Assignment 1

Question : 64

Can Asia Survive a Global Economic Slowdown?

Introduction:

In this topic it is discussed that whether Asia will survive a global economic slow down or not. The impact of the US and European Union economic slowdown will certainly hit the Asia-Pacific region through weakening trade and investment flows. The most export-dependent economies of East Asia, including Singapore, Hong Kong, South Korea and Taiwan, will be the most vulnerable. The impact on Asian growth will be mitigated by continued strong growth in China, the world's second largest economy, and a growth rebound in Japan due to post-disaster reconstruction.

Discussion:

Weak economic data from the US coupled with the ongoing debt crisis in Europe has raised concerns that growth in the world's two largest economic zones might slow.

Fears have been fanned further after Morgan Stanley downgraded projections for global growth and said the US and Europe were "dangerously close to recession".There are concerns that an uncertain economic outlook will hurt consumer demand in developed countries and affect growth in the export-dependent Asian economies.

Some of Asia's biggest economies, such as China and Japan, rely heavily on demand from the US and Europe to boost economic growth.However, economists across the region said that while a slowdown in developed economies would hurt, growing domestic demand from within the region could help cushion the impact.

According to 'Paul Gruenwald', Chief economist Asia, ANZ Bank, recent market developments look less severe (so far) than 2008.

Mr Gruenwald says increased regional trade will help Asian economies. While asset price declines have come harder and faster, markets have been less disorderly and the sharp inventory adjustment that hit Asia three years ago has been absent.

Moreover, our analysis shows that in the post-global financial crisis period there has been a pick-up in intra-regional trade driven by Asian demand, which has led to increased "delinking".

This has been more robust in the larger, less open, economies of China, India and Indonesia, which we expect to lead regional growth. There are signs of contagion from developments in Europe and the US.

The three main channels are:

Volatile capital flows, particularly as regards Asia's deficit countries. Intra-bank funding stress, which spilled over to Asia in the global financial crisis during 2008 Foreign demand shocks, which we see are already having relatively outsized effects on Asia's smaller, more open, economies. Recent US and European Union economic data is increasingly concerning, showing clear signs of weakening growth.

The impact of the US and European Union economic slowdown will certainly hit the Asia-Pacific region through weakening trade and investment flows. The most export-dependent economies of East Asia, including Singapore, Hong Kong, South Korea and Taiwan, will be the most vulnerable.

However, the impact on Asian growth will be mitigated by continued strong growth in China, the world's second largest economy, and a growth rebound in Japan due to post-disaster reconstruction. India is also expected to record quite strong growth in 2012, albeit its weight in the global economy is still much lower than China's.

Moreover, Asia-Pacific economies have become more resilient to external shocks due to major reforms undertaken since the East Asian crisis to reduce government debt levels, increase foreign exchange reserves and strengthen banking systems.

Therefore the Asia-Pacific economies are better positioned to handle a global economic slowdown, and most still have leeway for fiscal stimulus measures should the global economy slow significantly.

Conclusion:

There are concerns that an uncertain economic outlook will hurt consumer demand in developed countries and affect growth in the export-dependent Asian economies. Some of Asia's biggest economies, such as China and Japan, rely heavily on demand from the US and Europe to boost economic growth.However, economists across the region said that while a slowdown in developed economies would hurt, growing domestic demand from within the region could help cushion the impact.

Submitted by : Amanpreet singh (MBA 1 C)

Submitted to : Mr. Gurdeepak singh