Exports, an important driver for many Asian economies, getting affected

The gloom battering the United States and European economies is increasingly dragging down Asia, the world’s global growth engine.

South Korea sought to aid its economy on Thursday with an unexpected interest rate cut, and the odds of a similar move in Australia rose after figures showed a weaker-than-expected job market.

In Japan, the central bank trimmed its outlook for growth. China, which dominates the region, was releasing data on Friday that will show a further slowdown in its giant economy.

Combined, the events crystallise the sense that the Asia-Pacific region is increasingly vulnerable to economic chills elsewhere.

“We are worried about Asia,” said Rob Subbaraman, an economist at Nomura in Hong Kong. “The slowdown so far has been moderate, but there is a real sense that Asia is teetering, that it could reach a tipping point where the slowdown accelerates and companies really start to cut down on capital expenditures and hiring. We’re not there yet, but we are edging closer to that point.”

Reduced demand

The Asian Development Bank echoed that sentiment on Thursday, when it lowered its 2012 forecast for economic growth in developing Asian countries to 6.6 per cent from 6.9 per cent. That group includes India and Thailand. For next year, the bank now projects 7.1 per cent growth, rather than the 7.3 per cent it had forecast in April.

“Slower growth in the U.S. and euro area reduced demand for the region’s exports,” the bank said in a report. “Worries over the economic strength of important developing economies have also emerged recently.”

Over the last five years, hypercompetitive Asia has withstood with relative health the United States financial crisis and then the European debt crisis.

So far, the weakness across the region is far less pronounced than after the collapse of Lehman Brothers in 2008. The question for many policy makers, economists and businesses is whether it will remain that way.

The drawn-out debt problems and austerity measures in Europe and the lethargic pace of growth in the U.S. have affected Asia and many other emerging-market economies directly by undermining demand for exports. Asia, and particularly China, is the world’s factory, and exports remain an important driver for many Asian economies.

On the policy front, central bankers and officials also appear increasingly concerned about the slowing growth and have begun to follow the West with efforts to bolster it.

In South Korea, the central bank lowered its key base rate on Thursday to three per cent from 3.25 per cent. It was the first cut by the bank in more than three years and surprised economists, most of whom had expected the bank to keep interest rates unchanged.

The Bank of Korea cited the global environment for its move. Some economic indicators in the U.S. “have shown signs of deteriorating, and the sluggishness of economic activities in the euro area” has deepened, the central bank said in a statement.

“Growth in emerging market countries as well has continued to slow,” it said, adding that the uncertainty surrounding the euro zone fiscal crisis and economic slumps in major countries presented “downside risks.”

Elsewhere in the region, the Japanese central bank left its key interest rate unchanged at the already low level of 0.1 per cent on Thursday, but in a regular review of its economic forecast, it trimmed its outlook for the year ending next March to a growth rate of 2.2 per cent, from an earlier projection of 2.3 per cent.

“There is still a lot of uncertainty about the fiscal and structural reforms that Europe needs,” Masaaki Shirakawa, the central bank governor, said, according to Reuters. “Europe remains the risk factor that we have to watch out for the most.”

In Australia, employment fell by 27,000 in June, and the unemployment rate crept up to 5.2 per cent from 5.1 per cent in May. That is a low rate compared with that in the U.S. and Europe, but the unexpectedly weak outcome raised the likelihood that the central bank might lower interest rates again in coming months.

Like the rest of the region, Australia is heavily reliant on demand from China, whose cooling growth has added to the economic drag from elsewhere and undermined investor sentiment around the globe. — New York Times News Service

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