Citi's outlook for 2008

The bank's head of Asia-Pacific economic and market analysis, Yiping Huang, expects continued growth for the region.
Asia is expected to continue to register above 8% growth over the next two years, with the obvious candidates of China and India leading the pack, says Yiping Huang, CitiÆs head of Asia-Pacific economic and market analysis.

In a press conference on Wednesday, Huang issued his annual economic outlook for the next year. He forecasts only a cyclical slowdown in the coming months, especially in industrial countries, but he says he expects central banks to ease policy, including another 100 basis point rate cut by the Fed.

That said he hedged his bets, and noted that the level of uncertainty around the predictions this year is unusually high. Given the market volatility of the past few months, that was a smart call.

More interestingly, he was keen to debunk some of the theories circulating at the moment. He says that Asia will probably not decouple from the rest of the world.

ôAt the end of the day, weÆre talking more about globalisation these days not regional economies becoming independent,ö says Huang. ôTo argue at this stage that Asia, particularly China, has decoupled is a gross exaggeration.ö

He notes that while intra-regional trade has indeed surged, much of it is trade of intermediate goods. Only about 21% of finished good exports stay within the region, according to Huang. And he noted that during the past month, capital left Asia for quality when US risk rose and then returned to the region when US risk became controlled. This, says Huang, implies that despite the popular argument of decoupling, market participants still view risk in Asia as linked to risk in the US.

However, he adds, Asian economies have become more robust in terms of debt structure, foreign reserves, current accounts, fiscal balances and financial institutions. And they are all in better positions to withstand external shocks.

Another myth Huang made a point of debunking is that China is a major contributor to global inflation. He says that he does not deny that ChinaÆs export prices may rise in the near term, due to higher production costs and a stronger currency. However, he notes, inflation is determined by central banksÆ monetary policies, not by prices of selected imports. He also points out that over the years, when cost pressures have come to bear, China has climbed up the technological ladder to maintain a competitive edge. He reckons the Mainland will continue this trend. And so, if China is able to continue to improve product quality, then it is likely to remain a disinflationary force in the global markets for some time.

Indeed, he argues that barring significant external shocks such as a US recession or major trade wars, ChinaÆs real GDP will probably grow by at least 10% over the next two years. Interestingly, Huang says that while the Olympic Games in Beijing will likely boost sentiment and the countryÆs image, he says that any suggestions about a significant impact on national GDP both before and after the games are probably exaggerated.
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