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Paris, Monday, September 6, 1999

Asia's Recovery May Imperil the Great American Boom

By Philip Bowring International Herald Tribune.
HONG KONG - Six months ago one could (and did) postulate that Asian recovery would lead to the end of America's ''Goldilocks economy.'' Now the facts are coming in thick and fast. A reviving Asia means higher prices for commodities and manufactured goods, and a lower U.S. dollar.

 Neither technological wizardry nor better than expected productivity gains can shield the United States from a reversal of at least two of the ingredients of the inflation-free growth that has generated record price-to-earnings and price-to-book valuations for the leading stock indices.

 The final leg up for the long U.S. expansion and its even more remarkable stock market boom was provided by the Asian crisis. Interest rates were slashed to stave off global financial meltdown and the Asian-led weakness resulted in continued price declines in almost all goods.

 Most eyes have been on the biggest price reversal: this year's rise in oil prices. That is due more to OPEC's output cutbacks than to Asian demand recovery, and may be dismissed as an exception to the new paradigm of low global inflation. But if the collapse of Asian demand in 1998 set the tenor for world manufacturing prices, we should be looking now at prices in Asia to determine the impact on U.S. import prices and inflation.

 Last week, South Korea announced that prices of its exports in July rose 4.1 percent compared with June. In dollar terms, this is the first significant increase in three years.

 This is not a freak figure. The only economy in Asia where consumer prices are still fall-ing month-on-month is Hong Kong, which is an exception because of its currency peg to the dollar and the heavy weighting of real estate in its consumer price basket. Everywhere else, even in China and Japan, the deflation corner has been turned under the influence of relaxed monetary policies and massive fiscal stimulation. Prices have stabilized or started to creep up even in economies, such as Malaysia and Thailand, where currencies have been stable or strong against the dollar. 

Nor is this likely to end soon. The International Monetary Fund is still mostly in favor of stimulation. The regional pickup is having a multiplier effect. Export growth has returned largely because of regional trade.

 This is not to take too rosy a view of Asian recovery, which is very patchy and could stall once consumer demand has returned to pre-crisis levels. Grave banking problems remain, especially in China and Indonesia. Reform has often been inadequate or avoided. Governments are burdened with debt that will be with them for years and whose servicing cost will inhibit needed spending on infrastructure and education.

 For the United States, however, the issue is not how sustained the recovery will prove but how it will impact the now bloated condition of the U.S. economy. In the short run, Asia's recovery is adding to U.S. demand. Exports to Asia are picking up, partly offsetting the huge rise in the U.S. import bill. But import price pressures and the weakening of the dollar will now compound whatever domestic inflationary pressures exist in the United States, and there are quite a few, including job creation levels and asset prices.

 Prices of non-oil imports into the United States fell 1.4 percent in the 12 months to July and 3.9 percent in the same period a year earlier. Those from newly industrialized Asia dropped 3.6 percent in the past year, and have fallen every month since April 1997. But there are no more treats to come.

 Soon those numbers will start rising again to add to the impact of oil prices and the fall of the dollar against the yen. If U.S. financial markets wake up to these realities, this time around the Federal Reserve will not be able to shore up the markets with interest rate cuts without precipitating a further weakening of the dollar, and more inflation.

 This is not to decry the stabilizing role that the United States has played, through its monetary policy and trade access, in preventing worse fallout from the Asian crisis. Would that Europe, which misspent 1997 and 1998 obsessed with the launch of the euro, had done the same. But it is now more than likely that the stronger the Asian recovery, the more painful will be the demise of America's great bull run.