Global demand slump pummels Asia, recovery still far off

23 January 2009 06:08  [Source: ICIS news]

(Recasts lead for clarity)

By Pearl Bantillo

SINGAPORE (ICIS news)--Asia’s fast-paced expansion has been derailed by the slump in exports as the US-centric financial crisis has morphed into something far worse and the world may be looking at its worst recession ever, economists said on Friday.

“Prepare for things to get worse,” said David Cohen, chief economist at research firm Action Economics.

A review of the extent of the damage that the credit crunch and the extremely weak external demand has done to Asia may prompt financial stability overseer International Monetary Fund to significantly revise down its 2.2% growth forecast for the world economy.

Given the region’s heavy trade dependence with the US and Europe, economic data across Asia have deteriorated significantly at an unexpected speed and this is just the tip of the iceberg, economists said.

“There is no meaningful prospect of any pick up in global demand. It is not going to happen at least in the next couple of quarters,” said Ray Attrill, Australia-based global research director at consultancy firm Forecast.

“The US might start to pick (up) later this year and Europe in 2010. That’s the absolute earliest when things will get a little less bad,” he added.

For Asia ex-Japan, economic growth is expected to slow to 3.5% this year from over 5% in 2008. GDP expansion in developing Asia will be stronger at 5.5%, driven by their domestic economies, based on Action Economics’ forecasts.

“China is probably going to be one of the engines for sustaining the (Asian) region’s economy. The hope is that they’ll start to see the impact from the (implemented) fiscal measures,” said Action Economics’ Cohen.

China’s economy is expected to continue growing although at a much lower pace in 2009 after snapping five years of consecutive double-digit growth in 2008.

Some economists were projecting its GDP expansion to decelerate to as low as 5% coming from a 9% clip last year.

“Exports, including petrochemical products, will be very terrible this year due to shrinking overseas demand,” said Huang Feng, analyst at Tianjin-based Bohai Securities.

“We are still confident that China’s GDP this year will expand around 8% although the first quarter will look worse,” Huang said.

China’s net exports are unlikely to return to previous levels in the mid-to-long term but its domestic market offers huge potential for growth due to the government stimulus package introduced recently, a plastics end-users in China said in Mandarin.

“The Chinese government has the money and the work for putting that money into good use,” he said. Some of the key industries that are expected to grow rapidly with the support of government funds include nuclear power generation, city rail system and passenger aircraft, he said.

Government policies that drive basic petrochemical exports could also help support the China economy during the current downturn, he added.

“China is in a position to export raw materials such as polypropylene (PP) but the current 17% value added tax does not make exports viable,” he said.

“China may not be a net PP importer now but there is still export demand for some of its PP grades,” he added.

Other Asian economies, however, would take time to recover, economists said.

“For the others, we’ll just have to wait,” said Cohen of Action Economics, adding that exports from Taiwan, South Korea, Singapore and Japan had deteriorated sharply in December and it could take at least a few months before hitting a bottom.

Japan’s exports have declined for three months in a row, slumping 35% in December. The dismal external demand conditions are expected to continue its harrowing effects on Asia’s biggest economy and the Bank of Japan now expects its GDP to shrink in fiscal years ending March 2008 and 2009.

The country is suffering from a “double-whammy” of falling exports and strong currency. “It (Japan) is saddled with a strong exchange rate,” said Attrill of Forecast.

Its export-oriented companies, including petrochemicals, have been incurring heavy foreign exchange losses since last year.

Attrill expects the yen to continue strengthening despite the country’s gloomy economic prospects.

The currency’s movement is more dictated by investors’ risk appetite, which is currently at its nadir, supportive of the yen, analysts said.

South Korea’s economy may shrink for the first time in 11 years, taking into account the 5.6% decline in fourth quarter 2008 GDP from the previous quarter, economists said, although its government remained optimistic of pulling in a positive annual number.

Singapore warned of as much as a 5% decline in output this year as the city-state expected overall trade to fall between 17-19%.

Judith Wang and Chow Bee Lin contributed to this story

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By: Pearl Bantillo
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