The 2008-2009 financial crisis laid to rest the idea that Asia is isolated from the troubles in the US and Europe. The idea was that the fundamentals in Asia were strong enough to support growth. Proponents of decoupling were silenced and embarrassed but the celebration on the other side did not last long. There was a recession at hand and the debate swiftly switched to how best to address the recession.
The dead is walking.
It is 2011 and the idea of decoupling is reemerging again. It has been criticized, just it has been criticized before but statistics in the past few quarters and months have been surprising. The final GDP growth for Malaysia is very likely to be healthy despite all the skepticism and bad news from abroad. The industrial production index figures came out strong for October, beating forecasts by a long shot; it beat even the highest forecast among those polled by Bloomberg. Exports meanwhile has been amazing despite Europe tumbling up and down on a roller coaster ride. The only thing that is not as great as these things is the leading indicator, which by the way, is not negative. After all that has been said and done, it is likely Malaysia will grow at least 5% for the whole year of 2011.
Contrasting these numbers and those in Europe, there appears to be a strong case for decoupling.
Decoupling does make sense, since domestic demand is strong. Just observe the GDP growth figures. It is really hard to say there is a threat of a recession by looking at the GDP numbers so far. Still, the trade exposure is still high, and it is also really hard to say Malaysia will escape whatever really bad happening in Europe unscathed. I will not stick my neck out just yet, unlike the author of Economics Malaysia who writes that Malaysian exposure to European woe is not as big as a brouhaha some has made it out to be.[1]
Standard Chartered thinks 2012 will be a two-speed world, implicitly supporting the decoupling idea in its report. Financial Times’ Beyond BRIC sarcastically, maybe, writes, “just don’t call it decoupling” while reviewing the two-speed world report.[2]
As for myself, I think I prefer to be on the safer side. I subscribed strongly to the decoupling idea because I looked at the so-called real economy and concluded, Malaysia would go through the global crisis rather smoothly. I was wrong. There was a shallow recession. So, I will sit out and watch as an observer than a proponent this time around, for now.
Still, if the European crisis materializes, if the worst materializes, it will be worse than that experienced in 2008 and 2009.
Add that to the fact that the Chinese economy is slowing down (slowing down is relative because the growth rate is still high), I at least am expecting 2012 to be a rougher ride than 2011. But it does not take a genius to say that; I dare say it is the general feeling within the profession.
The more important thing is that we will see whether the decoupling hypothesis will survive 2012.
[2] — [Standard Chartered sees a resilient Asia, Mideast and Africa in 2012. Standard Chartered. December 12 2011]
One reply on “[2471] Decoupling, finally?”
Say not decoupling, but rather say that we’re looking at a two-tier exposure to Europe.
Total trade with Europe, based on the latest quarterly data, is about 10.1%. Of that, 7.3% is with just 4 countries – the UK, Germany, France and the Netherlands. Direct trade with the PIGS is just 1% (of which about half is with Italy). The bigger countries are slowing, but they’re not in recession and fiscal austerity is less severe, unlike the PIGS.
The key to Europe’s impact on Malaysia is less real economy factors, but still financial contagion. And my feeling is that the risk here is considerably less than it was in 2008-2009.