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Thursday, 4 January, 2001, 18:28 GMT
Trouble ahead in Asia and Europe?
Export containers
Export markets around the world would suffer from a US economic slowdown
by BBC News Online's Emma Clark

Most economists predict that any slowdown in the US could inflict pain on the Asian economies, and dent the growth prospects for Europe.

The US remains the world's largest importer and a reduction in American consumer demand will inevitably have a knock-on effect around the world.

Although the European trading block is insulated to some degree, the premise that its economy will prosper while the US faces a possible recession does not hold true.

"Any European policymaker would prefer a strong US economy," said Nigel Pain, senior research fellow at the National Institute of Economic and Social Research.

The National Institute predicts that a 1% reduction in US output will bring about a 0.1-0.2% decrease in European output. The European figure is expected to decrease further if the uncertainty in the US colours the performance of global financial markets.

The outlook for Asia, which regards the US as its most important export market, is considerably worse.

Percentage share of exports to the US
Canada 87.6%
Japan 31.1%
Korea 20.6%
Germany 10.2%
France 8.2%
Source: National Institute of Economic and Social Research

"The Asian recovery is still vulnerable ... In terms of trade, the US market is much more important for the Asian countries," said Val Koromzay, director for country studies at the OECD.

How slow in the US?

The extent of the slowdown in the US remains a subject for debate. The Economist Intelligence Unit in London has forecast an approximate figure of 2.5% for US growth in 2001, against a forecast of 5.1% in 2000.

Goldman Sachs, the US investment bank, is currently forecasting a 1.5% growth rate for the US economy in the first quarter of 2001, but could revise this to a negative figure before the end of the week.

The OECD's Koromzay is more optimistic. "Relax a bit. Don't overestimate what is happening in the US. The world has changed, but I don't think it has changed too much." He believes the US economy has "hit an air pocket on its way to a soft landing".

Relax a bit. Don't overestimate what is happening in the US. The world has changed, but I don't think it has changed too much

Val Koromzay

But whatever the forecast, most economists and strategists agree that Europe, particularly its technology sector, will be affected by some kind of economic slowdown in the US.

In Europe, the Economist Intelligence Unit has forecast growth of 3% for 2001, against 3.3% in 2000, although the 2001 figure is due to be revised down.

Finland and Sweden are considered most vulnerable because they are more open to trade with the US, said Jim O'Neill, chief currency economist at Goldman Sachs. Most other European countries trade mainly with themselves.

Asia catches cold

The Economist Intelligence Unit's projection for Asia in 2001 is 6.2%, but the figure is set to be reduced. The Unit has forecast 6.8% growth for 2000.

Paradoxically, despite the exposure to its US trading partner, there are more offsets for Asia than Europe from any US slowdown, said Koromzay.

The Federal Reserve's recent 0.5% interest-rate cut could ease Asia's debt burden. Lower interest rates would allow Asian companies to restructure their debt owed to US and foreign banks.

Falling interest rates will also likely mean a weaker dollar and this could be good news for some Asian countries, whose currency is linked to the US dollar, as it will make their exports cheaper.

"If the Fed is successful in cutting rates and stabilising growth without a recession, it will benefit the Asian economies," agreed Goldman's O'Neill.

The net effect of any US slowdown, however, remains bad for Asia and its economic reforms, said Robin Bew, chief economist at the Economist Intelligence Unit. "Reforms are not generally popular and as the economy slows, reforms will become worse. This undermines the political will to reform."

Japanese trader
Japan's fragile economy is vulnerable to the US

Asian countries that are particularly vulnerable to the US economy are Korea and Taiwan, said Goldman's O'Neill. Both Korea and Taiwan are export dependent on the US.

Japan's economy, which is already fragile, will also dread a recession. According to the National Institute, 31.1% of Japan's exports are to the US. Although, total exports are small compared to the size of the economy, trade has been a rare stimulus for recovery, said O'Neill.

Despite the doom and gloom, Bew is confident that Asia will not be plunged into another financial crisis. "It will be more difficult to attract foreign capital, which will depress the growth rates, but not on the scale of the crisis in 1997 and 1998."

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See also:

04 Jan 01 | Business
Avoiding a hard landing
04 Jan 01 | Business
US fends off global slump
21 Dec 00 | Business
US economy slows sharply
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