Asia Will Survive a Weaker U.S.
Philip Bowring International Herald Tribune
Tuesday, December 12, 2000
HONG KONG Asian worries about the regional impact of a "hard landing" for the U.S. economy could become a self-fulfilling prophecy. But there is no reason for the region to talk itself into another recession. The advantages of a weakening U.S. economy may equal the negatives.
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At the very least, the situation argues against premature attempts by Asian finance ministers to pursue conservative fiscal policies. They need to act on the assumption that there will be a U.S. recession because debt levels and other severe imbalances will not be corrected just because Mr. Greenspan lowers interest rates.
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At first glance, Asian worries seem well founded. Export growth has tumbled into single digits, even though the U.S. economy has so far only slowed from breakneck to cruising speed, and a strong dollar has been making life easy for Asian exporters. After an uptick in the first half of the year there are signs of renewed downward pressure on export prices. If this is reality now, how bad will life be if there is a real U.S. recession?
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Worries have been reflected in the weakness of Asian bourses, particularly Korea and Taiwan which are most closely linked to Nasdaq. Export weakness and falling stock markets have revived concerns that many banking and restructuring problems from the Asian crisis have yet to be resolved, threatening to create another crisis of confidence in 2001.
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However, closer examination suggests that the picture is not so gloomy. First, much of the slowdown in global growth affecting Asia has been due not to the United States but to oil prices, which appear to have peaked. They may well fall quite steeply over the next six months, stimulating demand in those regions most dependent on imported energy - Europe and East Asia.
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Second, Asian weakness has been exaggerated by domestic political problems, which should prove temporary at least in Taiwan and Thailand.
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Third, weakening in electronics exports has been the result of inventory correction after the manic boom in the first quarter of the year. This has affected prices as well as volumes. After a period of 30 percent annual growth, it has been a shock for exporters, but it is by no means a permanent situation. Even if the U.S. market stagnates, there is a still strong secular global growth. The fact that stock analysts' earlier absurdly high profit estimates are being brought down to earth does not mean that this key industry faces a crisis.
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As for the larger regional economies, doubts remain over Japan but China, India and Australia are stronger than earlier expected. Although China is more dependent on the U.S. market than its neighbors, domestic demand is now strong enough to sustain growth in the face of stagnation or worse in sales to the United States.
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A weakening U.S. economy will mean a softer U.S. dollar, which is good news for most of Asia. Dollar strength in recent months has helped rekindle concerns about foreign currency debts in the region. With interest rates in the region being kept low to try to stimulate demand, a strong dollar has resulted in capital outflow and a weakening in financial markets.
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A weaker dollar should bring money back to Asia, allow further cuts in interest rates, and cut the costs of dollar debt. The cooling of the global love-affair with the U.S. economy and with technology stocks will eventually bring into focus the attractions of Asian stocks, with lower valuations and better growth prospects than their U.S. or European counterparts.
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Positive capital flows should stimulate domestic demand and asset values more than enough to offset the downside impact of U.S. stagnation. Despite high oil prices, East Asia continues to run large current account surpluses. These countries can afford to ride out a U.S. recession by aiming for current account equilibrium. Indeed, they will have to learn to live with a world in which a gigantic trade deficit is not taken for granted. The sooner they do the better for all.

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