By Mark Tucker

Economics has its fashions, and this season the dominant interest is in how far the economic and financial markets of Asia can escape the worst effects of the present downturn in the West.

This preoccupation with decoupling and the scope for interaction is a relatively recent one. A year ago the world seemed a different and more confident place: the global economy was enjoying the fruits of a long period of strong and stable growth, with low inflation, rising corporate profits and robust financial markets.

Many Western commentators attributed this to sound economic management and the beneficial impact of trade liberalisation. The growing role of Asia as a force in the global economy was recognised, but there was no great readiness to acknowledge the enormous contribution made by developing Asian markets in sustaining either that prosperity, or the momentum.

Intuitively, the globalisation of manufacturing and labour markets had a significant impact in reducing headline rates of inflation and sustaining consumer confidence. Also, the readiness of Asian governments to finance the current account deficits and consumer appetites of Western nations has kept the tills ringing. Both can now be seen to have been taken too readily for granted.

Economists, politicians and commentators have been seduced too easily by the apparent stability of this era. But historians know better than to believe that the cyclical influences that have shaped economic progress since the start of the industrial age - trade, interest rates, investment levels, raw material prices, consumer demand and, above all, expansion and contraction of credit - had suddenly ceased to apply.

We need to be cautious in our acceptance of the concept of “decoupling” as an explanation of economic events, or as a basis for assumptions about how things will work out.

This is in large part because it is a generalisation that glosses over important distinctions - between “real” levels of economic activity and factors driving financial markets; between the scope for changes in economic prospect in the West to reduce growth prospects in Asia and the ability of Asian economic activity to override domestic influences and transform the prospects of the major Western economies; and by grouping together 20 or so national economies with widely different characteristics as a single, homogeneous Asian regional force.

Looking at Asian economic prospects from the perspective of a chief executive with successful operations across the region gives a number of “takes” that owe little to the decoupling concept.

First, in terms of levels of economic activity, a significant reduction in consumer spending in the major economies of the developed world is bound to have a negative impact on economies in Asia that are heavily dependent on manufacturing for export to sustain their expansion.

    But there is another side to this coin. In a number of countries, the authorities have been seriously concerned about overheating, and within limits policymakers may breathe a sigh of relief at a slackening of external demand.

Second, we need to remember that in some instances downturns in Asia will result from their domestic economic conditions and financial market behaviour. They may have their own home-grown excesses taking place in parallel with similar movements in Western markets, without any strong interdependence, or causal links.

Asian financial institutions may have some exposure to US structured credit risks, but there are regional instances of over-extended credit markets. Singapore has enjoyed a very robust residential property cycle: Chinese lending to the commercial property sector has been strong. Excessive credit card lending in Hong Kong, South Korea and Taiwan has made regulators conscious of the retail credit market risk.

Third, we need to ask how far recovery from a downturn in Asian economies and financial markets can provide the impetus for recovery in the West - the “rescue” component of decoupling.

It is possible to envisage some stimulus from inwards investment by Asian, or, indeed, Middle Eastern, investors buying Western commercial assets.

It is also possible that radical realignment of currency values will redress trade imbalances and stimulate domestic manufacturing sectors in the West. However, both of these look like “also-rans” compared with the need for a correction in asset prices - the affordability of housing in the United Kingdom is a specific instance - and restoration of personal balance sheets by reducing short-term indebtedness is a more widespread requirement. Consumer spending and economic confidence are unlikely to show sustained recovery until these corrections have taken place.

Finally, and again looking from the point of view of the chief executive of a group with major interests in Asia, it is essential not to be distracted by the short-term noise of economic cycles and corrections from the long-term trends that make Asia a region with such attractive prospects and such a fantastic place to do business. It was argued in 1997-98 that, in the fledgeling countries, financial crisis would reverse the pace of urbanisation, which goes hand in hand with economic development, and leave them as permanent losers. This did not happen and the number of countries that have achieved economic lift-off now well exceeds those that have not.

For a life insurance group such as Prudential, the favourable demographics, the rising trend of per capita income, the low penetration of institutionalised and efficient savings products, allied with a strong latent readiness to save, are all key indicators of our opportunity.

    We cannot completely discount the potential for short-term instability, but the strong external financial position of many countries is a powerful counter. （Ref. No. : JJ-20090252）