US Spending Slowdown Won't Hit Asia Hard

Source : The Business Times, October 3, 2007

But risk from China equity correction is a threat: economist

THE threat to Asian economic growth from a slowdown in US consumer spending may not be as great as widely feared, said a senior HSBC economist last week.

Economic growth in Asia is increasingly driven by domestic demand, while the historical relationship between US consumer spending and Asian export growth is quite weak, said Robert Prior-Wandesforde, senior Asian economist at HSBC.

'We think generally growth in Asia will hold up very well,' he said. He was speaking to members of the British Chamber of Commerce at the Raffles Hotel.

Overall US economic growth has already been slowing in recent months, but Asian economies have survived this 'incredibly well', he said.

And in the last two years, consensus forecasts of Asian economic growth a year ahead have shown an 'unprecedented divergence' from similar forecasts for US growth, as economists downgraded their outlook for the US while simultaneously becoming more optimistic about Asia.

He noted that in Malaysia, overall exports have not slowed as much as exports to the US alone, which suggested its exports were increasingly fuelled by demand from Europe, China, India, and other Asian countries.

In Singapore, overall economic growth accelerated in the first six months of the year even as export growth has been slowing, he noted. 'The domestic economy has managed to shake off the downturn in exports.'

'There are good chances that it will continue.' HSBC now predicts 8.5 per cent growth for Singapore this year, higher than the 7 to 8 per cent official growth forecast.

The other main fear - that a slowdown in US consumer spending triggered by falling house prices there would hobble Asian growth - may not be fully justified either, he said.

An analysis of nine major Asian economies including Singapore suggested that total export growth since 1995 was more closely linked to the amount of investment on equipment and software in the US than with American consumer spending.

'The point is that US tech spending has already slowed pretty dramatically. I think the worst is either close at hand or we may even be past the worst in the US tech cycle, and that is the more important driver of what happens to Asian exports.'

But there remained other risks to his relatively rosy outlook for Asia, including the risk of a correction in the Chinese equity market, where share indices have soared to five times what they were two years ago, he said.

'The danger is we focus too much on the US and forget about the bigger picture.'

'There are vulnerabilities in a lot of housing markets around the world, not just in Europe or the US,' he said.