Stock markets, instead of worrying about worldwide economic slowdown, should focus on mounting financial risks in Asia, an analysis by a leading business research organisation has said.
While the US and other economies are heading for a slowdown, a recession is not in the cards, Gail D Fosler, executive vice president and chief economist of The Conference Board, a non-profit organisation which conducts research, convenes conferences and makes forecasts on business trends has said.
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 per cent of GDP and has risen since then but savings have risen faster, making Asia once again a major lender, it said.
"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, Fosler said.
"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."
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, the analysis said.
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.
The present course seems to dictate that these imbalances will continue to expand and, at best, begin to be shared between the US and Europe, Fosler said.
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 per cent of global GDP in the 1960s, rising to about 20 per cent in the 1970s and to about 25 per cent 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 per cent of global GDP. By 2000, they had grown to 28 per cent. 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.
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