Why Europe is the best thing about Asia right now

Could be a better catalyst than China's comeback.

According to DBS, Europe has stopped shrinking and that will bring a big change to Asia’s export fortunes going forward.

Here's more from DBS:

China’s PMIs have ticked up noticeably in the past two months. In September, the manufacturing version rose by 0.5 points to 51.2 (avg of two measures) and the service sector version jumped by nearly a point to 56.3.

The latter is more important given the service sector’s greater weight in GDP (45% vs 38% in 2012). Combined with the 3Q GDP growth reading of 7.8% released two weeks ago, there is growing assurance that China’s growth will continue to run between 7.5% YoY and 8% as it has for the past seven quarters.

As good as this news is, it’s probably not the best thing about the outlook for Asia. The best news is (still) that Europe has stopped contracting. Why is this more important than acceleration in China?

To be sure, it wouldn’t be if China were really taking off or if it had just skirted a hard landing. But we reckon neither are true.

On the contrary, all signs continue to point to a government emphasis on structural change over cyclical speed and continued growth between 7.5% to 8%. In short, it’s business as usual as far as the cyclical speedometer is concerned.

Europe, though, is different. Europe has stopped shrinking and that will bring a big change to Asia’s export fortunes going forward. In fact, it already has. 

Asia’s exports to Europe fell by US$99bn in 2012. That’s a big chunk of change– equivalent to some 0.75% of GDP. If Asia’s exports to Europe had simply run sideways, GDP growth would have been that much higher – 6.8% instead of 6.1% in 2012.

With a bit of luck exports to Europe might even start to head north in the months ahead. But that would be icing on the cake. For now, sideways movement is good enough – that alone should add about a half a percentage point to Asia’s GDP growth in 2014.

At the moment, we expect 6.4% GDP growth in the Asia-10 in 2014 compared to 6% in 2013 and 6.1% in 2012. There is upside potential coming from Europe and China but, unfortunately, the US has slowed and Asia’s exports there have turned sideways over the past year. ]

Plainly this deterioration will negate some of the better news coming from Europe. One up, one down – Asia’s domestic demand will continue to provide the base-load demand for mid-6% GDP growth next year.