Asia's emerging economies are bouncing back much more strongly than any others. While U.S. industrial production continued to slide in May, output in emerging Asia has regained its pre-crisis level.
This is largely due to China; but although production in the region's smaller economies is still well down from a year ago, it is rebounding in those countries, too. Taiwan's industrial output rose by an annualized 80 percent in the three months through May compared with the previous three months. J.P. Morgan estimates emerging Asia's gross domestic product has grown by an annualized 7 percent in the second quarter.
Asia's ability to de-couple from the United States reflects the fact that the region's downturn was caused only partly by the slump in American activity. For most Asian economies, falling domestic demand was more important than the drop in net exports. The surge in food and energy prices in the first half of 2008 squeezed profits and spending power. Tighter monetary policy aimed at curbing inflation then further choked domestic demand.
The recent recovery in industrial production reflects the end of de-stocking by manufacturers as well as the large fiscal stimulus by most governments. But the boost from both of these factors will fade. Meanwhile, export markets in developed economies are likely to remain weak. So the recovery in Asian economies will stumble unless domestic spending, notably consumption, perks up.
Consumers' appetite to spend varies across the region. In China, India and Indonesia, spending has increased by annual rates of more than 5 percent during the global downturn. China's retail sales have soared 15 percent over the past year, including government purchases.
Elsewhere in the region, spending has stumbled, squeezed by higher unemployment and lower wages. In Hong Kong, Singapore and South Korea, real consumer spending was 4 to 5 percent lower in the first quarter than a year earlier, a bigger drop than in the United States. But Frederic Neumann, an economist at HSBC, sees tentative signs that spending is picking up. Taiwan's retail sales rose in May for the third consecutive month. Department store sales in South Korea rose by 5 percent in the year through May.
It is often argued that emerging Asian economies have large current-account surpluses--and are thus not pulling their fair weight in the world -- because consumers like to save rather than spend. Yet this does not really fit the facts. During the past five years, consumer spending in emerging Asia has grown by an annual average of 6.5 percent, much faster than in any other part of the world. Relative to American consumer spending, Asian consumption has soared.
Over the past six months, the government in Beijing has introduced a host of incentives to encourage people to open their wallets. Rural residents get subsidies for buying vehicles and other goods such as televisions, refrigerators, computers and mobile phones; urban residents get a subsidy if they trade in cars and home appliances for new goods; tax rates on low-emission cars have also been cut. There is huge potential for higher consumption in the countryside as incomes rise: only 30 percent of rural households have a refrigerator, for example, compared with virtually all urban households.
