It seems even the most optimistic in the air cargo industry have
reset their viewpoints with a reality check. The oft expressed
sentiment from a few months ago that the market has bottomed
and will see some pickup sometime in the fourth quarter has quietly faded, replaced by the ‘hope’ of some recovery early next year. But the bigger fear of course is of the euro-sky falling.
Many point to the most recent economic contagion of 2008-2009
where Asia, with the exception of Japan came through the crisis in pretty decent shape, as a possible outcome of another crisis, this time euro-inspired. But for at least one economist – Stephen S. Roach, former chairman of Morgan Stanley Asia and the firm’s
chief economist – the possible crisis sparked by a Greek withdrawal from the eurozone – would be very serious indeed for Asia, he argues.
Financial and trade linkages make Asia highly vulnerable to Europe’s problems, with European banks funding nearly nine per cent of total domestic credit in developing Asia – a full three times the share provided by US banks. And of course European banks play a massive role in the Asian banking hubs of Singapore and Hong Kong.
The trade front is also significant. Asia’s traditional source of external demand – the US has given some way to Europe and both of these have also gradually been replaced by a focus on China over the last decade. Combined shipments to the US and Europe fell to 24 per cent of developing Asia’s total exports in 2010 – down sharply from 34 per cent in 1998-1999. And at the same time, Asia’s dependence on intraregional exports – the much touted intra-Asia trade flows – expanded sharply, from 36 per cent of total exports in 1998 to 44 per cent in 2010.
And so what looks like a rosy picture of an increasingly autonomous Asia that can better withstand the blows from the West’s recurring crises, figures from the International Monetary Fund show that in reality 60-65 per cent of all trade flows in the region can be classified as “intermediate goods” – components made in various Asian countries, assembled in China and ultimately shipped out as finished goods to the West.
And with Europe and the US still the largest export markets for these goods, it becomes clear how tight the linkage is between Asia’s China-centric supply chain and the turbulence of the major developed economies. This of course is made worse by the fact that Europe has displaced the US as China’s main export market. By 2010, the EU accounted for 20 per cent of total Chinese exports, while the US share contracted to just 18 per cent.
The China-centric Asian supply chain made a bet on Europe, and it’s increasingly looking like a questionable bet.
As a number of economists have pointed out (see p.31 ‘Asia to see growth, but rebalancing critical’) the only defense against external global downturns is internal demand. But within Asia this has not been the case with private consumption falling to a record low of 45 per cent of developing Asia’s GDP in 2010 – down ten percentage points from 2002.
China’s economy is already slowing as a result of the problems in Europe and although the central government’s recent 12th Five-Year Plan is pro-consumption, its unlikely to go far as export markets for Chinese goods contract. Until China and Asia in general develop a more meaningful regional economy – true intra-Asia trade – there can be little hope of escaping the scourge of external shocks.
Certainly the air cargo industry – which banks on heavily on China and developing Asia – watches with anxiety the developments in Europe, hoping, perhaps against hope that the euro crisis passes. Should it come to be, the consequences are unimaginable for
an industry that is once again down, but not-yet – beaten.
