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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (48981)	8/30/2005 6:38:44 AM
From: IQBAL LATIF	Respond to of 50167

A Price to Pay Asia will suffer if soaring energy costs dent U.S. consumer spending BY STEPHEN ROACH We are in the midst of the first oil shock in the modern era of globalization. In today's U.S.-centric world, that spells unusual vulnerability. If higher oil prices take a toll on the over-extended American consumer, nations that rely on exports to the U.S. as major sources of growth will be hurt. That puts Asia right in the crosshairs of the energy shock of 2005. The risk is mounting of a sharp global slowdown—and possibly a recession—sparked by rising oil prices. U.S. consumer spending is likely to slow markedly if oil prices just stay at about $60 a barrel. This is true for several reasons. First, U.S. households have precious little flexibility in their budgets. They have drawn their personal average savings rate down to zero—far below the 9.5% average during the two oil shocks of the 1970s and the 7% rate during the shock just prior to the Gulf War in 1991. Today, the only backstop for most consumers is the transitory wealth created by America's increasingly precarious housing bubble. Second, just prior to the two oil-price spikes of the '70s, discretionary spending of U.S. households had become excessive—setting the stage for America's most severe consumer-led recessions. A similar overhang is evident today: spending for consumer durables and residential construction has averaged 14.3% of America's GDP over the past year. That's virtually identical to levels reached just before the energy-shock-induced consumption collapses of the '70s. With real (i.e. inflation-adjusted) oil prices having more than tripled since the last recession ended in late 2001, a pullback by the heretofore unflappable American consumer is a distinct possibility that would spell trouble for the rest of the world. Particularly worrisome is the possibility of a double whammy for the world's fastest growing region, non-Japan Asia. This economic bloc is likely to be hit especially hard by the combined impacts of its inefficient energy consumption technology and its excess dependence on the American consumer. China is the most obvious case in point. Its oil consumption per unit of GDP was double that of the developed-world average in 2004. China, like many Asian countries, tends to subsidize the price of retail energy products. While that means the blow of higher oil prices is softened for Chinese consumers, a heavy toll is taken on the government's finances. Moreover, about a third of China's total exports go to the U.S. That means one of China's largest and most dynamic sectors is very much a levered play on the staying power of the American consumer. That's a tough place to be for any economy during an energy shock—even China's. The rest of Asia may not be in much better shape. Still lacking in support from domestic demand, most other Asian economies have become tightly integrated into a Chinese-centered manufacturing supply chain. To the extent that China's exports to the U.S. slow as American consumers are shaken by surging energy bills, production adjustments will ripple through Korea, Taiwan, Singapore, and Malaysia. That's yet another manifestation of the interdependencies of globalization. Japan and India may fare a little better. Japan has seen an improvement recently in domestic demand, which—if sustained— would cushion any shortfall in exports. Japan also benefits from the extraordinary progress it has made in improving its energy efficiency. Since 1973, Japan's oil intensity ratio—a measure of the amount of oil consumed as a proportion of economic output—has fallen by 83%, well in excess of the 50% decline experienced by the U.S. over the same period. Nevertheless, with China now Japan's largest export market, any weakening in Chinese economic growth traceable to the energy shock could do real damage to the nascent recovery in the Japanese economy. For India, it's a different story— less of a China connection and more a tale of inefficient use and pricing of energy. India, like China, uses energy only half as efficiently as the developed world. Like China, India heavily subsidizes its domestic pricing structure of retail energy products, meaning that rising energy costs will adversely effect its already strained fiscal position. Consequently, while Japan and India are somewhat less exposed to soaring energy prices than other Asian economies, they can hardly be expected to emerge unscathed. For the most part, globalization is a blessing for the world economy. But for a world that relies too much on U.S. consumption, it faces grave risk if that growth engine gets derailed. Such is the case with the energy shock of 2005. If the over-extended American consumer gets hit—as I suspect will happen—Asia could be in serious trouble. Stephen Roach is chief economist and director of global economic analysis at Morgan Stanley TIM BOYLE / GETTY IMAGES America’s appetite for Asian exports has been a huge boon. Will it last?