Tiger, tiger burning bright?
Asia's economies, by and large, remain in robust shape and there is little reason to suspect a knock-out for the time being. Of course, bullish growth forecasts in themselves might not provide much reassurance if one suspects the bottom is likely to...
Asia's economies, by and large, remain in robust shape and there is little reason to suspect a knock-out for the time being. Of course, bullish growth forecasts in themselves might not provide much reassurance if one suspects the bottom is likely to fall out of the US economy. However, from an economic perspective, things appear less dire than commonly suspected.
Looking at the US economy, the onset of a recession is not likely. It might decelerate to about 2 per cent this year, a slowdown for sure from the 3.4 per cent growth rate in the second quarter, but hardly a pace warranting talk of a full-blown recession.
How would Asia fare if the US economy falters and growth were to decelerate more than anticipated? Certainly, the region would feel a pinch. However, Asian economies maintain sufficient momentum to withstand a US slowdown.
The growth drivers in recent years have shifted away from US demand and become more balanced across the globe with the EU and China in particular becoming more prominent. In short, Asia has begun to decouple from the US. In itself, this does not mean that the region will be unaffected by a further deceleration in US growth but it does suggest that the impact will be less severe than in the past.
The US is, of course, still the world's largest importer and the risk of deterioration in domestic American demand should not be entirely ignored. Moreover, the share of exports to the US in national GDP has increased over the last several decades in virtually all countries, even if their relative importance has diminished with rapidly growing trade openness. However, synchronised growth declines across the world have never been directly caused by a slowdown in the US alone.
Rather, as a recent IMF study has shown, these were usually due to common factors that affected all countries at the same time, such as rapidly rising oil prices or the bursting of the tech bubble.
In short, a slowdown in private consumption expenditure in the US is unlikely to tilt Asia into a recession. There are also other risks, like a global spike in energy or food prices but so far little suggests that commodity prices are hitting critical levels.
Apart from the declining dependence on US growth conditions, there are other reasons to expect Asian economies to be in reasonably good shape to withstand greater fallout from the American mortgage bust.
Parallels have been drawn between the current credit jitters and the Asian crisis. However, on most measures, Asian economies appear far healthier than they were 10 years ago. For one, non-performing loan ratios have declined substantially in most countries, even if more work needs to be done. More importantly perhaps, most of the economies are exposed to external payments vulnerabilities, with current account balances being in comfortable surplus and foreign exchange reserves generally adequate. Furthermore, there remains scope for policy stimulus as fiscal accounts look healthy and inflation is still well-contained.
There is, however, another side to the coin, which cannot be ignored. While Asia has become less dependent on the US economy and fundamentals look sound, the globalisation of financial markets in recent years has possibly rendered Asia more vulnerable to changes in sentiment in the US.
Net capital flows as a share of GDP have increased only gradually in recent years, although gross capital flows have surged. This distinction is important. Net capital flows may be relevant from a balance of payments perspective but gross flows matter for financial markets because they affect liquidity in financial markets and transmit shocks across geographic boundaries. Last year, gross capital inflows and outflows in emerging East Asia reached 11.8 per cent of GDP, far surpassing the pre-Asian crisis peak of about 8.5 per cent.
According to a recent study, rising asset prices in Asia were driven by capital inflows rather than excess domestic liquidity. Therefore, a sudden halt of capital inflows in response to financial market jitters would probably dampen asset markets in the region despite sound economic fundamentals.
Furthermore, the sensitivity of individual markets to global financial developments appears to have increased over the years. As American share prices have been on a rising trend in recent years, the underlying sensitivity of shares in other markets to US domestic investor sentiment has been somewhat concealed. This, then, raises the risk that swings in global asset prices could become more pronounced.
All together, from an economic perspective, there is reason to suspect that Asian financial markets will continue to be affected if US asset prices remain volatile. Sound economic fundamentals do not in themselves isolate Asia from financial contagion. This may appear paradoxical. While the region is decoupling from the US economically, financially Asia's exposure has increased.
