International | Jul 20 2006
By Chris Shaw
Stronger than expected growth in China in the June quarter may give the impression everything is ok in terms of Asian growth, but Morgan Stanley’s resident bear Andy Xie suggests there are reasons to be concerned about the region’s future growth outlook.
Much of it ties in to the oil price, as Xie notes the stronger oil price has a two-pronged impact on Asia. Firstly, it results in lower exports because of higher gas prices consumers are being forced to pay in countries such as the US, which is the single largest market for Asian production. This simply forces these consumers to cut consumption in other areas. As a result, they are buying less of the goods produced in Asia.
At the same time, manufacturing costs are increasing as the oil price rises as it is the largest single input cost for manufacturers in the region. This means margins are being cut, putting pressure on corporate profits. It is also putting pressure on the terms of trade in the region, as while export prices are moving higher they are increasing at a slower rate than import prices.
The GDP impact of higher oil prices is significant, with Xie estimating the ten countries in the region covered by Morgan Stanley consumed a total of 16.7m barrels of oil daily in 2005, while producing just 6.7m barrels per day. Given the average oil price this year could be as much as US$16 per barrel higher than last year, there is a potential income loss of US$58.4bn, or 1.2% of regional GDP.
Assuming the growth in US imports from Asia slowed to zero in the second half of this year as US consumption slows, and Xie sees the risk to export volumes as on the downside, it would cut another 1.2% from GDP figures. Such an outcome would represent the biggest shock to Asian economies since the currency crisis of 1998.
Xie suggests in the face of such an outcome governments throughout Asia must aggressively raise interest rates and stop subsidising exports, as by maintaining low interest rates in an attempt to support economic growth governments in the region are effectively imposing an inflation tax on their own consumers while subsidising consumers in developed countries.
Such an outcome isn’t apparent to date as capital inflows into the region have supported the Asian currencies, but as volatility is making investors more risk averse Xie sees the potential for these capital inflows to slow, leading to pressure on currencies in the region. This in turn increases the inflation tax, so creating conditions that could see some Asian economies moving into recession in the next six months. If the oil price moves to US$100 per barrel, Xie suggests it then becomes a case of most economies in the region moving into recession by the end of 2007.
