Chetan Ahya: Why are Asia’s Exports Deflating?

As consumers around the globe scale back on goods spending, how are Asian export markets impacted and where might opportunities lie?

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Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanly's Chief Asia Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be focusing on the challenging landscape for Asia's exports post-COVID. It's Thursday, September 1st, at 8:30 a.m. in Hong Kong. 

As listeners of the show are no doubt aware, the post-COVID recovery around the world has not been uniform, and each region is facing its own specific challenges. In Asia, one of those challenges is that the Asia export engine seems to be losing steam as goods demand continues to deflate. For instance, real export growth decelerated to just an average of 3% on a year on year basis in the past six months, as compared to a peak of 30% in April 2021. 

Whichever way you slice and dice Asia's exports, it is evident that the underlying trends are soft everywhere. Whether by destination or by product, there is simply pervasive weakness. Let's start with product: when we look at Asia exports by product across the different categories of consumer, capital and intermediate goods exports, we are seeing a synchronized slowdown. Commodities are the only product category which is holding up, supported by trailing elevated prices. But with industrial commodity prices falling by some 30% since their March peak, we think there is every chance that commodity exports will slow significantly too in the coming months. 

Now let's turn to destination. Demand is slowing in 70% of Asia's export destinations. While exports to the U.S. are still holding up, we expect that the slowing in the U.S. economy plus the continued normalization in goods spending, will weigh on exports to the U.S. too. Against this backdrop of weak aggregate demand, we see more downside for Asia's exports to the U.S. in the coming months. 

One of the reasons why Asia's exports are deflating rapidly is because developed markets consumers are shifting back into spending on services after an outsized spending on goods earlier during the pandemic. As a case in point, US spending on goods had risen by 20% between January 2020 and March 2021. Since reaching its peak in March 21, goods spending has been on a decelerating path, declining by 5%. We expect further weakness in goods spending as the share of goods spending still has not normalized back towards pre-COVID levels. 

Against this backdrop, investors should look at countries where domestic demand offsets the weakness in external demand. We continue to be constructive on India, Indonesia and Philippines as they are well placed to generate domestic demand alpha. 

Within this group, we believe that India is the best placed economy within the region for three reasons. First, we see a key change in India's structural story. Policymakers have made a clear shift in that approach towards lifting the productive capacity of the economy and creating jobs while reducing the focus on redistribution. Second, the India economy is lifting off after a prolonged period of adjustment. The corporate sector has delivered and the balance sheet in the financial sector has also been cleaned up. This backdrop of healthy balance sheets and rising corporate confidence bodes well for the outlook for business investment. Third, against this backdrop, we are seeing unleashing of pent up demand, especially in areas like housing and consumer durables. 

Finally, what about China - the largest economy in Asia? Typically when export slows down, we would expect China to be able to stimulate domestic demand. But in this cycle, while easing is already underway, the recovery in domestic demand is being held back by the housing market problem and its COVID management approach. We think that China domestic demand recovery should pick up pace by early next year as the full effects of its stimulus kicks in and private confidence lifts, thanks to China's anticipated shift to a living with COVID stance. 

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