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Why Asia is applauding Europe

Fearing a sharp slowdown in the US, Asia is turning to Europe for succour and finding reassuring signs in its economic revival.

india Updated: Sep 28, 2006 16:33 IST

Fearing a sharp slowdown in its biggest export market, Asia is turning elsewhere for succour and finding reassuring signs in the economic revival of Europe, a continent that has not hugely influenced its fortunes until now.

As the US economy cools, evidence is mounting that a resurgent Europe has a growing appetite for Asia's high-tech gadgets and other goods such as pharmaceuticals.

While heavyweights China and Japan are likely to help buffer the region against a US slowdown, Europe is gradually gaining prominence for Asian exporters.

Europe's economy grew at an annualised rate of 3.6 per cent in the second quarter, its best in six years, and competitive Asian currencies are also helping exporters make inroads into European markets.

"In terms of priority to the Asians, it is Japan, China and the US," says Wong Keng Siong, a senior economist at DBS Bank. "A stronger Europe would definitely be better, nobody would complain about that."

For now, Europe's significance to Asian exports varies.

The European Union (EU) accounted for about 21 per cent of India's total exports in 2005, the United States, almost 16 per cent and the rest of Asia excluding Japan, 26 per cent.

It was a major export destination for Malaysia in the first half of 2006 with annual growth of almost 14 per cent -- less than a 16.5 per cent rise in exports to India, but more than about 12 per cent to China and 9 per cent to the United States.

EU-China trade is now worth more than€200 billion ($254 billion) a year, while Europe as an export destination for Japan and Taiwan comes after the US and the rest of Asia.

Growth of Singapore's non-oil exports to the EU rose to 13 per cent in the first half of 2006 from 5.8 per cent in 2005. A 29 per cent rise in pharmaceuticals lifted non-electronics exports.

Bouncing Back

Electronics are Taiwan's top export earner and firm European demand for personal computers is expected to bolster exports.

Goldman Sachs said this demand, which is partly seasonal and reflects a rebound from a lengthy period of weakness, should remain at peak levels until late 2007.

"Taiwan companies dominate PC production - that is quite important from a product mix point of view and we have seen Taiwan exports holding up pretty well compared say with Korea recently," said Goldman Sachs economist Enoch Fung.

"We believe in the decoupling story, so we would expect demand from China or parts of Europe to hold up reasonably well, serving as a buffer against the slowdown in US consumption."

Fung said Germany was the main driver of European demand for Taiwan's electronics exports.

Germany is boosting demand elsewhere too. High-tech imports from China rose 43 per cent to€8.9 billion in the first half of 2006, industry association Bitkom said this week.

Japanese high-tech imports were the second most popular in Germany, rising 21 per cent.

Don't Forget Fx

Currency weakness, though regarded by some as secondary to underlying demand, has also been a boon for Asian exporters.

The euro hit a record high at 150.79 Japanese yen last month, triggering some discomfort in Europe, while China is under pressure to let its yuan appreciate further.

"Currency weakness means it is not only easier for Asians to compete with European products on third markets, for instance the US, but it also facilitates Asian penetration of the European market, ie competing with local produce there—this is a key aspect that is sometimes neglected," said Sabrina Jacobs, Asia currency strategist at Dresdner Kleinwort. "The yen is the weakest, but this applies to other Asian currencies to a degree."

In the longer term, analysts expect Asian consumers to play a bigger role in countering a slowdown in the world's largest economy and amid uncertainties surrounding Europe's outlook.

"Europe is unlikely to offset most of the slowdown for most of the ASEAN countries. India could be an exception because it's not very exposed to the US," said HSBC Asia economist Robert Prior-Wandesforde.

German consumption could be hit when a three percentage point rise in value-added tax kicks in next year, for instance.

Asia's growing consumer wealth, however, bodes well for European firms.

French household appliance maker SEB said recently it wants to take a majority stake in a Chinese counterpart to make goods for sale in China and the rest of Asia more cheaply.

EU exports to China rose 24 per cent in the first half of 2006 from a year earlier. Germany was the biggest EU exporter to the East Asia region in 2005, accounting for 34 per cent of EU exports to China, Japan, South Korea and Southeast Asia.

First Published: Sep 28, 2006 16:33 IST