Will Market Jitters Slow Down Spending In Asia?

Source : The Business Times, August 24, 2007

Major risk comes from prospect of US downturn, says Credit Suisse

(SINGAPORE) Amidst the brouhaha about the economic boom, one puzzle has been why consumer spending in Singapore has not quite kept pace with the buoyant economy.

And now, there is the risk that private consumption across Asia - as well as overall GDP growth - could well be hit if the recent financial market turmoil intensifies, and especially if the US economy takes a sharp downturn.

While the Singapore economy grew a strong 7.9 per cent last year, growth in private consumption expenditure averaged a weak 2.5 per cent in the five quarters through Q1 2007. Things started looking up in Q2, as growth in private consumer spending more than doubled to 5.8 per cent, although there was no pick-up in spending on household goods and furnishings, communications products, and even food and beverages.

Then came the recent bout of global financial market volatility, which saw a rout on the stock markets.

Investment bank Credit Suisse's economists reckon the wealth effects of the recent sell-off are, for now, 'too modest' to have a big impact on consumption.

'To the extent the equity market sell-off intensifies in the months ahead, the wealth effects on consumer spending and growth would presumably be felt most where large numbers of retail investors participate in the equity market, including in Korea, Hong Kong, Singapore and Taiwan,' the bank says in an Emerging Markets Economics Research report this week.

But, pockets of banking and financial market risk notwithstanding, Asia's biggest risk exposure is to a sharp slowdown in the US economy, it says.

Emerging Asia's growth outlook is exposed to the recent market volatility mainly through US growth, it maintains.

While the region is gradually 'decoupling' from the United States and intra-regional trade is expanding, Asia remains linked and exposed to the US economy, still the biggest market for its exports.

The US share of Asia's exports has fallen since 2000, but this has been offset by commensurate increases in Asian exports of intermediate goods to China, which in turn are exported to the US as final goods, the Credit Suisse report notes.

Hence Asia's exports still closely track US manufacturing new orders and its GDP growth has remained correlated with US growth.

'A sharp slowdown in the US is thus bound to affect Asia's growth outlook negatively, although governments in the region generally have the flexibility to pursue counter-cyclical policies to cushion the impact,' the bank says.

Credit Suisse's economists have pared their forecasts of US economic growth for Q4 (to 1.7 per cent from 2.8 per cent) and for 2008 (to 2.6 per cent from 3 per cent) and 'the balance of risks is on the downside'.