Asia-Pacific Leveling After Soaring Growth

The condition of US and European markets is affecting export growth from the Asia-Pacific region.

Though the region will continue to see moderate growth in 2008, growth will slow from the multi-year high growth rates it has seen.

While exports from the region will be undermined by the decelerating economies in the US and Europe, intra-Asia demand will support exports within the region. On the import side, the region's import position will be inflated by high global commodity prices.

China is expected to slow as authorities implement more aggressive tightening measures in the second half of the year, with potential risks of a hard landing accentuated by unresolved structural imbalances in the economy. Impetus in regional growth will shift to recovering domestic demand, with the resilience of investment and consumption remaining the key variable in the near-term outlook.

The exposure of the region's financial system to the subprime loan crisis so far remains limited. The declared exposure of Asian banks to subprime loan losses remains comparatively limited, while property price inflation has been broadly in line with fundamentals, with the possible exception of heated real estate markets in Australia and New Zealand.

Continued, if softened, business investment should support consumer spending as employment and income growth remains stable.

Given the current balance of forces, aggregate growth in Asia, excluding Japan, should slow to 7.2% in 2008 from the 13-year high of 8% hit in 2007.

Accelerating inflation remains a key risk in the outlook for the Asia-Pacific region. Inflation has surged amid intensifying supply constraints in the context of robust domestic demand growth. Rising input costs, compounded by wage inflation, will exert pressure on company profit margins, while higher staple prices will undermine household purchasing power. Fiscal strain could be exerted in countries that operate extensive subsidy systems, reducing resources for public investment while monetary tightening targeted at demand pressures also fuels inflation.

Export dependency increases exposure to a prolonged US downturn. Undeniably, the region's growth still remains skewed to exports and to demand sourced outside the region. Much has been made about rising volumes in inter-regional trade anchored on the emerging markets of China and India. Nevertheless, the inter-regional production chain that this trade reflects remains overwhelmingly dependent on the United States and Europe as the source of final-stage demand, even as consumer markets in India and China grow. Any severe or prolonged downturn in US demand would result in an attrition of growth, with the risks exacerbated if the G3 economies enter a synchronized downturn.

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