FinanceAsia did a survey recently of what senior economists think the US rate cut will mean for Asia’s prospects.
Firstly, no one is predicting a recession, but they pointed out that Asian export growth is falling faster than expected. Geoffrey Barker, chief economist, HSBC explains: “Capital flows have changed because of rising US interest rates and greater risk aversion on the part of fund managers. Tightening liquidity conditions and slowing exports are going to hit where there has already been some loss of momentum.”
Are we likely to see further rate cuts in the near future? “Yes, possibly as early as the end of January,” says Sun-Bae Kim, economist with Goldman Sachs. Don Hanna, Salomon Smith Barney’s regional economist agrees: “Our view is that more adjustments are coming, up to 50bp or more. The Fed will wait to see what happens in the market and react accordingly.” JP Morgan Chase are predicting a rate cut of 175bps by the end of June – a revision of their earlier prediction that this would happen by the end of the year.
Temporary boost
“There is a very tight correlation between US investment in IT and Asian exports, particularly for countries like Korea, Taiwan, Singapore and Malaysia,” says Kim. Hanna adds: “A US slowdown will have more impact on SE Asia and China who produce more consumer and IT goods – although IT production should stay strong.”
Asked if the Fed’s recent cut is enough to divert the threat of recession, Kim answers: “Even if the US achieves a soft landing, substantially lower growth in the US will hurt Asia.”
There is evidence that everyone is feeling the pinch. HACTL, the franchise holders of 80% of Hong Kong’s air cargo concerns, reported an 18% growth in volume in September 2000, only to find that in the next three months, figures were down 3% compared to the 1999 figures for the same period. That left HACTL with an overall average for the year of only 11% growth. This is an interesting indicator of the way the Fed’s decision to raise interest rates last year led to slowing Hong Kong and Chinese exports.
New economy love affair
“The ‘love affair’ with the US Nasdaq has ended,” says Kwok Kwok Chuen, chief economist, Standard Chartered. “Funds are being re-allocated on the basis of risk-return and the case for increased recycling of global capital is stronger. Asia may only get a tiny part of this global capital, but a gradual return of capital flows would benefit the region.”
Goldman’s Kim comments: “Many Asian countries have unfinished agendas of financial and corporate sector restructuring. Making progress on these fronts will be more difficult in an environment of rapidly slowing economic growth.”
Paul Chanin, regional strategist for SSB says: “We fear a possible ‘punters' party’ in 1Q followed by painful withdrawal symptoms when the ‘drug’ wears off.”
