Evidence of "green shoots" -- early and tentative signs of macroeconomic stabilisation -- has surfaced in the most recent data on the Asia-Pacific economies. Could this be the prelude to recovery? Statistical analysis suggests that the region may have bottomed out in fourth quarter 2008, but the risks to recovery remain significant.
Several indicators, both real and financial, have seen a slowdown in the rates of decline after virtually free-falling in the fourth quarter of 2008. Some have even changed direction, but it is too early to determine how sustainable these trends will be.
Analytically, the focus has been on the "second derivative" or the "rate of change of the rate of change", which tells us how much more slowly an indicator is declining. A widely used proxy for this is the seasonally adjusted annual rate of growth (SAAR), which measures how much the indicator has changed month-on-month or quarter-on-quarter after allowing for seasonal effects (which are automatically eliminated when change is measured year-on-year).
To look for evidence of stabilisation in Asia-Pacific, Standard & Poor's measured the month-on-month SAAR of two critical monthly indicators -- exports and industrial production. When we computed the rates from the beginning of 2008 until the latest available (typically March 2009) a clear pattern emerged for most countries. In Table 1, we report the average month-on-month SAAR for 14 economies in the region for three two-month periods. The first is July-August 2008, in which virtually all the countries saw a transition in these indicators from positive to negative. The second is November-December 2008, during which the indicators reached their lowest levels. The third period is the most recent for which data are available, February-March 2009. It is the comparison between the second and third periods that suggests economic activity has begun to stabilise in the region.
Looking at exports, for all but one country the average month-on-month SAAR for February-March 2009 is substantially higher than for November-December 2008. In five of the 13 countries in which the reversal is visible, the number is still negative but shows a significant improvement from November-December 2008. In the other eight economies, the number has turned positive, indicating that there was an absolute increase in the volume of exports relative to the preceding month during this period. India was the one country where exports declined at a faster rate in February-March 2009 than in November-December 2008.
The same pattern emerges for industrial production, with the exception of Singapore where the deceleration intensified during February-March 2009. For the other 13 economies, the most recent period saw a significant increase in month-on-month growth rates when compared with the trough in November-December 2008. Seven of the 13 countries saw the indicator move into positive growth territory.
China is likely to play an anchor role in the region, as its import links with other economies pass its domestic growth impulses onto its trading partners. This may be particularly so for commodity exporters but is also likely to benefit exporters of capital goods (such as construction equipment) as China's extensive fiscal stimulus measures begin to take effect. Recent patterns in industrial production indices and, to some extent, export indices, reinforce the perception that the region is beginning to stabilise ahead of a turnaround in the US and Europe. The combination of domestic stimulus and regional linkages seems to be helping.
However, despite these relatively reassuring signs the risks are not insignificant. The US and Europe could slide further into recession, reducing the prospects of positive growth in 2010 and, along with this, any stabilisation of export volumes from Asia-Pacific. From the supply side, early signs of a resurgence in the prices of oil and other commodities pose a threat. A return to the inflationary conditions of early 2008 may force central banks to reverse course, potentially choking off a domestic recovery before it can take hold. Also, with China's performance playing a critical role in the recovery of Asia-Pacific, any weakness in its policy transmission will have implications for the region as a whole.
Subir Gokarn is an Asia-Pacific economist at Standard & Poor's.
