Consumption to the rescue
 
Philip Bowring IHT
Monday, April 8, 2002
HONG KONG Asian economies are looking healthier. But they still look more to Uncle Sam's apparently insatiable consumption habit than to their own devices to keep them on the recovery path. The Asian Development Bank has just predicted that East Asian GDP growth this year will hit 5.2 percent and accelerate further in 2003, with China heading the pack at 7 percent and South Korea at 4.5. Finance ministers of the Association of South East Asian Nations forecast expansion for their region of 3.5 to 4 percent this year. All are expecting the pickup in the United States to continue and power an export-led revival. So far, the region can feel happy that U.S. consumer demand has propelled it out of recession. And the turn of the inventory cycle gives a boost to the vital electronics industry.
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The ADB and finance ministers should be discussing what they will do if this is not spring but an Indian summer. Even during the brief recession, the U.S. current account deficit was still running at 4 percent of GDP, compared with 1.5 or less during previous recessions. With demand picking up and the dollar strong, it is headed toward 5 percent, or $500 billion.
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Recessions are also supposed to be periods when balance sheets are restored to health after overindulgence in debt. Yet thanks to low interest rates, households have continued to borrow, often against their homes. The collapse in profits has meant that corporations have increased debt even after slashing capital spending.
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The link between the current account deficit and the borrowing binge is provided by the U.S. bonds that are being bought by foreign investors. Much of this is the debt of federally backed institutions whose huge expansion has been a major stimulus to household spending.
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No one can tell when all this will end. But end it must, whether through a long period of slow U.S. growth or a sharp decline in the dollar, or both.
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Asia more than ever needs to keep focused on sustaining domestic demand stimulus. Only South Korea has been successful, with a boom in housing and in consumer finance. This was made possible by reform of much of the banking sector and by the impact on money supply of allowing the currency to weaken against the dollar.
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Other countries are either unwilling to sustain fiscal stimulus for fear of accumulating excessive government debt, or, as with Thailand and Taiwan, still have much to do to mend their banks and increase lending.
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There remains a reluctance to reduce interest levels as far as economic conditions justify, either because of fixed exchange rates - as with Malaysia, Hong Kong and China - or because of preference for a strong currency over domestic demand growth. As hangover from the Asian crisis, there is also still a fixation with building up foreign reserves. China's reserves are a wasteful $212 billion. Modest import growth suggests that its claim of 7 percent GDP growth is overstated.
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U.S. adjustment, when it comes, will require that Asian current account surpluses be slashed. That can happen through a contraction of exports resulting from U.S. recession, dollar re-alignment or protectionism. Or it can come from an expansion of Asian imports driven by domestic demand.
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The days of the United States as buyer of last resort are almost over. Asia must consume or stagnate. Responding to this challenge should be the priority of ministers and the ADB.
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International Herald Tribune
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