Economic ties around the world are evolving fast, even during the current period of relatively sluggish global growth. For Asia – the world’s most open region to trade – the question of which of the major economies matters most for external sector growth is critical.
If we just look at which economies dominate global growth, back in 2000, the answer to this question was clearly the US, and particularly the US consumer. The US economy accounted for a quarter of global GDP growth. Meanwhile, China accounted for just 7 per cent of world growth, despite its rapidly growing economy.
China dominates because its economic scale has increased, while its pace of growth remains well above that of the other major economies
However, by 2014, the US share of global GDP growth had fallen to 16 per cent, whereas China’s contribution had risen to 30 per cent – despite the country’s slowdown.
China dominates because its economic scale has increased, while its pace of growth remains well above that of the other major economies. But does this large share of growth actually translate into being the most important driver in the Asia region?
US and euro area still big swing factors
We analysed the impact of four major economies – China, the US, the euro area and Japan – on 10 Asian economies: Australia, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand. While China comes out as the biggest driver of economic activity, it is not by as wide a margin as you might think. We took two approaches to reach this conclusion.
First, we went to an alternative source to tell us who is really buying the goods exported by countries in Asia. We use data from the OECD, which calculates exports by ultimate destination (i.e. based on who is really buying the goods). Using this, the relative importance of the US and the euro area increases. This is likely due to the evolution of supply chains in the last 15 years, where goods go to various intermediate locations (i.e. China) first before ending up at their final destination.
For seven of the economies in our study – Australia, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand – the shares of their exports for end use in China are lower than official direct export data indices.
Second, we calculated how sensitivities to growth in the major economies have changed in the last decade. We estimated rolling betas for growth in each Asian country, explained by growth in each of the majors. We found that since 2011, China has risen in influence to the other.
We then modelled the reaction of each of the countries in the region to a 1 percentage point (ppt) GDP growth shock in each of the major economies. For the Asia ex-China and Japan region as a whole, the results were: US impact 0.28ppt, China 0.24ppt, euro area 0.35ppt and Japan 0.11ppt.
While the bigger swing factors in our view come from the west in 2016, the overall impact on Asia’s growth will likely be negligible
This means that if all four major economies accelerated their growth by 1ppt then the euro area would have the most impact on Asia. However, momentum requires both mass and velocity, something which China has above the others.
So what does all this mean for growth in 2016? We actually expect the bigger change in growth rates to come from the US and Europe. Our forecasts for growth in 2016 over 2015 are: US slowing, the euro area accelerating, Japan mildly accelerating, and China remaining steady at 6.8 per cent.
While the bigger swing factors in our view come from the west in 2016, the overall impact on Asia’s growth will likely be negligible. Our 2016 growth forecasts indicate that Singapore, Taiwan, Hong Kong and Malaysia will be the most negatively affected by demand from the majors in 2016.
While the economies of the US and the euro area are larger than China, China’s fast growth, combined with its bigger scale, means its impact on Asia is greater. Today, China is growing three times faster than the US and euro area. If all three economies saw a halving in their growth rates, the biggest impact by far would come from China.