Wary Asian countries eye brighter economy in 2002, say analysts
Wary Asian countries eye brighter economy in 2002, say analysts
Alan Wheatley, Reuters, Tokyo
Asia's second recession in three years seems to be drawing to
a close, but doubts about the vigor of a recovery in exports and
the risk of a sharp fall in the yen mean 2002 is shaping up as a
modest economic vintage for most of the region.
On an optimistic view, a rebound in U.S. demand for the
information-technology products that are the lifeblood of many
Asian economies will gradually erase memories of last year's
slump in exports, the worst in at least 15 years.
Recent data on Asian trade and U.S. manufacturing orders have
left economists increasingly confident that Asia is bottoming out
and that year-on-year export growth will resume by the second
quarter of this year.
"When the U.S. and the European and Japanese economies start
to grow again, hopefully in the second half of 2002, so will
Asia," said Takatoshi Ito, an economics professor at Hitotsubashi
University in Tokyo who recently completed a spell as a junior
finance minister.
With America still to work off the excess IT investment of the
internet-bubble era, some banks believe Asia will have to wait
until 2003 for a recovery worthy of the name.
Morgan Stanley, for instance, is forecasting a further 10.1
percent drop in U.S. equipment investment this year, which it
says will limit gross domestic product growth in non-Japan Asia
to 4.5 percent, a modest improvement on this year's 3.7 percent
rate. For 2003 the bank has penciled in 5.9 percent growth.
Lehman Brothers is a bit more optimistic, forecasting a pick-
up to 5.0 percent in 2002 from 3.5 percent last year thanks in
part to the significant monetary and fiscal stimulus already in
the pipeline, cheap oil and inventory rebuilding.
But with Asia so sensitive to external events, Lehman
economists Rob Subbaraman and Graham Perry said the risks around
their forecast were wider than usual.
"We cannot rule out a snapback in global IT demand, propelling
regional GDP growth to as high as 6.6 percent, nor can we
discount another geopolitical shock or a catastrophe in Japan,
crimping growth to just 2.9 percent," they said in a report.
More important than the timing of the eventual recovery,
economists say, is whether Asia's policy-makers capitalize on the
next upswing to implement the reforms that will reduce their
vulnerability to export boom-and-bust cycles.
The failure to harness strong growth during 1999 and 2000 to
ram through badly needed banking and corporate reforms meant most
countries were unable to rely on self-generated domestic demand
to cushion the blow of tumbling exports.
"Asia's structural problems make it highly vulnerable to
external shocks," said Michael Spencer, chief Asian economist at
Deutsche Bank in Hong Kong.
Writing in the bank's Asia Outlook for 2002, Spencer said
Asia's 'vulnerability' will be a boon over the next two years,
with a rebound in exports sparking rapid growth in incomes.
"But if governments do not take advantage of this opportunity
to complete financial sector restructuring -- of both the banks'
and the corporations' balance sheets and operations -- then the
next downturn in the industrial country growth cycle will see the
same exaggerated recession in Asia," Spencer said.
Breakneck growth rates came easily to Asia's Tiger economies
in the early stages of economic development.
But now they have less ground to catch up, future growth will
depend increasingly on an ability to innovate and increase
productivity, said Shahid Yusuf, a World Bank economist.
That, in turn, means pressing ahead with a host of nitty-
gritty reforms such as purging banks of bad loans, strengthening
legal systems and spending more on research and education.
"East Asia will have to work a lot harder than it did in the
past to achieve the same rates of growth," he said.
Adding to the challenge is the seemingly inexorable ascent of
China, which is set to become even more attractive for foreign
investors now that it has joined the World Trade Organization.
Morgan Stanley calculates that China gained 0.66 percentage
point of Asia's export share a year in the 1990s. It expects the
gain to increase this decade to 1.2-1.5 points per annum as China
quadruples its exports to $1 trillion a year.
"There is little Southeast Asia can offer that China can't
offer at a lower cost," said Jomo Sundaram, a professor in the
department of applied economics at the University of Malaya in
Kuala Lumpur. "The competitiveness of China -- and of India -- is
going to put Southeast Asia in a difficult position."
In the policymaker's nightmare, Asia becomes trapped between
the hammer of a low-cost China and the anvil of a Japan so
desperate to escape deflation and recession that it engineers a
sharp fall in the yen to spur exports and raise import prices.
Andy Xie of Morgan Stanley said a major yen devaluation was
the biggest risk to his scenario of an Asian recovery in 2003.
Many economists believe a sharp drop in the yen contributed to
Asia's 1997/98 financial crisis by enabling Japanese exporters to
gain market share from their Asian rivals.
"As Japan's exports are only 10.7 percent of GDP, the
devaluation required to solve its deflation problem would be
huge," Xie said in a recent note to clients. "Another round of
competitive devaluation would be likely to follow."