DBS Analysts See US Slowdown, Not Recession

Source : The Business Times, January 23, 2008

WITH the markets falling all around them, DBS analysts are standing out with a contrarian and notably optimistic view on where macroeconomic variables are headed.

The bank's head of group research, Sanjit Maitra, said at DBS's annual outlook seminar for corporate and private clients yesterday that he believes that US domestic consumption is not headed for negative territory, although it will slow. He believes that the worst is over, with the turning point not in the last month but actually as far back as the first quarter of last year.

Mr Maitra compared the current US slowdown to the downturn in late 2001. At the time, monthly job losses reached nearly 300,000, with some 2.6 million people losing their jobs over the period, yet growth in consumption never fell below 2 per cent.

'Now we're talking about job growth being weak, with losses picking back up to around 100,000 per month. But unless another external dynamic comes into play, it is hard to conclude there will be negative consumption growth,' he said.

And from looking at historical US GDP growth, the slowdown - which Mr Maitra said was 'three years old' - was sharpest in 1Q07, when year-on-year growth slowed to about 1.5 per cent.

Meanwhile, Asian domestic demand has grown to the point where it will represent 93 per cent of US growth in 2008. That means that this year, for every dollar of American consumption Asians will consume about 93 cents - a proportion that has steadily increased from less than 50 cents in the late 1980s.

By 2010, Asia will contribute at least as much as, if not more than, the US to world consumption, Mr Maitra said.

He also reminded the audience that China's largest trading partner is the European Union - at an average 24.6 per cent of total exports for the last three months - and not the United States, which took in 23.6 per cent of Chinese exports. Another 19 per cent go to Asia ex-Japan and India.

As such, it is actually the US that relies more on foreign demand. Some 19.5 per cent of America's GDP growth came from a rise in net exports in 2006-2007, compared to 18.5 per cent for China, said Mr Maitra.

In sum, DBS expects US growth for 2008 to slow to 2.4 per cent, but not slip into recession. The euro zone will see steady growth at 2.25 per cent, China's growth will slow to 10 per cent, and the rest of Asia ex-Japan will stay the pace at 6.25 per cent.

But this does not mean that regional equity markets will bounce back within the week, said Timothy Wong, head of regional equities at DBS Group Research.

Asian markets are still very much driven by liquidity from the US and Europe, and high-risk aversion has led these foreign investors to sell down - in the face of uncertainty, they retreat from what they perceive as risky emerging markets back to their home markets, he said.