Uncertainty in the eurozone and the economic outlook in the US are having an impact even on fast-growing Asian markets like China, proving again that the world has not ‘de-coupled’ into isolated markets that perform regardless of the global market (as if logistics specialists needed to be reminded). But while markets are interconnected, the force of Asia’s own economic momentum should be strong enough to sustain the aftershocks of a mild recession in the West–but it would likely be rocked by a eurozone implosion.

While there has been rebalancing in the Chinese economy towards consumption– with punters going in particular for more high-end products like German luxury cars–that consumption is still at the top end of a highly stratified society. A huge portion of the economy runs on low-value exports and as prospects in the West worsen, those factories in China and South Asia suffer, with a knock-on effect for passenger and commercial vehicle demand. Such impact is harsh for logistics too, hurting inland transport and port services; container shipping has already seen rates plummet, for example. Purchasing indices towards the end of the year started to show manufacturing declines in China for the first time in three years (although automotive production has shown strength).

In what we might term the autumn of downgrades, LMC Automotive (formerly JD Power Automotive Forecasting) has again lowered its outlook for the region. Asia, including Japan and Australia, is forecast to grow by 4.2% in 2011 and 5.1% in 2012, compared to the 4.6% and 5.7% growth projected in June, according to senior analyst Meg Sunako. Emerging Asia is expected to expand by 7% in 2011 and 6.7% in 2012, compared to the original 7.3% for both years.


The good news is that if you weren’t paying much attention to previous forecasts, those are still quite positive outlooks. The bad news depends on how bad the news gets in Europe–these forecasts would be likely to change a lot in the event of any break-up within the eurozone.

After subdued growth in the overall vehicle market this year in China (premium cars boomed, passenger cars increased, while light commercial vehicles retreated), the world’s largest market is predicted to surpass 19.7m vehicles in 2012. Although LMC at one point predicted sales at a similar level for 2011, with 2012 well above 20m, that would still be a world record. Sunako pointed out that inflation in China and some other Asian markets has begun to ease, which gives governments room to loosen monetary policy. Indeed, in early December the Chinese and other central banks made moves to ease credit.

A notable exception has been India, which was still seeing high inflation at the end of the year. The market hit a snag in the second half of 2011 as the central bank hiked interest rates. Nevertheless, Indian sales are also expected to get back on track in 2012, surpassing 3.2m vehicles. Japan is another exception to the inflation trend as it continues to experience deflation. Sales will recover from last spring’s earthquake, but will remain below 2010 levels, according to LMC.

Volume has been held back elsewhere in the region by the earthquake’s supply chain disruptions and by the Thai floods. Sunako said the floods are expected to knock around 1.5% off Thai GDP in 2011, although light vehicle sales are still expected to be higher in 2011 than 2010.

The flooding is partly responsible for restrained forecasts elsewhere, but more significant at a macro level will be the eurozone. The relative strength of the car industry for the moment has given manufacturers something of an advantage in terms of rates and capacity (although container liners are moving quickly to hack away services). But it is unlikely that the car market could sustain such a strong momentum if the rest of the economy were to keep sinking. The worst-case scenario of a partial euro breakup could hit Asia like another tsunami. A devalued euro would make the yen even stronger, while a likely credit crunch would hurt demand everywhere.

If Asian natural disasters have reminded us that the physical supply chain is surprisingly connected globally, so too would European financial shocks send tremors through the foundations of Asia’s emerging markets.