STRATEGY
Asia's Silver Lining
February 21, 2008
Christopher Bjorke, AFP

Worldwide growth is projected at around 3%, while China and India see most robust growth.

Developed markets are stumbling into 2008, but Asia and other emerging markets may be the silver lining on a gloomy year.

Economists and firms have modest expectations for the coming year's economic conditions. While there are a number of large question marks that could affect 2008-how far the price of oil will rise or how low the dollar will sink-the general outlook calls for modest growth in the West and healthy growth in the developing world.

"A substantial global slowdown, led by a possible recession in the United States and trouble in the Chinese economy is clearly a risk," wrote Michael Mussa, senior fellow with the Peterson Institute for International Economics in a recent paper. "The more likely outcome for 2008, however, is moderately slower global growth, in the neighborhood of 4%."

The World Bank also forecast restrained growth for the coming year. Its projection of 3.3% is down from 3.6% in 2007 and 3.9% in 2006.

In its Global Economic Prospects 2008 report, the Bank noted that "global markets have entered a phase of heightened uncertainty" following the troubles in mortgage-backed securities in the United States.

Developing prospects

Despite the increased uncertainty in equity markets, commodity prices and exchange rates, the outlook for the developing world's strongest performers is still good, according to the World Bank's report.

"Notwithstanding the increased volatility, the impact on developing countries has been relatively minor to date," according to the report. "Risk premiums have escalated, but remain relatively low in a historic context, and capital inflows remain plentiful, although bank lending has dropped off. Aggregate growth in developing countries continues to be strong, reflecting improved fundamentals in many countries, sizable revenues from commodity exports and continued access to international finance at moderately higher cost."

As expected, China's economy is expected to stay at the head of the pack, with projected growth of 10.8%, down somewhat from its 11.3% growth over the past year, but still stronger than any major economy. The other developing giant, India, is expected to grow at a rate of 8.4%, according to the World Bank.

"Because developing economies have been less affected by the fallout from the subprime crisis than high-income economies, the anticipated slowdown of growth in 2008 should be less pronounced," according to the Bank's report. "Gains among developing countries are projected to slow from 7.4% in 2007 to 7.1% in 2008."

However, according to Mussa, China's continued double-digit growth cannot be maintained long and demands some economic or political adjustment.

"Inflation has been accelerating in China. Rising food prices had a lot to do with this, but the inevitable pressures from continued very rapid growth are also an important part of the story," Mussa wrote. "The fact is that it is very difficult to maintain monetary control when the country is being flooded with gigantic inflows of foreign exchange reserves that are the consequence of resisting currency appreciation."

Continuing investment

Despite less-than-desirable conditions, companies still expect that they will expand, and will be more likely to invest in research, acquisitions and equipment, according to the McKinsey Quarterly.

Responding to the developing world's relative immunity to the slowdown in North America and Europe, executives are looking forward to more hiring and investment there.

"The proportion of companies planning to raise their recruitment and training investments soars to 54% in the Asia-Pacific and 62% in developing markets," according to McKinsey, which also found the outlook for new hires to be strongest in the Asia-Pacific region.

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