December 28, 2009Whether you look back over the past year or forward to the coming decade, you reach the same conclusion: it's the developing countries of Asia and elsewhere that now do most to drive the world economy and most to influence our economy's growth.
Our biggest forecasting mistake this year was assuming that if the mighty United States economy was stuffed, we would be too. Wrong.
It was an easy mistake to make because for a long time such an assumption worked well. But the clearest lesson from the world recession - which, globally, did turn out to be the worst recession since the Great Depression - is that the US no longer makes Australia's world go round.
Had so many economists not had an almost mystical view of the power of the world's largest economy to influence our future, we might not have been so sure we were in for a terrible time this year.
This is a particular vice of people in the financial markets because developments in US financial markets undoubtedly do dominate developments in the global financial market, which makes it easy to assume the same must hold for the real economy.
But even on the financial side we got the wrong end of the stick this year. I think Dr Philip Lowe of the Reserve Bank was the first to observe that the ''global financial crisis'' is a misnomer. ''It hasn't been a crisis in all financial systems around the globe,'' he said in November.
Rather it's been a crisis in the financial systems of many of the advanced countries of the North Atlantic - the US and Europe. There's been no crisis in the financial systems of Asia (or Australia).
And while virtually all countries were adversely affected by the sudden fall in business and consumer confidence after the failure of Lehman Brothers, the plunge in international trade and the rise in borrowing costs, it's pretty much only the North Atlantic economies that have had severe recessions.
Japan has been very weak, but its problems are mainly of domestic origin. In Europe, the former communist countries have been hard hit. The Economist's Intelligence Unit has produced growth forecasts for almost 200 countries in 2010 and ranked them from fastest to slowest.
Of the 12 countries expected to continue contracting, nearly half are in Eastern Europe. Of the world's 20 slowest-growing countries, 15 are in Europe overall.
By contrast, of the 20 fastest-growing countries, five are from East Asia: China (8.7 per cent), India (6.5 per cent), Sri Lanka (6.4 per cent), Vietnam (6 per cent) and Bangladesh (5.6 per cent).
After it became clear that China's exports had been hit by the crisis, many people ridiculed the earlier theory that China had ''decoupled'' from the developed world. But though no country can be completely decoupled in a globalised economy, this year has seen the decoupling theory vindicated.
The sceptics imagined that China's growth depended on its exports to the North Atlantic. The believers were confident an economy of the size (and potential size) of China could and would switch to domestic demand-oriented growth when the need arose. It did.
People who overestimate the global influence of America and the other North Atlantic economies tend to underestimate the size and dynamism of the developing countries in general, and Asia in particular.
They don't adequately appreciate that there's a lot more to Asia than China, or even China and India. South Korea is a big economy, for one. They don't realise that a lot of world trade is trade within Asia - and only some of that trade ultimately depends on exports to the North Atlantic.
To disabuse you of the notion that the US makes the world go round, consider these figures from the International Monetary Fund. In 2008, the US economy grew by 0.4 per cent, whereas the world economy grew by 3 per cent. This year, the US is expected to contract by 2.7 per cent, whereas the world will contract by just 1.1 per cent.
Next year the US is forecast to grow by 1.5 per cent, whereas the world should grow by 3.1 per cent. And get this: if you weight the various countries according to their share of our exports, our trading partners are forecast to grow by 3.7 per cent.
That's how far we are from the American orbit. The four most important destinations for our merchandise exports this year have been China, Japan, South Korea and India. The fifth largest was the US.
Just six years ago, the US ranked second, but was first overtaken by China, then Korea and then, just recently, India. The four large Asian trading partners now account for about 55 per cent of our total exports of goods. Add the rest of Asia and you get to about 70 per cent.
It's not just that we've become more oriented towards Asia. It's also that the developing countries in general, and Asia in particular, now account for a much bigger share of the global economy and especially the growth in the global economy.
Lowe is correct in concluding that our medium-term economic prospects are more closely linked with those of Asia than ever before.
Fluctuations in Asia's business cycle are also likely to have a bigger effect on the dynamics of our cycle.
Scott Haslem, chief economist at UBS, has challenged my statement last Monday that ''this time last year, virtually all economists were as sure as sure could be that … Australia was in for a severe recession''.
I stand corrected. This time last year most business economists were expecting a mild downturn. Their move to a more pessimistic view came later as the official forecasts were revised down.
http://www.smh.com.au/business/australia-exits-americas-orbit-after-crisis-20091227-lg7x.html
