Global Growth Rotation – A Positive for Asia

Summary

• A global growth rotation from China to the US this year leaves downside risks for the rest of Asia given trade flow patterns.
• But with global trade starting the year strongly and Asian exports to the US gathering pace, we expect trade to broaden out rather than any significant export slowdown.
• A wider US C/A deficit this year (4-5% of GDP) also indicates bigger surpluses in Asia.

The composition of global growth is changing. Versus the 0.4pp of last year’s global GDP growth attributed to China (from the 3.5% overall global contraction), this year is expected to be primarily US led. Consumption patterns are also shifting towards services versus last year’s goods-driven growth. For the manufacturing and export-driven economies in EM, the direction and structure of trade could materially alter this year’s overall growth performance. We examine what it means for Asia.

Asia Trade Is Primarily Intraregional

Last year’s pandemic-related surge in Chinese exports was fundamental to China’s growth outperformance. Forecasts for 2021 incorporated export normalization and consequently a narrowing of the US-China growth differential some time ago. But the scale of the US stimulus under President Joe Biden has meant this rotation is outpacing expectations. We do not, however, think it will derail the ongoing EM growth recovery.

Firstly, around 60% of Asia’s trade is intraregional. China is the main trading partner for most major Asian economies, accounting for 26-27% of South Korea’s and Taiwan’s total trade. For Singapore, China is also the largest trade partner but accounts for a smaller 15%. The share of trade with the US is around 10-12% for these three countries. India is the outlier, with trade with China, the US and the euro area more uniform around 10-12%.

Slower Chinese growth could mean some downside risks for South Korea, Taiwan and Singapore. That exports are heavily skewed towards electronics should limit these risks, though. The semiconductor shortage is unlikely to resolve anytime soon, and the global demand for electronics, while levelling out, will not disappear. Instead, we expect trade to broaden out, potentially relinquishing China of some of the global market share gained during the height of the pandemic.

Both Singapore’s and South Korea’s exports to the US are now running above those to China. Only in Taiwan are exports to China still growing faster than to the US (Chart 1). Another consideration is Vietnam. The US now runs a $70bn trade deficit with Vietnam, versus $32bn in 2016, reflecting increased outsourcing across Asia. And Vietnam’s global export share has increased steadily over the past decade. Some of the direct intraregional trade is therefore effectively trade with the US.

Bloated US C/A Deficit Needs Surpluses Elsewhere

While China-US relations look set to remain strained under Biden, as the largest US trading partner China still stands to benefit from a significant acceleration in US growth. The US C/A deficit is expected to widen to around 4-5% of GDP this year, from 3.1% in 2020, implying rising surpluses elsewhere. Again, the boost may be modest in China given last year’s medical/PPE-related exports leave a high base (consensus sees China’s C/A surplus unchanged this year at 1.5% of GDP). But Asia’s other surplus economies should benefit.

More generally, a strong US economy should support global trade. And recent data show global trade already accelerating sharply. We have been cautious on early-year data out of China given the impact of last year’s COVID shutdown, the shift in timing of the Lunar New Year holiday and the ‘stay put’ policy. But that the trade acceleration is fairly broad based and comes with very strong readings in IP and better-than-expected PMIs suggests a very strong start to the year for the global economy.

Spending Shift from Goods to Services Limits C/A Impact

Economic reopening will shift global consumption from goods to services. As services are less import intensive, this will limit the C/A shifts versus what would otherwise be the case in the upward US growth revisions. But since international tourism will take longer to recover, this benefits China’s C/A dynamics by delaying any widening of the services deficit from outbound tourism. And it is broadly neutral for South Korea and Taiwan, where tourism is a small share of the economy.

Overall, we see improvement in C/A positions in Asia (ex China) this year. A higher US deficit needs higher surpluses elsewhere, leaving Asian exporters, and Asia FX, well positioned to benefit.