Asian crisis will hurt North America too,
warns Canadian economist
Arthur J Pais in New York
A leading Canadian investment expert has warned that the notion that the Asian economic crisis will not affect North America is being proved wrong.
"The bottom line is that the crisis that started in Asia last year is finally beginning to be felt in the United States," Ranga Chanda said in an interview with The Globe and Mail, Toronto.
Chanda, a much-quoted independent economist and mutual-fund analyst, is president of the research firm, Chand, Carmichael & Company Limited.
"For several months, because of the strong domestic momentum of the American economy, it appeared that the Asian situation would only have a marginal impact on them. Well, that's no longer the case," he said.
He says he has trouble understanding Wall Street's optimism.
"With the world economy being as weak as it is, we certainly expect corporate earnings to remain more or less flat, at least for the next few quarters. What I find remarkable is that several Wall Street analysts are continuing to forecast double-digit growth in corporate profits for next year," he said.
"I don't know what they are smoking, but I can tell you that that is not going to happen."
Indeed, third-quarter numbers show that the growth in corporate earnings in the United States -- which is a key determinant of stock prices -- was negative. "And that is the first negative showing in corporate earnings since 1991 when the US economy was in recession."
"Asia may indeed pull down US economic growth by as much as a full percentage point this year. But, having said that, I don't think Asia by itself will topple the American economy into a recession."
The American consumer will play a bigger role, he said. "And here, the critical indicator to watch for over the next few months will be consumer sentiment. Remember, consumer spending accounts for about two-thirds of the US economy, and if consumer confidence weakens significantly, this will certainly be a major negative factor for US economic growth."
Chanda acknowledged that the American consumer is still satisfied with the economy. For one thing, there is full employment -- the only industrial country to have full employment. Secondly, the incomes of American workers have been rising. "Wages are now rising at just about their fastest pace since the beginning of the decade," he noted.
A slowing US economy will certainly lead to slower growth in Canada, he argued.
"The United States is our largest trading partner and well over 80% of our exports go to that market. But, there are also a number of other domestic factors, including depressed commodity prices, declining corporate profits, and low consumer savings, that are pointing to slower growth for the Canadian economy," he said.
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