- Growth will slow in the U.S. and Europe in 2023 while recovering in China, putting Asia-Pacific in the middle of crosswinds.
- We use trade in value-added data to estimate the net effect of this shift in the external environment, taking into account the ultimate source of demand for countries' exports. Asia's economic ties to China have grown, but integration with the U.S. and Europe is still substantial.
- The net external growth impulse for most Asia-Pacific economies will be negative given we expect a stronger slowdown in the U.S. and eurozone relative to China's rebound and that the U.S. and Europe remain important export destinations.
- The GDP growth effect of the shift in the external environment will depend on how externally oriented economies are. Several Asia-Pacific economies are externally oriented and global demand fuels their economies. India, Indonesia, Japan, and China are the more domestically driven economies in the region.
A global growth rotation is underway. China's GDP is picking up as it exits COVID controls, while Western economies are slowing down. While the Chinese recovery should dampen the effect of the Western slowdown, the net impact on export demand should generally be negative this year. We expect the deceleration in the U.S. and Europe to exceed the acceleration in China.
Moreover, the West remains more important as a source of demand for most Asia-Pacific economies. This is according to our analysis of the value added in each country in regional supply chains, as some imports are processed and subsequently reexported before reaching an end market.
The Implications Of Rotations
In 2023 growth is likely to slow in the U.S. and Europe, which together account for nearly 40% of global GDP in nominal U.S.-dollar terms. In Europe, growth had strong momentum in the run-up to 2023, but is now set to slow. Higher interest rates, reduced hiring, and weaker housing markets are hitting activity (see "Economic Outlook Eurozone Q1 2023: Reality Check," published Nov. 28, 2022, on RatingsDirect).
In the U.S., higher interest rates are leading to slower activity (see "U.S. Business Cycle Barometer: Constrained By Tight Monetary Policy And Global Slowdown," Jan. 25, 2023), and household savings buffers are gradually falling.
A rebound in China following relaxation of COVID-19 controls partly offsets the weaker growth environment in the West. China's earlier COVID-19 policy shift will bring forward its economic recovery and boost domestic demand, especially private consumption (see "China's Earlier Policy Shift Advances Its Recovery," Jan. 18, 2023.)
Activity in the fourth quarter of 2022 was weaker due to COVID-19 lockdowns, which hit consumer confidence and spending particularly hard in the country. Following China's abrupt end to most COVID controls, we expect consumption to lead an economic rebound in the country, while muted activity in the manufacturing and real estate sectors will constrain investment growth.
The net effect of these offsetting external growth forces is largely negative. Asia-Pacific economies are closely integrated with China, whose economic influence in the region has grown quickly. On the other hand, the region is also enmeshed with the U.S. and Europe with strong trade, financial, and business linkages.
Applying A 'Value-Added' Filter To Chinese Demand
We estimate the exposure of Asia-Pacific economies to the U.S. and Europe relative to China using the trade in value-added data from the Organization for Economic Cooperation and Development (OECD).
We use this data as it gives a better indication of the importance of different trading partners than the mainstream trade data. The normal, "gross" trade data is more timely--value-added data is from 2018 whereas 2021 trade data is available for all economies.
However, a significant share of the exports from some Asian economies is sent to China for further processing before being sent onward to the U.S., Europe or elsewhere for consumption. In that case the source of final demand for those exports is the U.S. or Europe. Looking at the gross export profile would attribute this activity to China and overestimate the exposure of the region to the final demand rebound in China.
The importance of China as a source of demand measured through gross exports is typically higher than when measured using value-added. This is true for economies that export manufacturing inputs to China such as raw materials or intermediate goods, which are then be exported onwards for final use.
For example, we might overstate China's relative economic impact on Australia if we looked only at gross exports. Australia exported goods worth about US$130 billion to China in 2021, compared with US$12 billion to the U.S. This would suggest China's impact on Australia's economy is about 11 times as large as that of the U.S. However, a lot of these exports such as iron ore go on to be processed and consumed outside of China.
In value-added terms, Australia's exposure to China was about US$94 billion in 2018 compared with US$23 billion to the U.S., which suggests China's underlying impact on Australia's economy is about four times as large as the U.S. This is still a large difference, but a much smaller one than the gross trade profile would suggest.
For some economies the relative importance of China compared with the U.S. and Europe would be similar when looking at gross exports. Taiwan and South Korea are examples of economies in this group. Taiwan, for instance, exports goods worth US$114 billion to China and US$64 billion to the U.S. in 2021. So China's relative influence is about double.
Looking at value-added exposure, China accounted for about US$65 billion in value-added in 2017 whereas the U.S. accounts for US$37 billion. This also implies the influence of China is about twice that of the U.S.
The export basket in these economies is geared more toward capital goods and final goods that are consumed at the export destination in the U.S., Europe, and in China. As such, final demand in these respective economies directly influences demand for Taiwan or South Korea exports.
Accounting for the final demand market of a good, and the value-added during processing, makes a big difference to our estimate of the external economic reliance for each Asia-Pacific country (see chart 1). Our data show how much of the economy's total value-added in percentage terms relies on final demand in these countries.
For example, about 12% of Taiwan's economy relies on demand from China. Another 7% of the economy relies on U.S. demand, and 3% from the large eurozone economies. Taiwan's highly open economy has a combined exposure of 20% of value-added to these large external economies.
