Prolonged Asian Drag Unlikely

Asian stocks have declined broadly, but it would take a far bigger downturn in the U.S. economy than currently forecast from the housing market bust to derail Asia's generally strong economic outlook this year and in 2008, economists and analysts contend.

There is no denying that the short-term market pain was felt far and wide from the sell-off in New York. However, China's white-hot stock markets in Shanghai and Shenzhen were mixed and largely unaffected by the turmoil in global equity markets. In some Asian emerging markets such as South Korea, where stock prices have shot up more than 30% this year, investors may have been looking for a reason to sell.

Nor does it look like the U.S. is in immediate danger of falling into recession. On July 18, U.S. Federal Reserve Chairman Ben Bernanke in testimony to the House of Representatives' Financial Services Committee disclosed that the Fed was slightly lowering its forecast for 2007 growth from what it said back in February. The "central tendency" is for the economy to expand 2.25% to 2.5% from the fourth quarter of 2006 through the fourth quarter of 2007, he said. That's down from a forecast of 2.5% to 3% in February. He said the Fed was lowering its 2008 forecast by a quarter-point, to 2.5% to 2.75%.

Standard & Poor's Chief Economist David Wyss expects gross domestic product growth of 2.5% for the second half of the year and 2.1% for the full year and improving into 2008. He also calculates that the housing decline has clipped about one percentage point of growth from the GDP for the U.S. this year and doesn't expect housing prices to bottom out until the spring of 2008.

Those numbers aren't spectacular. Yet they suggest the odds of a U.S.-led downturn of Asian economies are pretty low.

If the U.S. downturn exceeded expectations or the American economy fell into a recession, which is viewed as unlikely now, regional economies such as Singapore, Hong Kong, Thailand and Taiwan would be most vulnerable given relatively weak consumer demand and heavy reliance on exports, according to Lehman Brothers.

China's sizzling economy, in contrast, likely would experience only minor pain. The mainland expanded at 11.9% in the second quarter, and most economists have upgraded their full-year 2007 forecasts to 11%-plus in recent weeks.