Inflation is Asia's greatest concern: Merrill

May 15, 2008

Inflation is Asia's greatest concern: Merrill

US recession is less of a threat as the European Union is this region's largest trading partner

By Grace Ng

THE United States economy may be heading south, but Asia should be more concerned about global consumer prices heading north.

That was the view of several economists from US financial giant Merrill Lynch who spoke at a Singapore conference for the investment bank's clients yesterday.

The US is already in a recession, but the greatest concern for Asia is inflation rather than the impact of crumbling American consumer demand on the region's growth, they said.

The recession started late last year and could well resemble the worst slump since the Great Depression of the 1930s, Mr David Rosenberg, the chief North American economist for Merrill Lynch, warned.

Despite this gloomy outlook for the world's largest economy, however, Asia's growth is not likely to be as badly hit, said Mr Timothy Bond, Merrill Lynch's chief Asia economist.

The region's growth is not as strongly linked to the US economy as it is to the European Union, which is Asia's largest trading partner, he explained.

Instead, the biggest bugbear for Asia is inflation, particularly rising food and energy prices, he told the audience at the four-day conference at the Ritz-Carlton Millenia hotel.

Mr Bond and Mr Rosenberg were among a team of experts from Merrill Lynch who gave their views on the global economy.

Merrill Lynch vice-chairman William McDonough said that as liquidity begins to creep back into the financial markets, 'we are seeing the beginning of the end of the sub-prime crisis'.

Mr Rosenberg said key factors, such as unemployment and industrial production, all peaked in the fourth quarter of last year. This indicated that the US recession had already started several months ago.

He added that the deep-seated problems in the US housing sector and sagging consumer demand signalled a rough ride for the economy ahead.

Mr Bond noted during a panel discussion on the outlook for Asian economies and markets that the 'key macro risk for Asia' was not a sharp drop in economic growth, but inflationary pressure, which was unlikely to abate soon. Rocketing prices of food and energy may lead to social instability, he said.

Adding to the pressure are subsidies given by Asian governments to support some commodities, which are increasingly eating into the countries' budget surpluses, the panellists said.

Indeed, perhaps the 'most pressing issue that the world faces is spiralling inflation', said Mr Lim Hng Kiang, Singapore's Minister of Trade and Industry, in his keynote speech.

'With increasing food prices and high oil prices, mitigating the impact of strong inflationary pressures will remain a key priority for many Asian governments.'

Mr Lim also noted that 'a significant proportion of Asian exports is finally consumed in the US', so the US recession will have an impact on Asia, but 'the Asian growth story is still strong'.

He urged Asian countries to forge closer ties with each other and with other non-Asian countries.

graceng@sph.com.sg


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NORTH OR SOUTH?

Mr Rosenberg says the latest data shows the US in a recession that could resemble the 1930s Great Depression, but Mr McDonough says the sub-prime crisis' end is at hand as liquidity creeps back into financial markets.



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