When will Asia’s export downturn bottom out?

Double-digit declines:

Merchandise exports have been contracting in several Asian economies for months now. Countries with large electronics sectors have been particularly hard-hit: In Q1, exports fell by 12% year on year in Korea, 16% in Singapore, 18% in Hong Kong and 19% in Taiwan.

A perfect storm:

The downturn is being driven by tepid Chinese import demand, rate hikes in developed economies, a global pivot to spending on services and reduced work-from-home demand now that the pandemic is in the past. Moreover, oversupply is hitting prices in the semiconductor market, while commodity exporters such as Indonesia and Malaysia are seeing lower prices for crude and palm oil. These factors are being partly offset by stronger electronics demand from the automotive sector, on surging electric car sales and vehicles’ increasing technological complexity.

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Muted near-term prospects:

The Consensus among our panelists is for a 2.5% average contraction in Asia-Pacific goods exports in 2023, followed by a small rebound in 2024. In H2 2023, there should already be some signs of improvement, with key economies set to return to year-on-year growth by Q4. Risks appear skewed to the downside, given a surprisingly slow recovery in Chinese import demand so far this year.

Longer-term challenges and opportunities:

U.S. efforts to nearshore manufacturing production have been turbocharged under Biden, and the EU is also aiming to boost its strategic autonomy. The upshot is that 20% of freight from Asia could shift to markets closer to end-customers by 2025, according to a recent survey by Deloitte—a proportion which could rise to 40% by 2030. Nearshoring would be bad news for Asian goods exporters, which are reliant on sales to Western markets. On the flip side, the ongoing migration of manufacturing activity from China to the broader region is an opportunity for other Asian economies.

Insights From Our Analyst Network

On Chinese demand, EIU analysts said:

“The benefits of China’s reopening will be less apparent to Asian commodity producers. […] This reflects our forecast for a still-tepid investment environment in China this year. Markets also appear to have come round to this view, with the prices of hard commodities that are sensitive to Chinese demand, such as crude oil, gas and iron ore, having fallen back after jumping initially on news of China’s reopening.”

On exports and the outlook, Nomura analysts said:

“Asia’s export downturn is now over a year old. By product type, exports of semiconductors & electronics, chemicals and electrical machinery have slumped […]. By destination, exports to China have weakened the most, followed by the US and EU, while exports to ASEAN and the rest of the world have held up. Our view has for some time been that Q2 would mark the trough of Asia’s exports downcycle. High frequency data show that Asia’s exports are in the process of bottoming out. Q2 will likely be worse than Q1 (on average), but it should mark the cycle bottom.”

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