Investing.com — Morgan Stanley analysts say Asia will be more vulnerable to a U.S. recession than in the past, and a resulting slowdown in China will reduce the region's economic buffers.
The firm still sees a soft landing for the U.S. economy as its base case, but a bigger slowdown or even a recession would create headwinds for Asian economies.
MS said the prospect of a recession in the United States in particular would have a “significant negative impact” on growth in Asia, slowing exports generally, a scenario that would also have an impact on business investment in the region.
MS said Japan, South Korea and Taiwan were most vulnerable to a US slowdown, while China and India would be moderately affected. Australia and Indonesia would be least directly affected by the US slowdown.
Asian countries, excluding China, are highly dependent on exports to the United States, and a slowdown in the U.S. economy would likely affect this trend. Technology exports make up a large part of this dependency and could help cushion the slowdown in demand in other sectors.
Although China's dependence on exports to the United States has declined in recent years, it remains relatively high, MS noted.
Interest rate cuts and fiscal easing will help mitigate the impact
If the U.S. economy slows, the Federal Reserve is likely to cut interest rates, and a larger cut would make Asian markets more attractive.
However, any easing in Asia is likely to offset headwinds from the United States and not provide much support.
China in particular is suffering from a long-term deflationary trend and slowing growth, so its presence in effectively offsetting headwinds from the United States is expected to be limited.
“Even if (China) implements meaningful stimulus measures, it will be important to watch whether they follow the same supply-centric policies as before or pivot to boost consumption,” Microsoft analysts wrote in a note.
