Stephen Roach,writes in an extremely provocative but well analysed article, more than ever,externally led Asian economies remain a levered play on US consumption. Asia’s biggest pitfall: If the American consumer ever fades, Asia could be headed for serious trouble. The coming US current account adjustment offers good reason to worry about just such a possibility.
Asia has learnt that many of the painful lessons of the last decades financial crisis, and has done a very good job of repairing its balance sheets and reorienting some of its most misguided policies. This shows up in current account deficits have giving way to surpluses.Foreign exchange reserves have been rebuilt in an especially dramatic fashion. All of these developments are unequivocally good news for for the most dynamic region of the global economy. Backward-looking fixes are no guarantee that new and different problems will be avoided in the future. The region’s unbalanced growth model - an externally led macro dynamic that is still lacking in meaningful support from internal private consumption. In a US-centric global economy, that spells one thing - over-reliance on the over-extended American consumer. Should the US consumer cave - a distinct possibility in the event of a long overdue current account adjustment - Asia would be toast.
A decomposition of the sources of Asian growth clearly demonstrates the region’s lack of autonomous support from internal demand. Chinese private household consumption falling to a record low of 42% of GDP in 2004 as against US 71% of GDP. China remains very much an export-driven growth machine, with the export share of GDP having soared from 20% in 1999 to 35% in 2004. Moreover, China’s investment bubble - with fixed investment likely to exceed 50% of GDP this year - is also an outgrowth of outward-oriented industrialization and infrastructure. Lacking in domestic consumption growth, Asia has had little choice but to go back to the well and do what it has long done best - opt for another dose of externally led growth. With US imports fully 61% higher than exports (as of February 2005), the only conceivable way to correct the external deficit is by a reduction in consumption-driven imports.For Asia, that spells serious trouble: If US current account adjustment happens, Asia’s most important growth prop is about to meet its demise. Mr.Roach - that adjustment within US can never happen in isolation - the US consumer shall not consume less - nor can the US get away from deficits - and Asia is key in decision - aferall the current account deficit of the US is financed mostly by Asia.But no disputes on the fact - the US consumers are the key in any global economic equation.