How Will the Eurozone Crisis Affect Asia in 2012?

by Ernst & Young, 16 December 2011

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Risk Management

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2012 economic forecast Eurozone

Sharper than expected slowdown in the Eurozone – where Ernst & Young now sees GDP growth at close to zero in 2012, rather than our the forecast 0.6% growth in the Autumn Forecast – will have a moderately adverse impact on prospects for the Asia-Pacific region next year.

With the main economies in Asia already slowing in the second half of 2011, weaker demand in Europe will weigh further on the region’s export prospects in 2012. But we expect emerging Asian countries to still grow by over 7% in both 2012 and 2013, albeit down from just above 9% in 2010.

Export hit

With 20% of their exports going to the EU, both China and India will be impacted, despite the slightly stronger outlook for the U.S., as will other leading exporters in the region including South Korea, Thailand and Taiwan.

In addition, the continued high level of financial market stress stemming from the sovereign debt crisis in the Eurozone will deter capital flows and FDI to emerging markets in general, putting further pressure on their balance of payments.

And although banks in Asia and credit conditions generally will not be directly affected by Europe’s mounting banking sector problems and the need for recapitalisation, there will be knock-on effects, which in turn will slow credit growth in some Asian markets, especially those like India that still face significant inflation risks.

But many countries in the region are now relaxing monetary policy, which will help to offset this threat coming from Europe.

The expected modest slowdown in key countries such as China and India will affect other countries in the region, dampening their exports and weighing on business and consumer confidence.

Domestic consumption

On the other hand, consumption is holding up reasonably well in some countries such as China and Indonesia, helping to support activity, while in addition an increasing share of these countries’ trade and FDI flows are intra-Asia.

For some other countries, continued high real commodity prices will continue to support activity and state spending.

The continued strength of domestic demand in many of the Asian economies, with key manufacturing exporters holding lower levels of stocks than at the onset of the 2008/09 global recession, should help to protect the Asia-Pacific region from the threat of recession in Europe, especially if demand continues to hold up reasonably well in the US and other regions of the world such as Latin America and Africa.

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