Will Asia’s cool down slow down the world economy?

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A few months back I voiced concerns that some economists were being overly rosy about the outlook for global growth this year. And there are more and more reasons to be gloomy. The U.S. economy is disappointing, Europe is tied in knots over the Greek debt crisis, Japan’s earthquake sent the economy back into recession, and commodity prices, though no longer exploding, still remain lofty. Now out here in Asia, we’re finally seeing the inflation-busting efforts in recent months take effect. Growth seems to be cooling off around the region. And that’s not good news for the entire global economy.

Just look at the headlines from the past couple days:

First, India announced that GDP growth in the January-March quarter came in at a well-below-consensus 7.8% — the slowest pace since late 2009 — led by a sharp and worrying decline in investment.

Secondly, South Korea’s growth is softening. Industrial production growth was down in April, export growth was slower than expected in May, and the HSBC purchasing managers’ index is falling, a sign that the manufacturing sector is heading for bumpier times ahead. Korea’s economy, driven by exports like chips and LCD panels, is often seen as something of a bellwether for what’s going on in global manufacturing overall, and Korea looks to be predicting clouds with a chance of rain.

Third, China’s PMIs are also trending downward, a sign that industry is slowing in the Workshop of the World as well. April industrial production growth already fell. And commercial banks dished out fewer loans than they did a year ago. That’s probably good news, since banks have been far too generous with credit, but it probably means dampened growth as well.

What’s going on? Part of the problem is the uninspiring growth in the U.S. and elsewhere, which dents Asia’s export-focused economies. Inventories seem to be stocked up. The supply disruptions caused by Japan’s earthquake, tsunami and power shortages haven’t helped, either. But we’re also seeing – finally – the impact of the steps taken to tamp down inflation in the emerging world. India and China have for months been trying to quell inflation, brought out by high commodity prices and extremely robust demand, by hiking interest rates and bank reserve requirements. Those measures would inevitably cool off these heated economies.

That process is likely not over. Though growth may be scaling back, inflation remains high. In China, consumer price inflation is still running above 5%; in India, the wholesale price index was up 8.7% in April. That makes it highly likely that the central banks in China and India will keep on tightening. And that means we haven’t seen the full impact of the inflation-fighting efforts on growth. In regard to India, HSBC economist Leif Lybecker Eskesen wrote in a May 31 report that “it is too early to jump to the conclusion that an end to RBI’s (Reserve Bank of India) tightening cycle is just around the corner.”

Looking ahead…growth will slow in response to the lagged effect of the monetary tightening undertaken so far and the additional hikes still expected. Also, with output at or above potential, the economy faces a natural speed limit. Finally, the elevated level of inflation will also in itself dent growth, including by raising uncertainties about economic prospects until it is firmly under control.

Of course, when we talk about a “slowdown” in Asia, we’re not talking all that slow. GDP still surged 8.5% in India in its latest fiscal year, even with the soft March quarter. Anyone in the world would be more than happy to see such a growth rate. That’s why Eskesen assures us “there is no need to panic about growth” in India. But slower growth is still slower growth. Goldman Sachs last week lowered its 2011 GDP growth forecasts for Asia (excluding Japan) to 7.8% from 8.2% and for China to 9.4% from 10.0%. Goldman sites everything from lower U.S. growth to high oil prices to tighter monetary policy as reasons for the downgrades.

What does all this mean for the rest of us? Well, it’s not good. Asia has been the fastest growing region in the global economy, a bastion of resilience in a world beset by housing crises, debt crises and political crises (or in certain places, some combination of the three). China, especially, has been a key source of demand for everything from cars to iron ore. So a slower Asia means a slower global economy.

And a slower Asia is just not something we can afford right now. In the U.S., unemployment persists and the housing meltdown continues. In Europe, the prospects aren’t terrible in a few spots, mainly Germany, but the drastic austerity measures being taken in places like the U.K., Spain and Greece to fix strained national finances will continue to drag on the region’s growth. Oil prices are taxing the global economy. Goldman recently raised its oil price forecasts to $120 at the end of 2011 and a staggering $140 by end-2012.

In my opinion, those who have been overly rosy in their view on the global economy have lost sight of the fact that the fallout from the Great Recession will last for years. Sure, some parts of the global economy are generally robust – especially emerging markets such as Brazil and India. But the effects of the housing bust in places like the U.S., Spain and Dubai will take years to sort themselves out, whatever policy measures are taken. The debt crisis in the euro zone isn’t going away anytime soon, no matter what its befuddled leadership attempts to do. High commodity prices are here to stay as well. All that adds up to a global economy simply not strong enough to absorb unforeseen shocks – the Arab Spring and natural catastrophes. The bottom line is we’re still working through a ton of problems. A roaring Asia can help ease the pain. A slowing Asia means a bigger headache.