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Report sees Asia growth hit by credit crisis

Report sees Asia growth hit by credit crisis

Global investment bank Lehman Brothers said on yestersday that it has revised down its Asia - excluding Japan - GDP growth forecasts to 8.3 percent (from 8.4 percent) for 2007 and to 7.9 percent (from 8.3 percent) for 2008 in response to the global credit crunch and downgrades to its U.S. and Euro area GDP forecasts.
"The main channel is weaker global demand for Asian exports, but the global capital market sell-off may also hurt the region's real economy through financial linkages - net capital outflows, negative wealth effects, and higher external borrowing costs," the investment bank said in its latest report.
"We judge that the risks to our new baseline forecasts are skewed firmly to the downside: We will review our GDP forecasts if the dimming U.S. economic outlook darkens further."
Since the 1997 financial crisis, Asia ex-Japan has not moved away from its export-led growth model.
"In fact, the region is now more open than ever in terms of exports to GDP," Lehman Brothers said.
"True, many of the region's exports now go to China and intra-regional trade makes up about 40 percent of total exports, with production lines specialized across multiple countries. But much of this intra-regional trade is in intermediate products, especially electronic parts and components; as much as 70 percent of intra-regional trade is dependent on final demand from outside the region."
The highly sophisticated cross-country production network leaves the region vulnerable to "ripple-down" effects from assemblers to suppliers in the case of a sharp global economic slowdown, it warned.
China is often thought of as a safe haven in times of global economic downturn, but this may no longer be the case. China's exposure to the global economy has increased significantly relative to the situation during the Asian financial crisis. The ratio of China's exports to GDP has doubled since 1998 to 40 percent, more than twice that of other large economies, such as the U.S. and Japan.
In particular, exports to the U.S. contributed an average of one percentage point to China's annual GDP growth in 2000 to 2006. China's trade surplus with the U.S. accounted for a hefty 81 percent of its total surplus in 2006.
"The region's exposure to global growth is unlikely to be linear. Further downgrades to our U.S. GDP growth forecasts to near one percent or less could have a bigger impact on Asia's economies as weaker Asian exports start having multiplier effects on domestic economies via employment and investment cutbacks; as weakening asset prices and economies feed off each other via negative wealth and confidence effects; and as capital outflows intensify," said the bank.
In China, surging exports have been helping the economy to absorb its massive production, creating jobs and providing incentives for further investment. Even without a sharp slowdown in the global economy, Chinese exporters are starting to feel the pinch from an appreciating currency and reduced value-added tax export rebates.
On top of these are increasing domestic cost pressures from rising prices of land, labor and natural resources, and tightening requirements on environmental protection and product quality, said the investment bank.
"We have been expecting the cumulative effect of all these factors to show up in (the second half) and 2008. A sharp global economic downturn will likely accelerate this process and lead to a marked slowdown in China's exports," Lehman Brothers said.
"Our concern is that after years of overinvestment, a major export downturn could give rise to a major oversupply problem in China; the piling up of inventories forcing factories in China to cut output and prices, with negative ramifications for the rest of the region.
Within the region, we judge that if the U.S. economic outlook darkens, the most exposed economies in the region are Hong Kong and Singapore (because they are so open, with large financial hubs) Thailand (because domestic demand is very weak), and possibly Australia (if China's oversupply problem really comes to a head)."
Asia ex-Japan's economies are vulnerable to a major global economic downturn, but are well placed to bounce back strongly once the global cycle turns favorable again, with growth much more domestically led, it continued.


Updated : 2021-06-20 06:13 GMT+08:00