Of course, individual valuations matter and macroeconomic explanations of asset price changes may not always be applicable. However, it is clear that globalisation may at times be a double-edged sword.
• This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.
Looking at the US economy, the onset of a recession is not likely. It might decelerate to about 2 per cent this year, a slowdown for sure from the 3.4 per cent growth rate in the second quarter, but hardly a pace warranting talk of a full-blown recession.
How would Asia fare if the US economy falters and growth were to decelerate more than anticipated? Certainly, the region would feel a pinch. However, Asian economies maintain sufficient momentum to withstand a US slowdown.
The growth drivers in recent years have shifted away from US demand and become more balanced across the globe with the EU and China in particular becoming more prominent. In short, Asia has begun to decouple from the US. In itself, this does not mean that the region will be unaffected by a further deceleration in US growth but it does suggest that the impact will be less severe than in the past.
The US is, of course, still the world's largest importer and the risk of deterioration in domestic American demand should not be entirely ignored. Moreover, the share of exports to the US in national GDP has increased over the last several decades in virtually all countries, even if their relative importance has diminished with rapidly growing trade openness. However, synchronised growth declines across the world have never been directly caused by a slowdown in the US alone.
Rather, as a recent IMF study has shown, these were usually due to common factors that affected all countries at the same time, such as rapidly rising oil prices or the bursting of the tech bubble.
In short, a slowdown in private consumption expenditure in the US is unlikely to tilt Asia into a recession. There are also other risks, like a global spike in energy or food prices but so far little suggests that commodity prices are hitting critical levels.
Apart from the declining dependence on US growth conditions, there are other reasons to expect Asian economies to be in reasonably good shape to withstand greater fallout from the American mortgage bust.
Parallels have been drawn between the current credit jitters and the Asian crisis. However, on most measures, Asian economies appear far healthier than they were 10 years ago. For one, non-performing loan ratios have declined substantially in most countries, even if more work needs to be done. More importantly perhaps, most of the economies are exposed to external payments vulnerabilities, with current account balances being in comfortable surplus and foreign exchange reserves generally adequate. Furthermore, there remains scope for policy stimulus as fiscal accounts look healthy and inflation is still well-contained.
There is, however, another side to the coin, which cannot be ignored. While Asia has become less dependent on the US economy and fundamentals look sound, the globalisation of financial markets in recent years has possibly rendered Asia more vulnerable to changes in sentiment in the US.
Net capital flows as a share of GDP have increased only gradually in recent years, although gross capital flows have surged. This distinction is important. Net capital flows may be relevant from a balance of payments perspective but gross flows matter for financial markets because they affect liquidity in financial markets and transmit shocks across geographic boundaries. Last year, gross capital inflows and outflows in emerging East Asia reached 11.8 per cent of GDP, far surpassing the pre-Asian crisis peak of about 8.5 per cent.
According to a recent study, rising asset prices in Asia were driven by capital inflows rather than excess domestic liquidity. Therefore, a sudden halt of capital inflows in response to financial market jitters would probably dampen asset markets in the region despite sound economic fundamentals.
Furthermore, the sensitivity of individual markets to global financial developments appears to have increased over the years. As American share prices have been on a rising trend in recent years, the underlying sensitivity of shares in other markets to US domestic investor sentiment has been somewhat concealed. This, then, raises the risk that swings in global asset prices could become more pronounced.
All together, from an economic perspective, there is reason to suspect that Asian financial markets will continue to be affected if US asset prices remain volatile. Sound economic fundamentals do not in themselves isolate Asia from financial contagion. This may appear paradoxical. While the region is decoupling from the US economically, financially Asia's exposure has increased.
Of course, individual valuations matter and macroeconomic explanations of asset price changes may not always be applicable. However, it is clear that globalisation may at times be a double-edged sword.
• This report was compiled by Peter Calleya, manager corporate strategy and research, HSBC Bank Malta plc, on the basis of economic research and financial information produced by HSBC International Bank.