How to Avoid the Mistakes of Past Recessions

by Cesar Bacani, 23 August 2011

0 comments

Facebook

Digg

Twitter

topics:
Management Risk Management

tags:
ASEAN Bank of America Merrill Lynch deflation GDP growth inflation policy rates recession

Forewarned is forearmed.

It’s an old saw that CFOs should be thinking about today as they watch with unease the wild gyrations in stock, bond and currency prices because of the uncertain prospects of the real economy. Will there be a global recession or just an economic slowdown? Will an economic contraction, if any, only be a ‘Western Recession,’ with Asia and other emerging markets continuing to grow, albeit at a more moderate pace?

No one really knows the answer, but it is never too early to plan for contingencies. If indeed there is a double-dip global recession or, more likely, a marked economic slowdown, how may the economies where a company operates be affected and how long will the tough times last?

When the US Catches Cold

Bank of America Merrill Lynch is trying to read the tea leaves by analysing Asia’s past growth patterns and linking them with slowdowns and recession in the US. The bank’s conclusion: “Asia, including ASEAN, is resilient, but not immune to a US slowdown or recession.”

In an economic slowdown in the US, a 1% fall in American GDP growth trims economic growth in Singapore by -1.7%, in Malaysia by -0.8%, in Thailand by -0.4%, and in the Philippines and Indonesia by an identical -0.3%. On average, about 0.7% is lopped off Asian GDP growth.

The impact becomes much worse when the US economy actually contracts. In a US recession, a 1% fall in American GDP growth trims -2.4% off Singapore’s growth, -1.7% in Malaysia, 1.3% in Thailand (the same as the Asian average), -0.8 in the Philippines and -0.5% in Indonesia.

Click image to enlarge

Asia's Sensitivity to a US Slowdown and Recession

How likely is a US recession? As of 19 August, BofA Merrill Lynch’s US team reckoned that the chances in the next 12 months that America’s GDP will contract was at a significant but not overwhelmingly high 35%. The US economy is only “one shock away from a recession,” they warn. A modest worsening in current financial conditions or in unemployment could well tip the balance.

Asia Gets the Flu

If indeed the US tips into recession and Asia then gets sick as well, the region’s CFOs should prepare for a hospital stay. BofA Merrill Lynch examined Asia’s four most recent crises – the 1997-98 Asian financial crisis, the 2001-02 technology recession, the 2003 SARS downturn, and the 2008-09 global recession – and found that the tough times lasted from 10 to 12 months on average, depending on the economy.

The most exposed to the global economy, tiny Singapore saw its peak-to-trough economic growth fall by mid-teens in three of the past four economic crises. Malaysia, another small country with high exposure to export markets, experienced double-digit falls in three of the four crises as well.

Comment on this article

Your name: *

E-mail: *

The content of this field is kept private and will not be shown publicly.

Homepage:

Comment: *

Web page addresses and e-mail addresses turn into links automatically.
Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd> <a> <p> <span> <div> <h1> <h2> <h3> <h4> <h5> <h6> <img> <img /> <map> <area> <hr> <br> <br /> <ul> <ol> <li> <dl> <dt> <dd> <table> <tr> <td> <em> <b> <u> <i> <strong> <font> <del> <ins> <sub> <sup> <quote> <blockquote> <pre> <address> <code> <cite> <embed> <object> <strike> <caption>
Lines and paragraphs break automatically.
Use  to create page breaks.

More information about formatting options

Verification Code

This question is for testing whether you are a human visitor and to prevent automated spam submissions.

What is the second word in the phrase "ojesen luguhi edugete ilujeba egofoy"?: *

Accounting and Regulations

CFO innovation Asia Accounting and Regulation the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Accounting Regulation, IFRS, US GAAP, Tax, investor relations, corporate governance, Corporate Law, Financial Regulators, Internal Audit, Audit, Corporate Law.

Auditing, Investor Relations, Law and Compliance, Tax

Finance and Banking

CFO innovation Asia, Finance and Banking the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Corporate Finance, trade finance, treasury and risk management, capital expenditure, Banking, mergers and acquisitions

Cash and Liquidity Management, Corporate Finance, Insurance, Treasury Management

Management

CFO innovation Asia the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Management, Corporate Governance, Human Resource Management, Compensation and Benefits, Mergers and Acquisitions, Professional Development, Corporate Real Estate, Risk Management, Budgeting and Forecasting, Business Process Management, Business Process Reengineering, Outsourcing.

Budgeting and Planning, Business Expense Management, Human Capital Management, Outsourcing and Shared Services, Risk Management

Metrics

Corporates, Financial Services

Technology

CFO innovation Asia Technology the Asia Pacific resource center for senior finance executives, daily news, analysis, best practice and case studies in Finance Systems, Business Intelligence, EPR, Accounting software, CRM, Cloud Computing, Telecommunications, Business Process Outsourcing, Business Process Management Software.

Business Intelligence, Enterprise Software and Systems, Financial Systems, Security

CFO innovation ASIA