Economic chill from the West weighs on Asia

Weak export demand from the United States and Europe drag down the regions growth

The gloom battering the US and European economies is increasingly dragging down Asia, the world’s global growth engine. South Korea has sought to aid its economy with an unexpected interest rate cut, and the odds of a similar move in Australia rose after figures showed a weaker-than-expected job market.

In Japan, the central bank trimmed its outlook for growth. China, which dominates the region, is expected to release data on Friday that will show a further slowdown in its giant economy. Combined, the events crystallise the sense that the Asia-Pacific region is increasingly vulnerable to economic chills elsewhere.

“We are worried about Asia,” said Rob Subbaraman, an economist at Nomura in Hong Kong. “The slowdown so far has been moderate, but there is a real sense that Asia is teetering, that it could reach a tipping point where the slowdown accelerates and companies really start to cut down on capital expenditures and hiring. We’re not there yet, but we are edging closer to that point.”

The Asian Development Bank echoed that sentiment when it lowered its 2012 forecast for economic growth in developing Asian countries to 6.6 per cent from 6.9 per cent. That group includes India and Thailand. For next year, the bank now projects 7.1 per cent growth, rather than the 7.3 per cent it had forecast in April.

“Slower growth in the US and euro area reduced demand for the region’s exports,” the bank said in a report. “Worries over the economic strength of important developing economies have also emerged recently.”

Over the last five years, hypercompetitive Asia has withstood with relative health the US financial crisis and then the European debt crisis. So far, the weakness across the region is far less pronounced than after the collapse of Lehman Brothers in 2008. The question for many policymakers, economists and businesses is whether it will remain that way.

The drawn-out debt problems and austerity measures in Europe and the lethargic pace of growth in the United States have affected Asia and many other emerging-market economies directly by undermining demand for exports. Asia, in particular China, is the world’s factory, and exports remain an important driver for many Asian economies.

On the policy front, central bankers and officials also appear increasingly concerned about the slowing growth and have begun to follow the west with efforts to bolster it.

In South Korea, the central bank lowered its key base rate to 3 per cent from 3.25 per cent. It was the first cut by the bank in more than three years and surprised economists, most of whom had expected the bank to keep interest rates unchanged.

The Bank of Korea cited the global environment for its move. Some economic indicators in the United States “have shown signs of deteriorating, and the sluggishness of economic activities in the euro area” has deepened, the central bank said in a statement.

“Growth in emerging market countries as well has continued to slow,” it said, adding that the uncertainty surrounding the eurozone fiscal crisis and economic slumps in major countries presented “downside risks.”

Elsewhere in the region, the Japanese central bank left its key interest rate unchanged at the already low level of 0.1 per cent,  but in a regular review of its economic forecast, it trimmed its outlook for the year ending next March to a growth rate of 2.2 per cent, from an earlier projection of 2.3 per cent.

Lot of uncertainity

“There is still a lot of uncertainty about the fiscal and structural reforms that Europe needs,” Masaaki Shirakawa, the central bank governor, said, according to Reuters. “Europe remains the risk factor that we have to watch out for the most.”

In Australia, employment fell by 27,000 in June, and the unemployment rate crept up to 5.2 per cent from 5.1 per cent in May. That is a low rate compared with that in the United States and Europe, but the unexpectedly weak outcome raised the likelihood that the central bank might lower interest rates again in coming months.

Like the rest of the region, Australia is heavily reliant on demand from China, whose cooling growth has added to the economic drag from elsewhere and undermined investor sentiment around the globe.

Much of the uncertainty gripping investors in Asia stems from China, with investors and economists divided as to whether that economy is set for a rebound, or a sharper deceleration, in the coming months.

The once sizzling pace of growth in China has slowed considerably since late last year, partly because overseas demand for Chinese-made goods has weakened. This is partly because the Chinese authorities began measures to slow growth and contain inflation last year.

In recent months, Beijing has once again stepped on the economic gas pedal, lowering interest rates twice in quick succession and freeing up more lending from banks.
June figures released Thursday showed that banks had indeed stepped up lending from the previous month, to 919.8 billion renminbi ($144.3 billion), more than analysts had expected. These measures, however, have yet to jump-start growth.

Likewise, growth data for the second quarter of this year, expected on Friday, is expected to show that the economy expanded only about 7.5 per cent from a year earlier. That is down from the 8.1 per cent recorded during the first quarter of this year, according to a Reuters poll.

Many economists think that the Chinese economy may have bottomed out recently and that it will re-accelerate during the second half of this year.

“Things aren’t getting slower and slower,” said David Carbon, an economist at DBS Bank in Singapore, in a note. “More importantly, things have run pretty steadily ever since, in spite of the trouble in Europe and may even be getting better on the margin.”

Others, however, fear that the Chinese economy, and its banking system, may be in far worse shape than the official statistics indicate.

Others still feel the outlook is too murky to judge. Tim Condon, an economist with the ING Group in Singapore, said that in 2008, the tremendous hit to growth in China brought about a forceful policy reaction by Beijing. This time around, he said, “things are not as bad – there are no mass layoffs, no collapse in exports. This is making it harder for the authorities to react and the policy action is being seen as more cautious compared to 2008.