US Credit Crunch Has Little Global Effect: Economist

Source : The Business Times, August 22, 2007

Asia's fundamentals still strong, says Deutsche Bank exec

(SINGAPORE) The current credit crunch will prolong the correction in the US housing market but have little effect on the global real economy, says Deutsche Bank chief economist Norbert Walter.

Prof Walter: The global economy should not spiral into a downswing unless the credit market worsens

'On a global scale, the correction in credit markets should have only limited impact on the real economy, given the healthy financial situation of corporates and consumers,' said Prof Walter, who was in Singapore last week.'In the US, by contrast, the problems in the sub-prime market will prolong the correction in the housing market. Negative wealth effects due to falling house prices might provide a bigger drag on the US economy than some of the more optimistic observers have thought so far.'

Prof Walter sees a 30 per cent chance of a US housing crash triggering a recession in America through 2008, which he lists as the biggest macro downside risk for global growth over the next two years.

'But even if the US avoids a recession, GDP growth in 2008 will probably be at least half a percentage point lower than the consensus still expects,' he told BT.

He sees the US economy growing 2 per cent in 2007 and 2008, after an average 3.2 per cent in the past four years.

The problems in the US mortgage market have been around for 18 months but have only just come to the attention of a wider audience, he pointed out.

Unless the credit market situation deteriorates 'significantly further', the global economy should not spiral into a downswing, he said.

'But (global) growth rates in the next two to three years should, mainly for cyclical reasons, turn out somewhat lower than during the last three years. This holds true for the Asian economies as well.'

Asia - led by India and China, which he deems to be the 'growth stars' for the 15 years to 2020 - will continue to drive global growth.

The current market turmoil - in which Asian bourses and currency markets have taken big hits - shows how much Asian economies are integrated into the world economy, he said.

'As such, they remain vulnerable to market correction episodes like the ones we are experiencing now. On the other hand, Asia's fundamentals are quite strong, particularly in what concerns their growth performance and prospects and their abundant external liquidity. The latter is a factor which makes the current turmoil different from the Asian crisis in 1997-98.

'Of course, this is not to say that the region is completely immune. For one, if market jitters continue and companies face tougher financing conditions, this is going to have a consequence on investment plans, and thus on growth. But overall, we expect growth in Asia-Pacific to remain robust, if not as buoyant as in 2006.'

Apart from a 30 per cent chance of a US recession, the other top macro downside risks over the next two years include a disorderly unwinding of the major currencies (15-25 per cent probability) and an escalation of military conflicts in the Middle East (15 per cent), resulting in a surge in oil prices on fears of supply shocks.