This Time, US Woes Won't Stall Asian Engines

Source : The Business Times, September 21, 2007

IT used to be said that when the US economy sneezes, Asia catches a cold. These days, however, the more interesting debate is just how much this region's growth trajectory can diverge or decouple from that of the US.

This week, we have witnessed two significant events: the US Federal Reserve Bank's generous half percentage point cut in two official short-term interest rates and the Bank of England's rescue of Northern Rock, the UK's fifth largest mortgage lender.

What these events underline is that policy-makers are more than a little worried about the broader economic fallout from complicated, illiquid - and yet to be unwound - financial structures as well as sliding house prices.

So far, the picture in Asia couldn't be more different. Last weekend, the Chinese central bank raised both its deposit and lending rates for the fifth time this year - and more hikes are expected.

And on top of lending the US our record foreign exchange surpluses to fund their imports of goods from this region, Asia's growth outlook seems to be promising. Just this week, for example, the Asian Development Bank raised its forecast for Asia's 2007 growth from 7.7 to 8.2 per cent, led by the two powerhouses of China and India. And at worst, it assures us, this will slow to something like 6 to 7 per cent next year - even if the US economy does suffer a worse than expected fallout from trouble in the sub-prime mortgage sector and a further 10 per cent slide in the US dollar.

In DBS's latest research quarterly, it is also suggested that these days, we really should not need to fret so much about any serious contagion effect for Asia if worsening US credit or housing sector woes induce a US slowdown.

DBS argues that since mid-2005, average US growth has in fact almost halved to around 1.7 per cent per annum already, while the average for 10 Asian economies has actually accelerated from 5.7 to 6.8 per cent. It says that even if we take out China and India from the calculation - leaving us with the eight economies of Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Indonesia, Thailand and the Philippines - we would still be talking about growth of 4.6 to 5.9 per cent per annum.

Looking ahead, DBS expects that in the short space of three years, Asia's fast-growing economies may even generate more new demand than the US - and thus become an even bigger driver of global growth.

To be sure, not everyone is as confident that Asia's export-heavy economies can be so easily decoupled from that of the US. UOB researchers argue, for example, that a good chunk of what China imports from the region is re-exported to the US eventually. And it's also true that Asian powerhouses like China and India have some way to go before they achieve consumption levels of the developed countries.

But it is also this lack of sophistication in areas like financial markets that has saved them the grief inflicted by some of the more exotic financial instruments available in New York and London.