|China's tallest building - - Shanghai's World Financial Center
The slowdown that began in the US is going global. It now appears that economies in much of the developed world are slipping towards significantly slower growth, if not outright technical recession, according to Morgan Stanley's latest forecast, which cuts global growth forecasts for both 2008 and 2009, to 4 per cent and 3.5 per cent - each 0.1% lower than in July. The impact of the slowdown is also being seen in Asia.
The IMF generally defines a global recession as growth in world gross domestic product of 2.5% or less but in its April 2008 World Economic Outlook, it said growth of 3% or less would be enough to be considered a recession - if for example, high growth in an emerging market such as China, halved to 5%-6%, the impact would be very significant.
"In a number of companies we have looked at, profit margins are contracting at least by half,"said KY Tang, chairman of the Asia-based private equity firm Affinity Equity Partners at the Super Return Asia conference in Hong Kong today .
Rising raw material prices that can't be passed on will take their toll on Asian firms, Tang said.
"The bigger problem is the US economic slowdown," he added
However, it was also claimed that the US slowdown may be shorter than expected and private equity investors should start searching for bargains after valuations tumbled this year.
``I just don't see a long, protracted recession,'' Mark Mobius, executive chairman of Templeton Asset Management Ltd, which manages about $40 billion in emerging market stocks, told the conference.
``There is an opportunity to buy low right now and sell high in the next cycle,'' he said.
Mobius added that private equity investors with a five-year investment horizon should watch out for bargains, even in export- oriented industries, because world trade is still increasing. The economies of emerging countries including China, India and Russia should withstand the financial-market turmoil because they have resources to boost domestic spending, he said.
An extensive analysis of China's economy, in the Financial Times today, says that with Wall Street in tatters and Europe’s and Japan’s economies faltering, many investors are beginning to ask if China too might stumble badly. After five turbo-charged years of accelerating growth, the Chinese economy is clearly slowing.
The FT says the growing anxiety about China reflects the conflicting signals emanating from the economy. Take exports, one of the bedrocks of China’s recent expansion, which have increased at more than 20 per cent a year. Given the US downturn, economists had been expecting a slide in exports this year. Yet these have continued to grow strongly, expanding 22 per cent in the first eight months of the year.
One explanation is that Chinese companies have continued to find new markets for their products in other booming developing economies. Yet some economists believe this is only delaying the inevitable. In particular, there is growing evidence of a sharp contraction in Europe, China’s biggest market, which could start to hurt Chinese exports. “This could be the calm before the storm,” says Stephen Green, an economist at Standard Chartered in Shanghai.
Morgan Stanley says its annual forecasts mask considerable near-term weakness: In the US,
New Zealand, it expects a few quarters of essentially no growth. In its view, the slowdown abroad still doesn’t portend a global recession, but the risks have clearly shifted to the downside.
MS says that the continued tightening of global financial conditions − including the response to higher inflation by many emerging-market and developed-economy central banks − has been a major factor behind the global slowdown, and that this tightening won’t reverse soon. As a result, the slowdown likely will persist into 2009, will probably be somewhat deeper than many hope, and recovery will probably be tepid when it emerges later next year.
Morgan Stanley:The Slowdown Goes Global