US tagged as top growth risk

BY NORMAN P. AQUINO, BusinessWorld Associate Editor A SLOWING US ECONOMY remains the number one risk to global growth but Asia, including the Philippines, is gradually decoupling itself from the world’s biggest economy. And while financial markets will have to deal with volatility over the next two months as a result of the US’ subprime woes, the Philippines can weather the storm thanks to rising dollar remittances from Filipinos working overseas, HSBC economist Frederic Neumann said Tuesday. "Decoupling doesn’t mean Asia will be entirely unaffected, particularly if the US goes into deep recession. There will be an impact on exports, but it will be less than it used to be," he told chief executives attending an international conference in Makati on Tuesday. Mr. Neumann, who spoke at the 6th International CEO Conference of the Management Association of the Philippines, said a recession in America remains the top threat to the global economy as a declining reliance on the US market would continue over the next five, 10 or even 20 years. Still, a US slowdown would not have much impact on remittances since Filipinos working there belong to noncyclical industries — healthcare and education, for instance — where growth will continue even during a recession. Moreover, the reported 30-40% share of the US in total overseas Filipino worker (OFW) remittances is overstated, he said, because a big chunk passes through remittance centers there. "So I don’t think a US economic slowdown will have such impact on remittances," he said. The World Bank ranks the Philippines fifth globally in terms of remittances from overseas workers. Based on 2004 figures, India received $22 billion; China, $21 billion; Mexico, $18 billion; France, $13 billion; and the Philippines, $10 billion. In 2006, OFW remittances coursed through banks reached a record $12.8 billion. Another $1.2 billion was estimated to have been sent through informal channels. The total is equivalent to 10.9% of Philippine gross domestic product (GDP), a huge resource that offers a lot of opportunities. Economic activity, Mr. Neumann said, was shifting away from the US to Asia and Europe, which is reflected in the weakening dollar. The weaker dollar has made it increasingly harder for Asian economies to complete globally, he said, but Asian countries have to get used to it. The long-term phenomenon will force countries to rely less on exports and more on domestic consumption. "We can see that in the Philippines. Domestic consumption is growing. The driver of economic activity tends to be more local now. The external sector becomes less and less important." It used to be that when the US economy slowed, the dollar would rally because it was viewed as a safe investment haven. The greenback had also gained together with rising US long-term interest rates. This is no longer the case, Mr. Neumann said. Asian exports, meanwhile, continue to perform strongly even as the US manufacturing index has dropped. It also used to be that when the US slowed, commodity prices declined. Now, oil prices are at an all-time high of nearly $85 per barrel, despite slower US growth, as global oil demand continues to pick up. "How can this be? Because the center of economic activity is shifting away from the US towards other nations. The US economy as a share of global GDP has shrunk," Mr. Neumann said. Asian countries, he said, are selling less goods to the US and more to Europe, China and other emerging markets. China, in particular, is figuring more in the global economic equation since it has become a dominant supplier of goods. Countries outside the US, he said, should not view China as a threat but more as an opportunity, especially as the communist country’s household spending should pick up soon. "Private consumption in China is yet to be unleashed. If that’s true, it has important implications for the world economy overall, especially for Asian economies outside China." Mr. Neumann further noted that rising oil prices would have inflationary consequences later on. "If inflation rises, interest rates have to rise over time." But this does not mean economic growth will be depressed. "But it will mean we will see higher interest rates and higher cost of capital over the next several years," he added. Mr. Neumann also said that aside from the threat of a US recession, there is the risk of rising commodity prices as well as a severe adjustment in China. "I would imagine at some point we will see a temporary correction in China as well."