Value-Added From China, The U.S., And The Eurozone Compared
The importance of China as an export destination is the strongest for Australia. Demand from China accounts for about 7% of the economy compared with 3% for the U.S. and eurozone combined. The relative significance of China as an export market is also strong for Hong Kong and Taiwan, even though both economies have high exposure to the U.S. and the eurozone as well.
For some Asia-Pacific economies, the importance of China is broadly equal to that of the West. This is the case for South Korea, New Zealand, Indonesia, and Malaysia.
For other Asia-Pacific countries, the significance of the U.S. and eurozone combined is greater than that of China. This group includes Singapore, Vietnam, India, the Philippines, Thailand, and Japan. China's economic influence has grown rapidly but the region still relies considerably on wider global growth.
The value-added data we have available is for 2018; external exposure has changed since then but our main takeaways are unaffected. We use the timelier trade data to track how external exposures have evolved since 2018.
Some economies have a greater share of total trade going to China in 2021 compared with that of 2018. These economies include Australia, Indonesia, New Zealand, and Singapore.
The scale of change is most noticeable for Indonesia, where exports to China as a percentage of the total rose to 23% in 2021 from 15% in 2018. One possible reason for this is large foreign-direct investment from China coming into nickel processing and battery supply chains in Indonesia.
On the other hand, Taiwan, and South Korea slightly reduced the share of their exports going to China between 2018 and 2021. For the other Asian economies, the trade profile has remained broadly similar over the pandemic.
What This Means For Asia-Pacific Trade In 2023
We use our latest growth projections for the U.S., the eurozone, the U.K., and China to work out the growth differential from 2022.
We translate this into a weighted average export market growth differential for Asia-Pacific economies using value-added exposures as weights. From there, we adjust our current growth projections and the implied change in 2023 growth from 2022 (see table 1), and assess the weighted export market growth differentials (see chart 2).
Unsurprisingly, given the substantial slowdowns expected in the U.S. and Europe, the net export market growth differential is negative for most economies.
Australia is the only economy in our sample that has a net positive external growth impact at about 40 basis points. This is a function of the economy's much higher net value-added from China relative to the U.S. and Europe.
|Growth Projections For Large Economies|
|Differential, percentage points||-3.3||-2.2||-5.3||1.8|
|Note: Projections from latest economic forecast publications, "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," Nov. 29, 2022; "Economic Outlook Eurozone Q1 2023: Reality Check," Nov. 28, 2022; and "Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth," Nov. 28, 2022. Source: S&P Global Ratings.|
Aside from Australia, Asia-Pacific economies have a net negative change in growth for the export market in 2023.
India, the Philippines, and Singapore have the largest magnitude of weighted export market slowdown. These economies' higher reliance on the U.S. and Europe is reflected in the negative exposure. India's export market growth differential in 2023 is nearly 1.9 percentage points, while the Philippines and Singapore have differentials closer to 1 percentage point.
Japan, Thailand, and Vietnam face export market growth declines of about 90 basis points. The remaining Asia-Pacific economies have more moderate export market growth change this year given their balanced external value-added exposure.
Open, Export-Focused Economies Are Exposed
The economic impact of the global growth rotation in the region will also depend on the external orientation of economies. With a slowing trade and electronics cycle, economic data has already weakened in the more open Asia-Pacific economies such as Taiwan, Malaysia, and South Korea.
Subdued export market growth would weigh more heavily on these economies. On the other hand, more domestically oriented economies would face less economic impact from stronger or weaker export market growth.
Several Asia-Pacific economies are externally oriented with large global trade linkages. Singapore, Vietnam, and Thailand have the most global exposure with external demand accounting for more than 40% of the economy in each case. These are closely followed by Taiwan, Malaysia, and Hong Kong where the value-added going to external destinations is a bit below 40% of the economy.
India, Indonesia, and Japan are the more domestically oriented economies in the Asia-Pacific region. These economies each have less than 8% of their value-added exposed to the U.S., the eurozone and China combined. More broadly, they have more than 80% of their total value-added originating domestically.
China also falls in the category of domestically oriented economies with about 86% of value-added dependent on domestic demand.
Risks to our forecasts would affect the net export market growth differential for Asia-Pacific economies. For example, if slowdowns in the U.S. and Europe are milder than our forecast or if a growth rebound in China is stronger than our forecast, the net differential would be more favorable. Asia's exposure to the U.S. and Europe relative to China is balanced, and the relative scale of slowdown or rebound will determine Asia's external environment.
Editor: Jasper Moiseiwitsch
- U.S. Business Cycle Barometer: Constrained By Tight Monetary Policy And Global Slowdown, Jan. 25, 2023
- China's Earlier Policy Shift Advances Its Recovery, Jan. 18, 2023
- Economic Outlook Eurozone Q1 2023: Reality Check, Nov. 28, 2022
- Economic Outlook U.S. Q1 2023: Tipping Toward Recession, Nov. 29, 2022
- Economic Outlook Eurozone Q1 2023: Reality Check, Nov. 28, 2022
- Economic Outlook Asia-Pacific Q1 2023: Global Slowdown Will Hit, Not Halt, Growth, Nov. 28, 2022
This report does not constitute a rating action.
|Asia-Pacific Economist:||Vishrut Rana, Singapore + 65 6216 1008;|
|Asia-Pacific Chief Economist:||Louis Kuijs, Hong Kong +852 9319 7500;|
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