US economy on a slowdown, Asian fundamentals strong

New Delhi, Aug 21 (UNI) The US subprime loss has morphed into something bigger as some financing channels of the global economy have shut down with central banks action being limited to adding short-term liquidity after it had warned of excessive risk taking coupled with its need to contain inflation.

According to a Merrill Lynch (ML) survey of the global economy, it says that the short-term picture is cloudy and cannot be resolved without the passage of time and/or central bank action.

The survey says that the global woes will be on higher cost of capital in the US, a more intense balance sheet squeeze, a housing sector still in doldrums and a 2008 US GDP forecast of 1.5 per cent.

Calling it a 'stall speed economy', ML states that it expects Fed to cut rates to 3.75 per cent by next year.

However, the ML survey says that Asia is still relatively resilient as the survey points out that the effect of the subprime issue is financial and not real. Asia's underlying fundamentals remain strong, even in face of US credit crunch and consumer downturn, the survey informs.

'Decoupling' should support Asian demand as the US slows. The survey says credit problems are more likely to affect global borrowers, not a region like Asia with a high savings rates, current account surpluses, and rising foreign exchange reserves.

Asian institutions have been significant investors in the US financial markets, however, exposure to subprime mortgages or corporate credit appear small. The most likely institutional investors are commercial banks and Asian central banks, who invest their large and growing foreign exchange reserves abroad.

The ML survey says that the domestic demand has been strong in countries like India and China for several years. There are signs, ML says, that it began picking up elsewhere in the region in the late 2006. ''Clearly, slower US growth could effect this trend.

However, the Asian consumer is not credit driven. Compared to the US, financial innovation and the use of leverage are much less developed,'' says the ML survey.

This reflects Asia's position as a high savings region, with current account surpluses, rising foreign exchange reserves, low loan-deposit ratios, and low corporate leverage, it added.

The survey also talks about the positive structural forces boosting domestic consumption and investment-the huge increase in export income, high rates of capacity utilisation, and reforms and balance sheet restructuring that have taken place over the past decades.

Also, ML says, despite the volatility of recent weeks, domestic wealth in India and China has been boosted by the big increase in asset prices in recent years. This should translate into higher consumer and investment spending in 2007-08.

ML points out that several countries have boosted exports in nontraditional areas such as services and labour. Ml says India's service sector had been at the forefront with exports of software and business services (such as call centers) accounting for nine per cent of GDP growth over the past three years- a striking figure, says ML, for such a large and domestically-oriented economy.

ML maintains a bullish stance on Asia as it believes the regions fundamentals are strong. ML says it expects a lasting slowdown in the US econmy, led by housing and consumer. ''But the spillover to the real economy in Asia is much less and the positive cyclical and structural forces we see in Asia and the rest of the world will provide some offset.

UNI