Asia Faces `Downside' Growth Risk, Merrill Lynch Says

By Shamim Adam

Sept. 12 (Bloomberg) -- Asia's economies will grow at a slower-than-expected pace this year and next as demand from the U.S., Europe and Japan weakens and turmoil in global financial markets deepens, according to Merrill Lynch & Co.

The region will expand 7.7 percent this year, from an earlier forecast of 7.9 percent, wrote Merrill analysts in Hong Kong led by Asia-Pacific chief economist T. J. Bond. Growth will ease to 7.3 percent in 2009, lower than a previous prediction of 7.9 percent, the report published yesterday said.

``The backdrop for global demand has deteriorated,'' the economists wrote. ``Asian exports to the U.S. have already slowed significantly, and will probably drop into negative territory. The deterioration in Europe and Japan is the unpleasant new surprise.''

Japan's economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. Manufacturing orders in Germany, Europe's largest economy, fell for an unprecedented eighth straight month in July and Europe's manufacturing and service industries contracted for a third month in August.

Asia's ``growth should remain well above recession levels,'' the Merrill report said. ``However, we now expect it to drop below trend.''

Global Recession

Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.

The U.S. Treasury Department and the Federal Housing Finance Agency last weekend seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies, which make up almost half the U.S. home-loan market.

Financial institutions worldwide have reported $510 billion in losses and writedowns since the beginning of 2007 and the credit market collapse erased $9 trillion from global stocks in the past year.

``The weakness in financial markets has reached levels where it could affect the real economy,'' the Merrill report said. ``The main channel is through the exchange rate: a sharp currency depreciation can feed through rapidly into inflation. Higher interest rates in response tend to slow domestic consumption and investment.''

Stronger Dollar

The U.S. dollar this quarter has strengthened against nine out of ten Asian currencies tracked by Bloomberg.

China's economy will expand 10 percent this year, Merrill predicted, cutting its earlier forecast of 10.4 percent. Growth will be 9.2 percent next year, the economists said, a percentage point less than previously expected.

``We expect China's potential growth rate to slow towards 9 percent for the next three years, gradually declining towards 8 percent by 2013,'' the economists said. ``Domestic consumption and investment, instead of exports, will help sustain China's growth and smooth volatility due to the global slowdown and the real- estate cycle.''

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net