Sharp Downturn in Asia Nears

Patrick Barta writes in the Wall Street Journal:

BANGKOK: ASIA, the world’s last redoubt of fast economic growth, may be closer to a downturn than people think.

For the US and other developed countries, investors typically define a recession as two consecutive quarters of economic contraction. For Asia, though, a sharp downturn occurs when region-wide annual growth slows to between 5 per cent and 6 per cent. For China, which has had multiple years of double-digit growth, the rate at which a downturn could effectively begin is likely even higher, possibly up to 8 per cent.

In part, that is because Asian nations’ populations are often younger than those in the US and Europe, and in many countries the labour force is growing more quickly, as millions of rural residents move to cities in search of opportunity. As a result, most Asian economies, excluding Japan, need to expand more rapidly than other parts of the world — often at annual rates of 5 per cent or more — so they can absorb all those new workers. If they don’t, unemployment will climb and poverty levels will follow.

The heavy reliance on exports that has driven Asia’s powerful growth is turning now into its worst enemy. Many companies in Asia have based investment decisions on the assumption that recent stellar growth rates will continue. If they don’t, profits will disappoint, new capacity won’t be needed and costs will have to be cut — just as in an American recession. As consumer spending in the US and Europe evaporates, Asian manufacturing titans that thrive on sales to the rest of the world are starting to feel the pain and are scaling down capital spending.

October 26, 2008, 9:07 PM
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