An economic slowdown in the US will have an impact on Asian profits, but despite current volatility ...
An economic slowdown in the US will have an impact on Asian profits, but despite current volatility in the market, GDP growth in the region should remain high, albeit off recent peaks. The forecast of around 7.5% GDP growth in 2008 for the Asia ex Japan region is currently five percentage points more than Japan, the UK and Europe.
There are several strong props to the Asian economy. First, while Westerners are heavily indebted, national savings in the Asia Pacific region have risen fivefold in the past 20 years. At the same time, consumer debt levels have fallen dramatically.
Second, corporate debt levels are much lower than recently - a decade ago, the debt-to-equity ratio was more than 80%, whereas the 2008 forecast is below 20%.
Thirdly, the financial position of most Asian governments also looks good. Foreign exchange reserves are healthy and their debt levels are looking better than the rest of the world.
The growth in Asian exports to the US has already slowed sharply, from 18.6% in March 2006 to just 3.1% in March this year. But this has been partly offset by exports to commodity producers, which have risen from 29.5% to 37%, while exports to the EU are up from 16.9% to 19.7%. Domestic demand has also remained firm.
But the risk is with inflation, which has spiked this year, mostly due to rising food prices. Many governments have dealt with inflation by using pricing policies and subsidies. Recently, however, some have realised that inflation will not go away soon, and have started to take action by raising interest rates or through other measures.
Asia's contribution to global GDP was higher than the US and Europe in 2007. Also, there is increasing breadth of investment opportunity, particularly after the number of IPOs seen in recent years. While inflation remains a concern in the short term, the long-term picture for the region is very positive.
- Economic slowdown in the West will have an impact on Asia
- Inflation is a major risk factor
- However, the long-term picture is positive
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