East Asian growth outlook

Chief Economist John Greenwood shares his latest views for the region.

Apr 12, 2019 | John Greenwood

Secular and cyclical growth
In the past decade economic growth in the East Asian region has slowed considerably. 

There is both a secular and a cyclical component to this slowdown.

Secular growth rates are best measured in terms of decades; cyclical growth rates refer to growth during the expansion or contraction within a single business cycle. 

The reason for the secular slowdown is that rising land prices and higher wage costs over several decades have gradually eroded the export-competitiveness of these economies and they have reached a state of development where growth becomes more difficult.

As a result, previously rapid-growth economies such as Japan, Korea, Taiwan, Hong Kong, and Singapore have seen many of their industries migrate to lower cost areas as their standard of living has risen.  

Migration of manufacturing
Although it is still at an earlier stage of development, the same is happening in China where the manufacture of garments, shoes or toys has started to migrate to countries like Vietnam, Bangladesh and Sri Lanka.

This is part of the reason why China’s real GDP growth averaged 10.6% p.a. in 2000-08 but has slowed to an average of 7.1% in 2012-18 (most recently to 6.4% p.a.), and will no doubt slow further in the years ahead. 

More fundamentally, once economies have caught up with the technological frontier, growth becomes much harder to achieve. 

The easy gains from shifting workers from farms to factories are no longer so easily captured. 

Therefore, even enhanced technical know-how and higher productivity have not prevented the leading Asian economies such as Japan and Korea losing their competitive edge in the production of cheap manufactured goods, forcing them to shift into higher value-added products such as autos, electronics, and services.

Ageing population
Also, as populations become richer, their birth rates and death rates tend to fall, slowing the growth of the labour force and accelerating the ageing phenomenon.

Moreover, greater longevity has tended to increase the dependency ratio in the population, slowing overall growth. This is already very apparent in Japan, but will start to show up in Korea, Taiwan and China over the next few decades.

Today the faster growing economies of East Asia tend to be the “frontier economies” such as Vietnam and Bangladesh where land and labour costs are still low, the age structure of the population is younger, and birth rates tend to be higher. 

In these countries the growth process has only taken hold in recent years. 

In practice the migration of lower value-added industries to lower cost areas together with higher income countries being forced into higher value-added activities is continuous across all of Asia, generating a Schumpeterian pattern of “creative destruction” (this refers to the incessant product and process innovation mechanism by which new production units replace outdated ones), country by country and sector by sector. 

This flexibility means that Asia will naturally comprise companies and economies with competitive advantages.

Chinese exports
On a shorter-term cyclical basis, Asian export growth has been determined mainly by the fluctuations in growth of the developed economies – especially the Organisation for Economic Co-operation and Development (OECD) which constitute the major export markets. 

For example, the years 2003-08 witnessed healthy growth in the OECD enabling Asian exports to grow at 20% p.a. in US$ terms. 

Over the same period China’s exports grew even faster at 27% p.a. as China gained market share from outsourcing by the developed economies and was increasingly integrated into Asian supply chains.

However, since the global financial crisis Asia’s trade performance has been much more mixed. 

In the immediate aftermath of the crisis China initiated a huge fiscal and monetary stimulus programme which created a corresponding rise in domestic Chinese spending and imports, prompting a 30% surge in the exports of the other economies of East Asia. 

Subsequently Asian export growth and domestic demand growth has remained persistently much weaker, with exports averaging only 3.3% p.a. growth in US$ terms between 2012 and 2018. 

In the recent past there have been two headwinds to growth and exports in the region. 

First, the US dollar was generally strong, rising 8-9% on a trade-weighted basis during 2018, and a buoyant US currency frequently hurts the exports of emerging economies. 

Second, global trade has softened with slowdowns in 2018 in the Eurozone, especially Germany, and Japan. 

The slower momentum of global activity has been exacerbated by the fading of the US fiscal stimulus (from President Trump’s tax cuts in December 2017), the impact of the US Federal Reserve’s interest rate hikes during the year, and the trade frictions between the US and China that have still to be resolved. 

The future
Looking forward, the limitations on fiscal expansion due to already-high government debt-to-GDP ratios in the developed economies and the constraints on monetary growth in the US, the Eurozone and Japan mean that none of these economies are poised to create a renewed burst of strong growth. 

Moreover, China, too, will not be able to repeat the massive stimulus of 2008-10. 

Together these factors suggest that the emerging economies that are suppliers of commodities to China and elsewhere will not be the big gainers. 

More likely, the consumer-oriented manufacturing industries of East Asia will continue to benefit from the steady rise in living standards in China and elsewhere, which in turn will promote demand for consumer goods across the developed and emerging economies.

Competitive economies
Until China’s stimulus policies start to have much more effect in reviving domestic spending growth and hence China’s demand for imports from other Asian economies (driving their exports), and until the developed economies of the OECD start to show more vigorous spending growth, Asian exports are likely to continue to tread water. 

In the long run there is little doubt that Asia’s skills, low cost base, and the famed flexibility of its labour force will keep its economies competitive, but in the short run weaker demand and slower spending growth in the OECD and in China will restrain the upside potential for Asian export growth.


Related articles

Important information

The opinions referenced above are those of John Greenwood as of April 11, 2019.

This document has been prepared only for those persons to whom Invesco has provided it for informational purposes only. This document is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of this document to any person without the consent of Invesco is prohibited.

This document may contain statements that are not purely historical in nature but are "forward-looking statements", which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

You should note that this information:
•    may contain references to amounts which are not in local currencies;
•    may contain financial information which is not prepared in accordance with the laws or practices of your country of residence;
•    may not address risks associated with investment in foreign currency denominated investments; and
•    does not address local tax issues.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

The distribution and offering of this document in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.