RBS/McCafferty

Recession likely to hit Asia

Jim McCafferty from RBS explains why Asia is not immune to deteriorating economic conditions in the West and which industries in Asia will bear the brunt.

Expectations of a global recession are increasing as economic indicators continue to deteriorate across the developed world. Asia’s impressive recovery from the last financial crisis has not immunised it to the problems, though specialists are still debating the likely extent of the contagion.

“If the US and Europe go [further] into recession, there is a good chance Asia will slip into recession as well,” said Jim McCafferty, product manager from the Asia equity research team at Royal Bank of Scotland (RBS), in an interview with FinanceAsia.

There are some optimists who suggest China might grow fast enough to offset declines in Europe and the US. That is a daunting challenge. The EU and the US together account for 40% of the world’s total GDP, while China represents only 8%.

“There is no way that China can make up for the loss in the EU and the US,” said McCafferty.

The extent of the problems in Europe, in particular, have caused alarm elsewhere in the world and led political leaders worldwide to express concern about how the situation will play out.

David Cameron has expressed concern that Europe isn't doing enough (AFP)

“The eurozone countries must act swiftly to resolve the crisis; they must implement what they have agreed; they must demonstrate they have political will to do what is necessary to ensure the stability of the system,” said British prime minister David Cameron in Ottawa recently, while asking for European leaders to resolve the sovereign debt crisis.

RBS this week released an Asia bear-case forecast that assumed global GDP growth would drop to 1% in 2012, as opposed to the World Bank’s estimate of 4%. RBS’s estimate is built on the premise that Asia and other key emerging markets will maintain relatively low debt levels, better funded governments, higher levels of reserves and stronger growth.

The three sectors most vulnerable to a global slowdown, according to RBS, are semiconductors in Korea, transportation in China and the information-technology sector Asia-wide. In its bear-case scenario, RBS estimates that the earnings of the three sectors will decline by more than 100%, which is to say that profitable firms will become loss-making.

Utilities in Hong Kong and pharmaceuticals in India are more resilient to economic downturns due to domestic demand, said McCafferty. “People are probably going to spend as much on electricity or stay in more to watch television during recession and therefore their earnings will not decline at all,” he said.

RBS forecasts that even in a bear-case China, India and Thailand will be able to continue to grow at 8%, 6.2% and 3%, respectively, compared to the current consensus of 9%, 7.4% and 3.7%. Hong Kong, Korea and Singapore will grow at less than half of the World Bank’s current estimates of 5%, 4.2% and 5% respectively.

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