Domestic demand to lead RI, others to recovery

Domestic demand to lead RI, others to recovery

Dow Jones, Hong Kong

The economies of China, Hong Kong, Korea, Indonesia and the Philippines are the healthiest in Asia, and will likely swiftly shadow a U.S. recovery in the first quarter of 2002, according to new research published by ING Barings Thursday.

Chief Economist Tim Condon said these economies will be the major beneficiaries of the U.S. recovery, now expected towards the end of the first quarter of 2002 following fiscal and monetary stimuli. But he noted the recoveries will be led by domestic demand rather than a return of strong demand for Asian exports.

"We will have, in Asia, an export-less recovery," Condon said. "That means top-line growth in the economies of Asia will have to be driven by domestic demand."

"These are the economies where we believe domestic demand is unimpaired and could sustain top-line GDP growth in 2002."

Condon said that in 2002 Asia won't be able to count on strong U.S. investment in information technology, which constitutes a large component of Asian exports.

Therefore, the healthiest economies will be those which are able to be flexible on pricing in the labor, capital and land markets. Political stability is also essential, while regional currencies across the board will be supported by a weaker U.S. dollar, he said.

"As soon as the U.S. economy is seen to bottom out, this region will...bottom out as well," he said. "Asian consumers are looking at the U.S. economy, and once it stabilizes it will act as a psychological boost to regional economies."

But he noted not all Asian countries will benefit equally from the US recovery, and that countries suffering from chronically weak domestic demand, such as Taiwan, Thailand and Malaysia, are likely to underperform.

In Hong Kong's case, Condon said the main driver of growth will be increasing links with China. The media, financial services, logistics, entertainment, education, and health sectors are set to show growth, he added. He forecasts 4 percent gross domestic product growth for the city in 2002 - one of the more bullish forecasts.

Condon says ING Barings' current 1.7 percent GDP growth forecast for the U.S. in 2002 already takes into account implications of the military buildup and the U.S. war against terrorism.

Asian equities are positioned to benefit from capital flows from the U.S. as foreign investors search for higher returns, said Markus Rosgen, ING Barings' Asian strategist.

But he said rather than investing by country foreign investors will look at the stocks with the largest market capitalization in Asia, which would benefit big names in Hong Kong, Korea, Taiwan and Singapore.