Wary Greenspan keeps Asia on tenterhooks

Wary Greenspan keeps Asia on tenterhooks

Anchalee Worrachate, Reuters, Singapore

Federal Reserve Chairman Alan Greenspan's cautious U.S. economic outlook suggests export-dependent Asia faces an uncertain few months.

Countries benefiting from strong domestic demand, such as South Korea, look set to fare best after Greenspan signalled on Wednesday the Fed is in no hurry to raise rates so long as inflation is subdued.

U.S. interest rates, currently at 40-year lows, have cut borrowing costs in Asia and helped fuel a dramatic stock market rally in much of the region.

But in his speech to the congressional Joint Economic Committee, Greenspan indicated the quality of the U.S. recovery is unclear. And if rates remain low because of a slow U.S. recovery, that will be bad news for heavy Asian exporters like Singapore and Taiwan.

Greenspan's guarded outlook will keep Asian exporters on tenterhooks, even if it largely welcomed by the region's stock markets. As sales executives scan U.S. economic data and corporate statements, they will be looking for signs of a pick up in business investment and sustained consumer spending to underpin this year's export recovery.

"I think his view is a sensible one. Despite positive data from the U.S. so far, I'm not quite optimistic, far less so than some analysts who forecast rosy outlook ahead. It will take time for the U.S. to clear its economic imbalances," said an executive in charge of sales at a Singapore-based semiconductor firm.

A late 1990s U.S. economic boom, fired by an Internet fueled high-tech investment bubble, fed an Asian export bonanza. But U.S. companies, counting the cost of over-expansion, slashed spending last year. Exports dried up, plunging swathes of Asia into recession.

U.S. consumers were the one bright spot, their spending emptying the shelves of high tech goods by late 2001, prompting firms to replenish stocks. But rising energy prices and mortgage rates may dent consumer spending and firms may not be ready to take up the slack.

"Export recovery in Asia is now driven mostly by rebuilding of inventories and that will be a one-time effect. If we are lucky that will see us through this year. But if capital investment does not pick up, we are likely to be in trouble again next year," said the Singapore businessman.

Goldman Sachs estimates that if inventories recover from a fall of $100 billion in 2001 to a rise of $50 billion in 2002, that alone would generate 1.5 percent growth for the U.S. economy.

Exports remain the major growth engine for most Asian countries. They account for around 149 percent of gross domestic product for Singapore (foreign goods re-exported through the city-state's major port inflate the figure above 100 percent) and almost 50 percent for Taiwan.

The United States is the most important Asian market, accounting for 25-30 percent of exports. The region's U.S. dependence, however, is even more pronounced when it comes to tech-related exports.

While some businessmen and the Fed chief remain cautious, many private sector economists are strongly upbeat about a U.S. recovery and its benefits for Asia.

"U.S. data have pointed to a robust recovery. Consumption might be a bit weaker than it was in January or February but we haven't seen any fall-off in that," said Michael Spencer, Deutsche Bank's chief economist for Asia.

"Industrial production is running strongly. We expect employment to continue to improve and consumption will rise on the back of that," he said.

"The consensus growth forecast suggests the growth will be above trend by the end of this year. The Fed is running a real danger here of being very late to return to either a neutral or tightening monetary policy."

If Greenspan's concerns about the sustainability of U.S. growth turns out to be true, a few Asian countries driven by strong domestic demand, such as South Korea, will fare better than others.

In fact, a number of economists are forecasting that the central bank of Korea will move ahead of the Fed in tightening its monetary policy.

Salomon Smith Barney, for example, expects a significant monetary tightening in Korea in the second half of this year to avoid the risk of overheating which could push prices higher.

Hong Kong, which pegs its currency to the U.S. dollar, is likely to benefit the most from any delay in the Fed's rate hikes.

"This is directly useful for Hong Kong which has been worried that even the gradual recovery that people expect could be squashed by strong Fed rate hikes. That doesn't seem to be on the card now," said Bill Belchere, chief economist at Merrill Lynch in Hong Kong.