Asia Could See Worrisome Slide As Growth Rates Drop
Asia, the world's last redoubt of fast economic growth, may be a lot closer to recession than people think.
For the U.S. and other developed countries, investors typically define a recession as two consecutive quarters of economic contraction. For Asia, though, economists generally believe a recession occurs when region-wide annual growth slows to between 5% and 6%. For China, which has had multiple years of double-digit growth, the rate at which a recession could effectively begin is likely even higher, possibly up to 8%.
In part, that is because Asian nations' populations are often younger than those in the U.S. and Europe, and in many countries, the labor 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% or more -- so they can absorb all those new workers. If they don't, unemployment will climb and poverty levels will follow.
At the same time, 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.
Indeed, many economists believe Asia is already teetering on the brink of a recession. At investment bank UBS, forecasters are now predicting gross domestic product growth of around 6% in Asia excluding Japan next year -- putting the region right on the edge of recession. Other economists, including forecasters at Standard Chartered Bank, are pegging China's growth below 8% in 2009, which also could put it in recessionary territory.
Such rates might look 'pretty good' to the U.S., but they're potentially trouble for Asia, says Duncan Wooldridge, chief Asia economist for UBS. The slowdown 'is going to be much more palpable' in Asia next year, he says, in large part because of weaker demand for Asian export goods in other parts of the world.
A recession in Asia wouldn't necessarily feel the same as one in the West. Asian consumers tend to save far more than Americans during boom times and thus might not find themselves as deeply stretched, financially, if their incomes fall.
Also, many Asian companies -- which are often state-run, family-owned or heavily unionized, especially in India -- are less inclined to lay off workers in hard times than those in the U.S., where many businesses slash staff at the earliest sign of trouble. In India, for instance, ailing carrier Jet Airways recently rescinded 1,900 layoffs after pressure from local political officials.
That hardly means an Asian recession wouldn't hurt. Many Asian governments offer less in the way of social safety nets than do those in the West, and with poverty levels already comparatively high, the risk of social unrest is probably greater in Asia than in more developed regions.
In Thailand, many consumers already think they're in a recession, despite growth that's expected to come in at about 4.5% this year. Consumer confidence has plummeted and layoffs are starting to appear in selected industries, including tourism. On Friday, a local newspaper offered suggestions on how readers could survive a recession, including advising people to cook their own meals and cut back on international travel. Another Thai paper included a special section devoted to layoffs.
'I hope the Thai economy will be getting better,' says Surangrat Poonkao, 26, who works for a Bangkok real-estate company. Although her business is still doing all right, she says, the number of American clients has fallen off dramatically, and a friend at another real-estate firm recently was laid off. 'It's undeniable that we will be affected' by the global slowdown, she says.
In China, scores of factories have already closed amid weak orders from the U.S. and Europe, resulting in thousands of lost jobs. So far, most of those workers appear to be getting new jobs elsewhere, but that could change rapidly. Chinese growth slowed to 9% in the most recent quarter compared with a year earlier, from a recent peak of 11.9% in 2007. Standard Chartered Bank's forecast calls for growth of 7.9% next year and even worse, 7.1%, in 2010.
Of course, Asia remains better off than many other parts of the world, and in some ways its economies still look quite strong. Consumer spending -- especially on low-cost items like noodles -- remains robust. Falling oil prices could help spur spending, as consumers save money on their fuel bills.
'If you look at a lot of these Asian economies, they're still very solid domestically,' says Sherman Chan, an economist at Moody's Economy.com in Sydney. After several boom years, some Asian nations including China have more firepower to boost public spending to keep growth rolling. Despite its latest problems, 'China still has the greatest potential' among major economies, she says, and therefore will likely continue to attract lots of investment.
The region also remains far better off than in the dark days of the 1997-98 Asian financial crisis, when several Asian economies collapsed amid a wave of defaults and falling currencies. Mr. Wooldridge at UBS says the region's economy excluding Japan slowed to about 2% growth at that time, including huge contractions in places like Thailand and Indonesia.
Still, the pain is only just beginning in this downturn. Despite their reticence about layoffs, many companies are already looking for ways to reduce headcount.
Last Tuesday, Taiwan's largest steelmaker by revenue, China Steel Corp., said it plans to trim its work force by about 150 to 200 people this year through early retirements and will freeze hiring in 2009. Other industrial-sector job cuts will likely follow. Motorola Inc. is letting go 700 workers this year in Singapore, which already is in recession after economic contraction in the second and third quarters.
Small private companies are laying off more people in places like Singapore, Malaysia and China, analysts say, with as many as two million or more factory workers at risk of losing their jobs in China as global demand weakens. |
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