Thursday, January 24, 2008

Slow down in US affects Southeast Asia Most

Southeast Asia will face stiffer export competition from China and likely bear the brunt of any impact in Asia from a major economic slowdown in the United States, an IMF official said Tuesday.

A recession in the United States, anticipated by some economists as a result of a current housing slump and related credit crunch, will obviously lead to a cutback in exports by Asia's rapidly-growing economies, led by China.

Based on a "rough rule of thumb," for about a one percentage point decline in US economic growth, there could be a "half to a full percent decline in Asian growth, depending upon what the effects are beyond the United States," said Steven Dunaway, deputy director of the International Monetary Fund's Asia and Pacific department.

"There will be much more of an impact in Southeast Asia," which faces direct competition from China in terms of a number of export products, he said.

"Those (Southeast Asian) countries will all face a much tougher time with the slowdown in the United States and probably some extra competition from China," he said at a forum on the Chinese economy at the Woodrow Wilson International Center for Scholars in Washington.

Dunaway said Asia's exporting nations were "going to be competing for a piece of a smaller pie" if US imports shrunk. He raised the possibility of China slashing prices to remain competitive.

"If the Chinese themselves face a more difficult environment, there will be some tendency probably at least to hold prices if not cut prices," he said.

This would "affect profit margins and put some additional competitive pressure on Southeast Asian firms as well as firms in other countries competing with Chinese companies," he said.

Labor-intensive manufacturing already appears to have given a competitive edge to China in trade and investments at the expense of export-driven Southeast Asian countries such as Thailand, Indonesia, Vietnam, and the Philippines, economists say.

But rapid Chinese economic growth in recent years has also resulted in increased imports of raw materials and intermediate inputs from Southeast Asia, helping propel growth in the region, they say.

Amid the competition for exports to the United States, China and Southeast Asia are also opening up their economies to each other through a free trade agreement covering a total of nearly two billion people.

IMF head Dominique Strauss-Kahn warned in Paris Monday that the global economic situation in the wake of a US slowdown was "serious" and could impact the world's emerging economies.

"Fortunately emerging nations continue to have fairly strong growth and to drive growth worldwide. But it is not impossible that even in emerging nations it could have a certain effect, that growth could be weaker than expected."

Dunaway said any decline in growth in Asian economies as a result of a US slowdown would depend on policy responses.

"Most of the countries are in positions where they can ease monetary policy, they can ease fiscal policy, so they can offset some of the decline coming out of the US," he said.

There is one school of thought that a US slowdown would provide a much needed breather for China, which was stepping up efforts to cool inflation to prevent the world's fastest growing major economy from overheating.

"There may also be some impact with respect to FDI (foreign direct investment) that might slow (in China)," Dunaway said.

But Beijing would probably raise government spending, particularly on infrastructure investment, to keep the economy chugging along at a growth rate of nine to 10 percent, he added.

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