Even though slowing global demand after the Great Recession affected Asia in recent years, improving trade figures in the region are now a ray of hope for globalization. But is the current recovery in Asian exports likely to continue?
Amid all the rhetoric about protectionism, improving trade figures in Asia are a ray of hope for globalization. An export powerhouse for a long time now, Asia has, however, felt the heat in recent years, as global demand slowed after the Great Recession, in turn bringing down the pace of international trade expansion. Thankfully, the tide appears to be turning of late. In China, for example, net exports contributed 0.3 percentage points to real GDP growth in both Q1 and Q2; the positive contribution in Q1 was the first since Q2 2015.1 In India, where exports had faced strong headwinds due to slower growth in key markets such as Europe, real exports grew 10.3 percent year over year in Q1 2017, the fastest pace of growth since Q2 2014. Similar trends of export recovery can also be seen in other key Asian economies (figure 1). Growing export volumes, combined with an uptick in commodity prices (commodities are a key export item for countries such as Indonesia and Malaysia), have pushed up export values for these countries (figure 2), which, in turn, has aided their external balances. That augurs well for currencies in the region facing potential downside pressure from rising interest rate differentials with the United States.
So, is the current recovery in Asian exports likely to continue? It seems probable, given that key fundamentals such as global demand and regional trade are likely to remain positive.
Global growth fundamentals for 2017 appear much better than they were a year before. According to the International Monetary Fund (IMF), world GDP is set to grow 3.5 percent in 2017 and 3.6 percent in 2018, up from a 3.1 percent rise last year, with growth in both advanced and emerging economies set to rise (figure 3).2 Troubled economies in the Eurozone appear to be getting back on track. Growth in Ireland (5.2 percent in 2016) and Spain (3.2 percent in 2016) has surged, while in Greece, inflation is edging up, rekindling hopes of a break from deflation.3 The story for emerging economies, especially those in Asia, is even brighter. While China’s strong GDP growth in Q1 and Q2 2017 (6.9 percent) helped dispel fears of a slowdown, India, with growth of 7.0 percent in Q4 2016 and 6.1 percent in Q1 2017, appears to have shrugged off any major dent in growth due to demonetization.
Asian growth has continued unabated over the years, driven in recent years by emerging economies such as China and India.4 Consequently, within Asia, the flow of goods and services has gone up sharply. For example, back in 1980, North America and Europe had the biggest share in exports from emerging and developing countries in Asia, while exports within the region itself were just 6.6 percent of the total (figure 4).5 By 2016, the region had the highest share in its own exports, highlighting a strong rise in demand from within the region. This is not surprising given favorable demographics and increasing prosperity, leading to a sharp rise in the middle class in the region.6 Also, Asian companies have rapidly moved up the value chain from being mere assemblers of semifinished products. Be it automobiles or smartphones, countries such as China and India are moving up the value chain and closing the gap, albeit in different degrees, with advanced manufacturing majors like South Korea and Japan7—and they are increasingly exporting to one another.
Global commodity prices have been on a rebound since 2016. For example, since the beginning of 2016 (until August 21, 2017), the price of Brent crude has gone up 38.3 percent, while rubber and coal prices are up 49.8 percent and 78.8 percent, respectively (figure 5). Asian commodity exporters such as Indonesia and Malaysia have benefitted from this resurgence in commodity prices. For example, the value of exports (in Malaysian ringgits) of inedible crude materials from Malaysia went up 40.7 percent year over year in Q1 2017 and 35.9 percent in Q2. Similarly, exports of mineral fuels and related products grew 41.1 percent in Q1, the fastest pace of expansion since Q2 2010, and the momentum has continued into Q2 as well. Palm oil exports, in particular, have been a key beneficiary of rising prices.
The trend is similar in Indonesia, where the value of mining and related exports (in US dollars) went up 37.2 percent in Q2 2017, the highest rise since Q3 2010. The rise in commodity prices is also translating into higher prices for refined products and, hence, exports of those products. Singapore, in particular, has benefitted, with the country’s export value of petroleum products rising 30.1 percent in Q4 2016, and then by 70.4 percent in Q1 2017; the growth momentum continued into the second quarter of this year as well. This trend of healthy commodity exports is likely to continue, given increasing global demand and elevated prices; although commodity prices have flattened of late, they remain high compared with 2015 and early 2016.
Supporting trade fundamentals in Asia is a return to stability of key currencies in the region. Currencies were a worry last year, as speculation increased about possible moves by the US Federal Reserve (Fed). However, the Fed’s interest rate path has become clearer in recent weeks.8 This has eased the pressure on key Asian currencies. For example, the Malaysian ringgit, the Indian rupee, and the Indonesian rupiah have stabilized this year (figure 6). Currencies are also likely to benefit from improving economic fundamentals across the globe. Within the Eurozone, rising inflation is a positive development, especially in debt-laden economies.9 In Greece, for example, where inflation went up above 1.0 percent this year—for the first time since August 2012—rising consumer prices, if sustained, will push up nominal GDP, thereby reducing the debt burden as a share of nominal GDP. The European Central Bank will be in no mood to stem this momentum. The same holds true for the Bank of Japan in its long-running fight against deflation.
Since the global downturn of 2008–09, Asian exporters have increasingly turned to domestic consumers for growth as international trade suffered. Asian households, in turn, delivered, with increasing affluence in emerging economies aiding spending.10 Times, however, are changing. Households in many parts of Asia have seen debt levels soar,11 with real estate cycles exacerbating the situation.12 This, in turn, has impacted banks’ asset quality in economies such as Thailand, while corporate bad debt is on the rise in countries such as India and China. These factors have hit credit growth despite monetary easing over the past year. Now, with inflation edging up, monetary policy is likely to play a smaller role in driving economic growth. In such a scenario, the current revival in exports is welcome, and key trade fundamentals indicate that exports are likely to remain strong in the near term. While naysayers may point to the risk of rising protectionist overtones in some parts of the world, rhetoric might remain far from reality. Good economics often makes for better politics, and both within Asia and across the globe, trade is likely to win in the medium to long term.13