STRATEGY
Stable Asia: While U.S. heads toward recession, Asian growth continues
April 17, 2008

Geoffrey Bell, executive secretary of the Group of 30 economic council, spoke with the Association for Financial Professionals in April on the outlook for the world economy. While a recession looms for the U.S., he said Asia's growth-and appetite for commodities-is likely to continue.

Obviously, China, Asia and Europe have different economic drivers, and we're decoupling somewhat, but how much will rest of the world slow down with U.S.?

It's a very good question, but nobody really knows the answer. For example, the IMF is coming out tomorrow saying that there would be a slowdown in the world economy and they saw a 25% chance of an actual recession, which is defined by the IMF as 3% growth in the world economy.

But, the way I see it, the U.S. is hit hardest, very low growth in 2008 and I think modest growth in 2009. The U.K. will probably also be hit very hard because we have a very similar economy to the United States. But the farther away you go, especially to the emerging markets of Southeast Asia and to a degree in Latin America, they'll have some of that, but it's not going to be enormous.

The IMF now forecasts that China, which grew at 11.9% last year, will now grow at 9.3% in 2008. Now that's a slowdown, no question about that. It was needed because there was too much inflation, but also it's worth pointing out that 9% growth is not exactly a recession. And of course maybe they got that wrong and it slows down to 8%.

I think the next stage is you can say, well all right, we'll see some easing of commodity prices, but it's very difficult for me to see a major drop in oil from $100 to $70 or $80. My own feeling is that the biggest impact is on the U.S., then you get to the U.K., then Continental Europe, but then the farther away you get from the epicenters of financial transactions in New York and London. I suspect the impact will be noticeable, but not severe.

That leads to one very important point. I see a situation whereby commodity prices ease, but not enormously.

People say there was a lot of speculation in oil markets or other commodity markets, and so the last $20, $30 or even $40 in oil was not sustained by fundamentals of supply and demand. Obviously other commodities like coal and cement will remain high. Do you think we've seen a near-term high in commodity prices?

I separate the two. Obviously their interlinked, but let's take them each in term. Commodity prices, of course, when you have a slowdown in the world economy you're going to have some impact. But the slowdown that I see is going to be particularly focused on the industrial world and less so on emerging markets. My conclusion is that commodity prices come down, but they don't come down all that much.

If we had a major recession, no question oil would drop to $70 or $60 a barrel and all the other commodities would go with it. I think that might happen, but it's certainly not an overwhelming possibility. It's probably a 25% possibility, as the IMF suggests. If that is the case, then it means that China, India, Brazil as well, if they grow, their demand for oil will remain pretty high. In China, the January oil demand over the year before had risen by 6% or something on that order. It's difficult for me to see an actual drop in demand.

Are there any big threats out there now that could make the situation toward a crisis?

If indeed markets around the world, including China, were to drop, not 20% like some of them have already, but more, then you could actually convert a slow period of growth or a modest recession into something much worse. That becomes frightening, because if that were to happen you'd get a big fall in commodity prices, which might do industrial countries a little good, but would do emerging countries great harm. That is a very big risk.

The other thing which goes along with that is, not only did we have an implosion of credit, but it's going in the opposite direction. Already, about $250 billion has been written off by banks. That's a lot of money. So the real risk is the financial crisis, which appears now to be contained, jumps out somewhere else and starts all over again. I don't think that's a high probability, but I think it's certainly a possibility, and you can actually get a really nasty further spiral in house prices and all the things that go along with it with a credit contraction. People are still working under the assumption that we'll have a slowdown, we'll have a recession and then there will be a recovery. It may be a quick recovery or a slow recovery, but happens if there isn't a recovery and if it continues to that way. I'm not saying it's going to happen, but the probability is not zero.

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