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Goldman Sachs cuts Asia’s growth forecast

Expected US recession seen eroding demand for region’s exports

(SINGAPORE) Goldman Sachs Group has lowered its growth forecast for Asia on concern that an expected US recession will erode demand for the region’s exports.

Asia, excluding Japan, will expand 8.3 per cent this year, down from an earlier estimate of 8.6 per cent, Hong Kong-based economist Michael Buchanan said in a report. The investment bank last week cut its forecasts for US and Japan.

Goldman, which last year said Asian growth was decoupling from the US, is now forecasting that a US recession may hit shipments to Asia’s biggest export destination. South Korea and Taiwan have already warned that easing demand for semiconductors, mobile phones and computers portends weaker growth in 2008.

‘There could be a ‘tipping point’ at which the US slowdown has a more significant impact on Asia than before,’ Mr Buchanan wrote. ‘The further deterioration in the US economy comes as Japan is also teetering on the edge of recession.’

Morgan Stanley and Merrill Lynch have also forecast that the US would slip into recession this year for the first time since 2001 amid fallout from the subprime mortgage crisis.

Goldman is predicting a 50 per cent chance of a recession in Japan, the world’s second-largest economy. It lowered its growth forecasts for all 10 Asian economies that it covered in the report, including China and India.

‘We’ll probably see suppressed US import demand because of an anticipated slowdown in consumer spending,’ said Thomas Lam, an economist at United Overseas Bank Ltd, Singapore’s second-largest lender. ‘The contribution from export- led growth for Asia from the US will be impacted. Larger Asian economies will not be spared.’

East Asia’s exports are forecast to climb 15.2 per cent this year, after jumping 17.8 per cent in 2007, the World Bank said in its Global Economic Prospects 2008 report released last week.

The region is almost twice as reliant on exports as the rest of the world, with 60 per cent of shipments abroad ultimately destined for the US, Europe and Japan.

Still, the US may need to go through a larger-than- expected slowdown before Asia’s growth will reach a ‘tipping point’, Mr Buchanan said.

‘The greater acceptance of the decoupling of Asia from the US that has built up over the last year or so may mean the tipping point for Asian households, firms and markets is at a lower, more negative growth rate than normal,’ he said. ‘There may still be a growth rate at which Asia caves in and consumption and capex slow more appreciably, but it may now take more than just a very mild technical US recession.’

China will expand 10 per cent this year, from an earlier forecast of 10.3 per cent, Goldman predicted. The US buys about 19 per cent of China’s exports.

The company cut India’s growth estimate to 7.8 per cent from 8 per cent, and expects export growth to probably halve. The Reserve Bank of India may cut interest rates twice in 2008, once in April and again in the second half, it predicted.

In Singapore, where consumer price gains are at the highest in a quarter of a century, Goldman expects inflation to outweigh growth concerns. It is ‘even less confident’ of growth in Thailand as political uncertainty hampers policy decisions.

Taiwan remains the ‘most-exposed’ to a US slowdown, while a greater-than-expected decline in Philippine exports will ‘take its toll’ on the country’s economy, Goldman said.

‘Overall, these forecast reductions are meaningful but not disastrous,’ Mr Buchanan said. ‘The impact on currencies is in general likely to be contained, although equity markets could be in for more volatility.’

 

Source: Bloomberg (Business Times 15 Jan 08)

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