if the us jumped off a cliff...

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    Rob Burgess

    Investors and businesspeople in Asia should be careful about believing everything the IMF says – particularly on the problematic notion of "decoupling". The debate over whether financial markets outside the US might become robust enough to function independently of America's ups and downs – and there's little evidence of this happening, with the possible exception of the EU (A glimmer of decoupling, April 8) – is producing some highly misleading rhetoric.

    Last week, the IMF was slashing global economic growth forecasts, with its managing director Dominique Strauss-Kohn telling the Financial Times that “the crisis is global. The so-called decoupling theory is totally misleading.”

    This theme was picked up by Wayne Swan on his tour of Washington: "No one at (my) IMF meetings believed that Asia was somehow de-coupled from the financial turmoil.”

    Why is this rhetoric misleading for Asia? Because it can easily give the false impression that the region is about to be pulled down by the current US economic slump. And false impressions, in financial markets, lead to all kinds of irrational behaviour of the downside variety – just what Asia's economies don't need.

    Late on Friday, the IMF released its Regional Economic Outlook report for the Asia-Pacific, revealing that, far from being pulled down by the US recession, Asia's economies will remain, in many cases, in overdrive.

    The IMF's newly revised forecasts have China growing at 9.3 per cent (9.5 in 2009), India at 7.9 per cent (8.0), and the ASEAN-5 nations (Indonesia, Malaysia, Philippines, Thailand and Vietnam) just a point or two either side of their average, which stands at 5.8 per cent (6.0). These are the brand new forecasts – "downgrades" on what the IMF released last October.

    That’s a lot of growth and, as Wayne Swan would attest to right now, it usually comes with a good burst of inflation. In year-on-year terms, the end of February saw Vietnam struggling to contain 16 per cent inflation, though the IMF thinks it will be back down to 10 per cent for the full calendar year, thanks to some fairly desperate measures by the Vietnamese government. That nation’s financial institutions, like China’s, have been hit with higher capital requirements and the state-owned banks have been forced to buy government bonds to suck even more liquidity out of the economy.

    Like Vietnam, most of the countries listed above are forecast to have some success in bringing down inflation in 2008, with the exceptions of India (up from 5 to around 6 per cent) and Malaysia, which should nudge up to around a modest 3 per cent.

    A large part of the argument for the decoupling of Asia relies on burgeoning intra-regional trade, which appears to be growing strongly – though this is not all it appears to be. IMF research shows high volumes of intermediate and capital goods being shipped back and forth between Asian nations, essentially only so they can be assembled into things that can then be shipped to the US and Europe for consumption.

    Nonetheless, Asian domestic consumption, another cornerstone of the decoupling theory, is seen as "holding up reasonably well in most emerging Asian economies, supported by strong momentum, steady consumer and business confidence, and healthy household and bank balance sheets."

    When the IMF or Wayne Swan point out how "coupled" Asia is to the US, they're primarily talking about statistical correlations in the financial sector, not the real economy.

    Asian markets have indeed tumbled in line with Wall Street and, as Asian stock price-to-earning ratios return to more realistic levels, there will be a slowing in investment growth. This is most pronounced in India – the IMF has revised its forecast for 2008 from an rise of 13.1 per cent to just 7.6 per cent (at the same time, it has revised its forecast for consumption growth in India upward from 5.7 per cent to 7.4 per cent).

    But while the IMF tweaks its figures up or down as further data come to hand, it’s easy to overlook the overwhelming fact that these are still growth stories – growing private consumption, growing GDP, even growing, if slowing, investment – all while the US economy is contracting.

    Meanwhile, the IMF's harping on how closely Asia is coupled to the US seems, at best, to be missing the point.


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