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Asian recession unlikely despite high oil prices

SINGAPORE — Asian economic growth forecasts have been slashed for this year and in 2006 as benchmark oil prices edge towards 70 dollars a barrel, but economists say a recession is unlikely.

Strong growth in key export markets the United States and China should keep Asian economies running smoothly, albeit at a slower pace, they said.

New York light sweet crude briefly hit an all-time high of 68 dollars a barrel on Thursday before retreating to 66.13 dollars the next day on the diminishing threat of Hurricane Katrina in the Gulf of Mexico.

But market observers believe the pullback is only temporary and that it is only a matter of time before prices gush past 70 dollars a barrel after more than doubling since the end of 2003 when prices hovered near 33 dollars.

The surging oil prices have caused a number of multinational financial institutions to revise their growth forecasts for Asia, among them the Asian Development Bank, said ADB economist Cyn Young-Park, without disclosing the new figures.

The ADB in its April report forecast East Asian growth to average 6.7-7.2 per cent in the next two years. Its updated outlook is due to be released on September 8.

“Asian economies, in the face of rising oil prices, are likely to slow down. But we do not expect that this deterioration in growth will be something that will be full-blown and have a recessionary impact,” Cyn told AFP by telephone.

“Generally, Asian economies are stronger (to withstand shocks) now, and we still have a very strong growth engine such as China.”

Milan Brahmbhatt, the World Bank’s lead economist for East Asia and the Pacific, said the bank is also likely to trim its growth forecast made in April, except for China whose growth is tipped to accelerate.

The downward revision is largely a result of higher oil prices and slower export expansion, he told AFP by email.

Growth for Hong Kong, South Korea, Singapore and Taiwan is likely to be at 3.8 per cent this year from the original 4.6 per cent, he said, pointing to the Korean and Taiwanese economies as among the most exposed to costlier oil.

“The main Southeast Asian economies -- Indonesia, Malaysia, the Philippines and Thailand -- are also expected to experience slower 2005-2006 growth than we had expected in April,” he said.

The World Bank is now projecting the four countries to grow at an average 5.0 per cent this year instead of 5.3 per cent. For 2006, these countries are likely to grow at 5.4 per cent instead of 5.6 per cent.

Thailand and the Philippines are expected to suffer more than Indonesia and Malaysia, which are both oil exporters.

But Brahmbhatt stressed the cuts are based on a “relatively benign” scenario of oil prices remaining at current levels this year and pulling back in 2006.

This would mean oil prices averaging around 55 dollars a barrel in 2005 and 50 dollars in 2006.

He warned the impact would be more severe if prices vaulted beyond 70 dollars a barrel.

Andy Xie, chief Asian economist for US investment bank Morgan Stanley, said higher oil import bills have begun taking their toll on the region’s economies.

“The strongest headwind for growth is oil so far,” Xie said in a report. “In the first half of 2005, the Asia Pacific region was paying 1.2 per cent of GDP more for exports than last year.”

Joseph Tan, a Singapore-based economist with Standard Chartered Bank, said high oil prices will impact Asian economies in varying degrees, with Indonesia, Thailand, India, the Philippines and South Korea being more vulnerable.

But he said the impact will be limited due to other factors.

“Asian economies rely heavily on the US economy, which at this stage is rebounding from its own soft patch. This will have a positive effect on growth in Asia and that is helping to support export demand,” Tan told AFP.

A modest rebound in global technology demand is also expected to bolster Asian growth, he added.

Michael Spencer, the chief economist for Asia at Deutsche Bank, said higher oil prices alone will not lead him to adjust his projections for the region.

“The independent impact of oil prices on consumption and investment is not significant. What matters is whether oil price increases dampen US consumption and investment, and that does not yet appear to be the case,” he told AFP.

“Even in Indonesia, Malaysia and Thailand, where oil subsidies have been cut in large discrete adjustments, the data do not show a material impact on demand. Of course, everyone complains, but there’s no hard evidence that demand is really affected.”

Crude futures have broken records this month amid mounting supply worries, while market sentiment has remained bullish due to the fierce global appetite for oil, particularly from China and the United States.

“It’s difficult to look around the global oil markets today and find anything bearish, any factors that might push down prices,” said John Kingston, global director of oil at Platts after on Friday’s price fall.

“But there are plenty of stops along the supply chain with weaknesses: the start of hurricane season, Iraqi production hanging on by a thread, recent problems in Ecuador, no sign of growth in Russian production and continued speculative interest in being ’long’ in this market.”