Stock markets are overreacting to the worldwide economic slowdown and should be more concerned about mounting financial risks in Asia, according to an analysis released by The Conference Board.
While the U.S. and other economies are heading for a slowdown, a recession is not in the cards. "Far more worrying are financial risks that are growing outside the U.S. and outside traditional equity and bond markets - especially in Asia," warns Gail D. Fosler, Executive Vice President and Chief Economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board's global business network.
In the early 1990s, investment in Asia exploded and total investment rose to match the level of savings. But after the Asian financial crisis, investment fell back to 29 percent of GDP and has risen since then - but savings have risen faster, making Asia once again a major lender. Says Fosler: "These imbalances are made worse when there are huge inflows of foreign capital to private markets. Many of these countries have high savings rates because they have less developed financial markets and institutions."
"There is a substantial and growing excess of savings that is misallocated globally and giving rise to huge waves of liquidity that may misprice risk in the short term and create credit and/or market crises," says Fosler. "Global trade imbalances are heavily influenced by financial motivations which arise in part because of the inability of emerging markets to allocate domestic savings efficiently."
Businesses and governments in many Asian countries need to hold precautionary savings in foreign currencies, like the dollar and the euro. This gives them a natural hedge since these currencies are increasingly required for trade and low-cost financing.
Why Global Trade Imbalances Will Continue
Says Fosler: "The present course seems to dictate that these imbalances will continue to expand and, at best, begin to be shared between the U.S. and Europe."
Trade in goods and services across borders has risen sharply - not just in dollar terms, but as a share of Gross Domestic Product. Global trade was about 12 percent of global GDP in the 1960s, rising to about 20 percent in the 1970s and to about 25 percent today. But global capital flows have virtually exploded, with the lion's share of the expansion in private capital flows. In the 1970s, global capital flows were equal to about 5 percent of global GDP. By 2000, they had grown to 28 percent. So global capital flows that were once much smaller than global trade flows actually became larger and may one day dwarf them.
The expansion in global capital flows is remarkably balanced by geographic region. Every global region at least doubled private capital flows over the past 20 years, with the exception of the Middle East, where private capital flows 20 years ago were already high. In 1970, global savings totaled less than $700 billion. Since then, global savings have risen to almost $7 trillion. The rapid income growth in emerging market countries, many of which traditionally have high savings rates, has spawned huge new sources of global savings.
Excluding U.S. and European savings, savings in the rest of the world tripled between the early 1970s and early 1980s, and then more than doubled again between 1985 and 1995. Asia has typically run a savings rate of about 30 percent and been a large net lender to the rest of the world.
