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2014, Apr 25

New World Order: Asia and the US Downgrade

New World Order: Asia and the US Downgrade

by Royal Bank of Scotland, 12 August 2011
That point might in fact be closer to hand than popularly acknowledged, since there is decent evidence that business demand for credit has begun to expand while broad money supply indicators have started rising at an accelerating pace – perhaps some ray of light!
 
Meanwhile in Europe, while growth expectations for Germany might look reasonably achievable, the generally disappointing remainder of the union means that the overall current consensus forecasts of 2% for 2011 might also turn out to be too ambitious. In fact, as Italy and France gets increasingly questioned by the markets on their ability to sustain increasing debts, the whole situation is looking increasingly like the summer of 1997 in Asia.
 
If forced to venture a guess, we think Greece, Ireland or Portugal will become the Thailand, Indonesia and Korea of that time before March 2012. If so, the ability of Italy and Spain to stay solvent could be strongly questionable, given their current account deficits and debt burdens, notwithstanding the lower entitlement component of their deficits.
 
At that juncture, we believe the euro in its current form would no longer look feasible.
 
Decoupling Asia?
At danger of being seen as naïve, we would suggest that the recent crisis of 2008 did teach us that we shouldn’t overestimate the risks created from an economic slowdown in the West as far as Asian economies are concerned. This is because Asia’s stronger balance sheet does provide the ability to counter-cyclically support temporary private sector withdrawal, should it happen, via fiscal policy – and despite the region’s already loose fiscal stance.
 
This was true four years ago when exports were significantly more important in driving growth, and so it should be true today as Asian activity is considerably more self-sustained through the presence of stronger consumption (helped by rising incomes), still-easy fiscal positions and particularly new investment cycles which are increasing well-embedded.
 
This backdrop should support, to some extent, Asian earnings and cash flow streams. This means that the knock-on impact from a slower/markedly reversing rest of the world is unlikely to completely remove the carpet beneath our feet, as has been seen on several occasions since 1998.
 
Economically, therefore, while it is clearly delusional to propose that complete decoupling is possible, Asia’s ability to withstand external economic adversity is improving, in our view.
 
About the Author

This article is excerpted from “The Asian Angle: From risk-free to dangerous,” a report by Royal Bank of Scotland and affiliated companies that was published on 8 August 2011. This material has been prepared for information purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy.

 

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