Published May 29, 2009

East Asians hardest hit in world crisis

Japan and Germany need an American recovery in order to bounce back


THE impact of Obama's economic policies on the US economy will be felt between the end of 2009 and 2010. To date Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers have succeeded in getting Congress to inject money into US banks and financial institutions. But this can be only the first installment. Voters have held the bankers responsible for their loss of asset worth and the nation's joblessness.

Following the G-20 Summit communique in April, stock markets around the world rose, reflecting expectations of an impending improvement in the global economy. Yet many American economists are still expressing reservations.

China, India, Japan, South Korea and the majority of Southeast Asian countries depend on exports to the US to lift their economies. After the drop-off in US imports they suffered sharp economic declines. Singapore's external (import/ export) trade is 360 per cent of its GDP, the highest in the world; Hong Kong is second, with trade making up 350 per cent of GDP. Premier Wen Jiabao has promised that Beijing will help Hong Kong if necessary.

Malaysia, despite its oil and gas revenues, has had to use budget stimuli in order to stave off negative growth. Asia's exports to the US in the first quarter of 2009 declined by almost 30 per cent year-on-year.

Intraregional Asian trade in goods had increased significantly, largely in intermediate products. The Asian Development Bank estimated that 60 per cent of Asia's total exports were eventually consumed in the US, the EU and Japan. With the decrease in US demand, this trade has dropped precipitately.

Japan and Germany, two of the world's largest economies, are export-dependent on the US. They need an American recovery in order to bounce back. Japan, with its aging and shrinking population and its refusal to allow immigration, cannot be a locomotive in this downturn.

On the other hand, EU governments fear that deficit spending will lead to inflation. German Chancellor Angela Merkel has been firmly against it as a means of stimulating the economy. She believed Germany was safe because it had no housing bubble or structural economic problems. But German banks had invested in toxic American derivatives. Negative GDP growth in Germany will have a cascading effect on other EU countries. Germany's CEOs are now pressing Merkel for a stimulus package.

In late April major US banks showed a first-quarter profit, but many economists doubt this is really a sign of an impending spring. Nevertheless, the mood of many Americans has become a shade more optimistic. And optimism is crucial for a return of consumer confidence.

The US economy will fully turn around when its corporations stop retrenching and begin rehiring workers. Americans will then be less fearful of losing their jobs and will begin spending more freely - but not at pre-subprime-crisis levels. People should feel encouraged by Paul Volcker's end-of-April comments: 'I'm not here to tell you the economy is going to recover very strongly in the short run. I think,' he added, 'there is reason to believe that it should be leveling off, at a low level.' And once American consumers start spending, exports from developing Asian economies will begin to grow again.

On April 24 the world became aware that swine flu had struck Mexico; on May 1 the country shut down. It looked likely a pandemic would devastate economies worldwide. Yet on May 4 Mexico unexpectedly declared it was winning the battle against swine flu and would allow cafes, museums and libraries to reopen.

This virus has infected more than 8,829 people in 40 countries. The World Health Organization has warned that a pandemic is still possible. Director-General Dr Margaret Chan said, 'Flu viruses are very unpredictable, very deceptive. . . One must not give H1N1 the opportunity to mix with other viruses.' If that happened it would be a medical and economic disaster.

The Asian Development Bank has said that if the virus were to take hold in the region it could set back any economic recovery. Nomura International ranked Singapore as the country most vulnerable to economic damage from a pandemic because of its high population density and compact size, exposure to international trade and position as an aviation and maritime hub. The second most vulnerable is Hong Kong, and the least are the US, Japan, Norway, France and Germany.

The author is Minister Mentor of Singapore. This article is sourced from 'Forbes Asia', issue dated June 8, 2009