Companies have been quick to blame a loss of earnings in Asia for poor results. In doing so, says David Smith, they ignore the far bigger impact of the rise of sterling.
It has been hard, in recent months, to decide who to feel more sorry for - Britain's farmers, facing low prices and health scares about their products; or Britain's exporters, faced with a cripplingly high pound and Asia. It never rains but it pours or, in the case of Asia, a monsoon hits (see feature, p54). Econo-mists have a problem with the Asia crisis.
The numbers suggest that there is indeed an Asian effect on the UK economy.
But, when we say that it will probably knock only 0.5% off gross domestic product growth this year and 2% off exports, we are accused of complacency.
A convenient scapegoat
'You don't know what it's like,' one exporter said to me recently. 'This is going to do a lot of damage.' And a trade union leader told me his members were extremely worried about lay-offs and short-time working, even Asia-related redundancy programmes. I lose count of the companies blaming a loss of earnings in Asia for poorer-than-expected performance.
It is natural to blame outside events for disappointing results but few chairmen admit: 'Well yes, these results were extremely good. But, frankly, it had little to do with us. With so much demand around, we couldn't fail to clean up.'
Every company has an Asia story to tell but the larger picture is harder to make out. The 1996 figures for UK exports to Asia (excluding Japan) totalled £15 billion, or 8.7% of the total. Add in Japan and there was another £4.4 billion (2.6%). Thus, Asia and Japan accounted for 11.3% of UK exports. Of course, exports to the region are not about to drop to zero. Many are associated with long-term contracts, others reflect well-established trade and corporate links. If exports drop by 15%-20%, which is plausible, this gives us our 2% cut in total UK exports. But dry numbers do not capture individual horror stories, such as when the payments or supply contracts stop mid-construction or because of the collapse of local currencies. Do you hang in and risk an even bigger cumulative debt or do you close down the contract quickly?
Fear of flood of cheap exports
These numbers also do not allow for second-round or third-country effects.
By second-round effects, I mean what Keynes described as the multiplier.
If my income is cut, I have less to spend, cutting your income, and so on - UK companies losing export contracts in America because their US customer had lost business in Asia. Third-country effects are where UK companies compete directly around the globe with Asian firms, many of which are now hugely competitive thanks to the sharp fall in the value of their currencies. The spectre of a flood of cheap Asian exports, including to Britain, is a potentially alarming one.
Mine may be a complacent view but I think the 'flood of cheap imports' argument is overstated. First, Asian companies still have debts to service on imported capital and are often importers of components and materials, the cost of which will have soared following their devaluations. Second, international firms do not tend to grab all their exchange rate advantages in the form of low prices - witness the response of UK companies after sterling's post-ERM fall. With profits squeezed at home, part of the exchange rate advantage was used, as the chart above shows, to rebuild export margins. With little profit in their domestic markets, similar motivations will apply to Asian firms. There is also the inward investment dimension; how far Asian firms will want to undercut, and risk driving out of business, their overseas operations.
These effects are hard to assess. Broadly, they only become serious if there is very little domestically generated growth in Europe (60% of UK visible exports) and the US. The evidence, so far, is that the US economy remains robust and that Europe is at last enjoying a cyclical upswing.
Economic growth of around 3% in the EU this year is in sight, and is probably enough to limit Asian second-round effects, insofar as they will impact on British firms.
Effect of an overstrong pound
Except for one thing. Before the Asian crisis, there was the problem of an overstrong (and overvalued) pound. Since the Asia crisis broke, this problem has become even more acute. The collapse of some Asian currencies means that, at the time of writing, the real exchange rate (adjusted for relative cost increases) had climbed by over 30% in barely 12 months.
This is a big move, even if you accept that the pound was undervalued prior to its climb. Harold Wilson's 1967 devaluation was only 14% and consider how the economy responded.
But unless you believe currency shifts are of little importance in exporting, sterling's rise has a far bigger impact than the Asia crisis. It severely limits the opportunity for companies to take advantage of the European upturn - the pound's appreciation against the prospective European monetary union currencies has been far more pronounced than against the dollar.
Bad luck, they say, comes in threes, so exporters may have reason to fear another nasty shock. If not, given that Asia is due at least two or three years of difficult convalescence, the best hope must be a significantly lower pound. It will happen, I am sure, although as discussed last month, sterling could be in for a bumpy ride on the edge of EMU. And if the pound falls, we will hear rather less of the damaging effects of the Asia crisis.