Global Knowledge Management and Economy - Nik Zafri

This is one of the 'wake-up' call article.

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The Sun Makin Sens Section - by Tan Siok Choo

East Asia - no longer a follower?

THAT the US appears to be sliding into a recession cannot be denied. What is uncertain is whether East Asia in general, and Malaysia in particular, can avoid following in its wake. While it may be premature to offer a definitive answer to this question, three separate indicators underscore export-dependent East Asia’s growing resilience.

First, a recent article by Bloomberg suggests Japan may escape the recession that appears to be engulfing the US. As one of the world’s largest financial news and data provider notes, since 1970, Japan has followed the US into all five recessions. In 1970, the US accounted for 30% of Japan’s exports. Today, that figure has fallen to only 20%.

Japan’s reduced economic dependence on the US is largely due to the success of manufacturing companies like Toyota in capitalising on buoyant markets, particularly in China and other countries. In the past two years, Japan’s exports to China jumped by 45% while those to Russia doubled.

Additionally, a 5.6% drop in US vehicle sales didn’t stop Toyota’s total unit sales from rising in the first quarter. Furthermore, Toyota is poised to overtake the US-based General Motors as the world’s largest auto company in terms of sales.

Last month, two usually bearish brokers on Japan – Goldman Sachs and Morgan Stanley – backed off from predictions that the world’s second largest economy will go into a recession this year. The catalyst for both brokers’ changed view was because revised industrial production figures for February showed output rose to a record rather than fell, the Bloomberg article says.

Even though exports could slow down, corporate Japan is now financially stronger than when its stock and property bubble burst in the late 1980s. The average ratio of corporate liabilities to assets has dropped to about 65%, the lowest level since 1955 from about 80% in the mid-1990s, the Merrill Lynch report says.

Moreover, Japanese companies have soaked up excess production capacity. Reduced debt and streamlined production will enhance corporate Japan’s capability to withstand a slump in the US, Bloomberg notes.

Second, the price of oil has continued its inexorable climb to a record high, even though its biggest market appears to be softening. Last in electronic trading last Friday, US crude futures for June delivery hit an intra-day record of US$126.20 (RM403.84) a barrel.

Admittedly, the escalating price of oil this year may be prompted by concern about possible disruptions in continued supply in countries like Nigeria and Venezuela. That prices continue to skyrocket despite sharply declining demand from the US, the world’s largest consumer of oil, is unusual. In February this year, US demand for oil fell to 19.7 million barrels of oil a day, down by one million barrels from last year’s average.

The International Energy Agency (IEA) says oil use worldwide will increase 2% this year because of growing demand in emerging markets. For the first time this year, emerging markets will consume more crude oil than the US, the IEA notes. Emerging markets will consume 20.67 million barrels of oil a day, an increase of 4.4%. In contrast, demand in the US will contract by 2% to 20.38 million barrels daily.

"The US recession will be a footnote as far as the oil market is concerned. Supply isn’t growing and demand is growing robustly in the developing world," says Jeffrey Rubin, chief economist at CIBC World Markets in Toronto who has correctly forecast higher oil prices since 2000.

Third, shipments of personal computers (PC) grew at a double-digit pace worldwide in the first quarter despite anaemic growth in the US, technology research firm, IDC says. Indeed, global figures for the first quarter exceeded its forecast.

Although growth in US sales slowed to around 3%, overseas gains boosted global first quarter PC shipments 14.6%, IDC notes. That’s because the US accounted for 23% of global shipments in the first quarter compared with 25% a year ago.

"Even if there is a particularly bad US market, it is becoming a smaller piece of the global puzzle," IDC vice-president Bob O’Donnell points out.

Despite these positive indicators, East Asia’s growing resilience cannot be equated with total independence from the US economy.

For a start, if the US economy is in recession, it may take months before the impact is transmitted to East Asia. Additionally, in an increasingly interlinked global economy – particularly in financial markets – it is inconceivable that what happens in the US can be ring-fenced from other emerging economies.

But if the inconceivable does happen – if the US sinks into recession and if East Asia succeeds in decoupling from the world’s largest economy – then a new era in global economic history may have begun.