BANGKOK -- Asia, the world's last redoubt of fast economic growth, may be closer to a downturn than people think.For the U.S. and other developed countries, investors typically define a recession as two consecutive quarters of economic contraction. For Asia, though, a sharp downturn occurs when region-wide annual growth slows to between 5% and 6%. For China, which has had multiple years of double-digit growth, the rate at which a downturn could effectively begin is likely even higher, possibly up to 8%.
In part, that is because Asian nations' populations are often younger than those in the U.S. and Europe, and in many countries the labor force is growing more quickly, as millions of rural residents move to cities in search of opportunity. As a result, most Asian economies, excluding Japan, need to expand more rapidly than other parts of the world -- often at annual rates of 5% or more -- so they can absorb all those new workers. If they don't, unemployment will climb and poverty levels will follow.
The heavy reliance on exports that has driven Asia's powerful growth is turning now into its worst enemy. Many companies in Asia have based investment decisions on the assumption that recent stellar growth rates will continue. If they don't, profits will disappoint, new capacity won't be needed and costs will have to be cut -- just as in an American recession. As consumer spending in the U.S. and Europe evaporates, Asian manufacturing titans that thrive on sales to the rest of the world are starting to feel the pain and are scaling down capital spending.
Many economists believe Asia is already teetering on the brink of a downturn. At investment bank UBS, forecasters are now predicting gross domestic product growth of around 6% in Asia excluding Japan next year. Other economists, including forecasters at Standard Chartered Bank, are pegging China's growth below 8% in 2009, which also could put it in notable pullback territory.
Such rates might look "pretty good" to the U.S., but they're potentially trouble for Asia, says Duncan Wooldridge, chief Asia economist for UBS. The slowdown "is going to be much more palpable" in Asia next year, he says, in large part because of weaker demand for Asian export goods in other parts of the world.
On the whole, the region -- site of an economic meltdown a decade ago -- today has limited exposure to the debt causing havoc in the financial systems of the U.S. and Europe. But in the past 10 years, Asia has doubled down with its bet on exports as an economic engine -- at the expense of developing a domestic consumer market that many economists believe will ensure more sustainable growth.
Exports accounted for 47% of gross domestic product in Asia, excluding Japan, in 2007. That is a jump of 11 percentage points from the comparable figure in 1998, during the last economic crisis in the region, notes Stephen Roach, Morgan Stanley's Asia chairman. Asia "may not be levered in the strict sense of reliance on global credit," says Mr. Roach. "But it's certainly levered to the global economy."
A slowdown in Asia wouldn't necessarily feel the same as one in the West. Asian consumers tend to save far more than Americans during boom times and thus might not find themselves as deeply stretched, financially, if their incomes fall.
Many Asian companies -- which are often state-run, family-owned or heavily unionized, especially in India -- are less inclined to lay off workers in hard times than those in the U.S., where many businesses slash staff at the earliest sign of trouble. In India, for instance, ailing carrier Jet Airways recently rescinded 1,900 layoffs after pressure from local political officials.
That hardly means a slowdown wouldn't hurt. Many Asian governments offer less in the way of social safety nets than do those in the West, and with poverty levels already comparatively high, the risk of social unrest is probably greater in Asia than in more developed regions.
In Thailand, many consumers already think they're in a recession, despite growth that's expected to come in at about 4.5% this year. Consumer confidence has fallen and layoffs are starting to appear in selected industries, including tourism. A local newspaper offered suggestions on how readers could survive a slowdown, including advising people to cook their own meals and cut back on international travel. Another Thai paper included a special section devoted to layoffs.
In China, scores of factories have already closed amid weak orders from the U.S. and Europe, resulting in thousands of lost jobs. So far, most of those workers appear to be getting new jobs elsewhere, but that could change rapidly. Chinese growth slowed to 9% in the most recent quarter compared with a year earlier, from a recent peak of 11.9% in 2007. Standard Chartered Bank's forecast calls for growth of 7.9% next year.
Of course, Asia remains better off than many other parts of the world, and in some ways its economies still look quite strong. Consumer spending -- especially on low-cost items like noodles -- remains robust. Falling oil prices could help spur spending, as consumers save money on their fuel bills.
"If you look at a lot of these Asian economies, they're still very solid domestically," says Sherman Chan, an economist at Moody's Economy.com in Sydney. After several boom years, some Asian nations including China have more firepower to boost public spending to keep growth rolling. Despite its latest problems, "China still has the greatest potential" among major economies, she says, and therefore will likely continue to attract lots of investment.
The region also remains far better off than in the dark days of the 1997-98 Asian financial crisis, when several Asian economies collapsed amid a wave of defaults and falling currencies.
