastic head room for growth. Independent economist Andy Xie estimates that current per capita income of $3,300 could triple within two decades through a combination of growth and currency appreciation. But two decades is a long time, and in the meantime we have to survive the next two years.
And it seems almost delusional to hope that Chinese and other Asian consumers will somehow throw off the habits of a lifetime, habits reinforced by the real risks they face if they lose their jobs and by their self-evident correlation with growing wealth to start to spend more. These consumers will be seeing the same headlines about the stock market and plunging exports that the rest of us do.
It’s also hard to imagine Asians looking across the Pacific at U.S. profligacy and seeing this as a model they want to emulate. Even now efforts at stimulus in Asia seem to focus more on keeping people in jobs rather than insuring them against income loss.
So, maybe over time consumption in Asia will grow as its economies mature, but in the meantime pouring concrete into public works plans seems a better bet for keeping the economies afloat while we wait for the next world economic order to be invented.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund)