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Slowing Europe may be bigger concern for S’pore, region

FOR Singapore and other Asian economies that are heavily dependent on exports, a decelerating Europe may be a cause for greater concern than a slowdown in the United States.

While the US economy will slow down in the first half of the year, it is unlikely to sink into a recession, said Deutsche Bank chief Asia economist Michael Spencer.

‘We are more concerned about growth slowing down in Europe than in the US, partly because the ECB has been persisting with a tight monetary policy,’ he said, referring to the European Central Bank (ECB). ‘Europe, we think, is under more distress now than the US.’

Asia’s red-hot economies are expected to slow this year as growing concerns of a US recession dominate the horizon.

Financial turmoil and a flagging housing market are expected to plague the world’s largest economy, which has also been the key growth driver of Asian exports.

Dr Spencer said that while US growth will moderate in the first half of the year, the economy should find its feet in the later part of the year.

In fact, the bank is predicting US growth to hit 2.5 per cent this year, up from last year’s 2.3 per cent.

He said that while the housing recession will deepen and consumers will finally trim their spending, the slowdown will not be that serious since wage growth has been sustained and interest rates are still relatively low.

‘We’ve never had a recession induced by housing alone,’ he said, noting that previous US recessions had been accompanied by oil price spikes, runaway inflation and tight monetary policy.

As for the still-brewing sub- prime mortgage debacle, US banks are sufficiently well-capitalised to stomach the huge write-downs, unlike Asian banks during the 1997 crisis.

It is a less reassuring story in Europe, where the economy is weaker than in the US, said Dr Spencer.

‘Industrial production and retail sales both probably contracted in the fourth quarter of last year when the US grew 2 per cent.’

And with inflation running higher in Europe than in the US, the ECB will be less keen to cut rates until actual economic contractions are recorded, he said.

 

Source: The Straits Times 15 Jan 08

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