By Jonathan Anderson, Chief Economist for Asia Pacific, UBS AG

As the US housing market continues to drop and the economy continues its slow slide into recession, here are two set of numbers that should warm the hearts of Asian exporters.

The first set concerns sheer dollar numbers. In 2000, at the beginning of the current decade, US consumers and firms purchased nearly US＄300 billion worth of goods from Asian (ex-Japan) countries, making it by far the largest export destination in the world for Asian goods. The European Union bought just under US＄200 billion, and Japan another US＄150 billion from its regional neighbors.

Now fast forward to 2007. Last year the US import bill from Asia ex-Japan expanded to US＄520 billion, still far larger than Japan's US＄270 billion expenditure but a visible second to the EU, which purchased US＄580 billion from the Asian region. In other words, in the past seven years alone, European demand for Asian goods has exploded from only 65 percent of the US level to more than 110 percent of its Atlantic neighbor.

This not only makes the EU Asia's largest market by a significant market, but also by far the fastest growing – 17 percent per year in dollar terms since the beginning of the decade compared to 11 percent in the US and only 7 percent for Japan. So much for the vaunted strength of the US consumer.

What happened to suddenly push the European Union into such a glorified position? As it turns out, there are three factors at play. To begin with, the continued expansion of the Union itself gave Asian exporters gradual access to new markets that were benefitting from economic integration and the removal of trade barriers. Second, an increased interest in imports in general; the EU-27 has almost always been larger than the US economy, but import penetration has also been much lower historically – until the past few years, when the import numbers began to increase at a more rapid clip. 

By far the most important factor, however, has been the enormous rise in the euro against the dollar. As the euro exchange rate jumped from US＄0.89 in 2001 to US＄1.40 last year and around US＄1.60 today, European purchasing power jumped along with it, powering a large increase in shipment volumes as the economy developed a strong taste for cheaper Asian goods.

Now here's the second set of “heart-warming” numbers. The bars in the chart below show the pace of Asian export growth (in dollar terms) to the United States; as you can see, the growth rate has already slowed to a virtual crawl as US consumers start to feel pain. But then turn to the two lines, showing export growth to Japan and the EU. Do you see any sign of weakness here? We certainly don't. Of course the falling dollar and the strengthening yen and euro have helped push up the recorded growth rates here – but even when we adjust for exchange rate movements, the spending pace is still a good bit stronger than in the US. And for regional exporters whose currencies are also generally appreciating against the dollar, being able to sell into yen and especially euro markets is a marked blessing.

Where do we go from here? Our global forecasts look for a slowdown in all three developed markets as US weakness drives a retrenchment in Japan and Europe as well. However, the export numbers clearly show that it's not happening yet. And we suspect that Europe in particular will continue to appear as a bright spot for Asian producers as long as the euro stays near current levels.