Asia faces rich world double whammy
Deep problems in Europe combined with the anaemic recovery in the US threaten to crimp growth in Asia, S&P’s chief economist warns
Europes seeming intractable woes and Americas slow return to recovery are starting to undermine Asias economic growth prospects, Standard & Poors chief economist has warned.
Paul Sheard described conditions in the eurozone as not helpful to Asia, in an interview with Emerging Markets on the sidelines of the ADB conference.
That doesnt mean that doldrums in Europe will derail Asias economic story the fate of Asia lies within the region itself, he said. But there was a latent realization across Asian economies that Europe isnt coming back anytime soon. This is starting to look like a lost decade for Europe.
The impact of slower demand for goods and services from Europe and to a lesser extent the US is hitting some countries worse than others. Sheard pointed to poor export data hitting both Singapore and Hong Kong. The latter saw its economy contract in the first quarter, squeezed further by falling exports to mainland China.
US trade with Asia is flattish, while European trade with Asia is contracting in the double digits, Sheard added. Intra-Asian trade just isnt enough to offset [those losses].
And the problems are mounting, notably for export-geared economies. Paul Gruenwald, S&Ps chief Asia economist, also highlighted concerns about Hong Kong and Singapore, as well as Taiwan. Its those countries who will take the biggest hit. All of those very globally-exposed economies are hostage to what is going on in the rest of the world.
The pair also flagged up concerns that a fresh round of monetary easing in Europe and the US, along with aggressive action in Japan, would force hot money to flow into Asia, destabilizing developing economies.
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Its quite natural that in this environment, youll see investors seeking to deploy capital in these fast growing countries. Emerging markets will have to manage these capital inflows, said Sheard.
And he warned that trouble lay ahead for several regional economies, notably Vietnam and Indonesia. Most of these countries dont have the tools to deal with [these inflows]. Their capital markets arent sophisticated enough, and they dont have strong enough monetary architecture.
Gruenwald said one could see waves of money flowing in to the region. Its the smaller markets who will struggle. The Philippines, notably, is struggling to intervene as hot money flows into the region. The tinderbox situation there is that it will start to push up inflation.
The agency was more upbeat on Asias three leading economic powers. The revolutionary economic policies adopted in recent months by premier Shinzo Abe and Bank of Japan governor Haruhiko Kuroda were an incredibly positive move for the worlds third-largest economy, Sheard noted, adding: Its the sort of policy switch people like me having been advocating for years.
China and India meanwhile face different challenges. China needs to internationalize its currency and dismantle a bank-dominated financial system, Sheard said. India has its own problems, notably inflation and slowing growth.
Sheard said he would rather be in Indias position. India seems to have a bit more inherent robustness, he said. China appears very well managed and planned, but they need to move away from state-directed reform and let a little bit of chaos into the system. India is chaotic, but its also more creative and innovative.
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