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$100 oil prices add to export worries in Asia

Business Materials 12 November 2007 08:21 (UTC +04:00)

Does Asia have more to fear from rising petrol prices as crude oil hurtles towards $100 a barrel than it does from slowing growth in its biggest export market of the US?

In fact, both rising prices and US demand are cause for concern that could ultimately leave Asian central banks with a policy dilemma, economists say.

Rising prices fuelled not only by oil but also by food point to the need for tighter monetary policy to control inflation.

But tighter monetary conditions could crimp domestic spending just when policy makers want to lean on local demand to make up for a slowdown in exports to the US, where a housing downturn is expected to drag on economic activity.

"If we're losing our export driver of growth in Asia and we have to rely on domestic demand, it is going to take some hit from oil," said Bill Belchere, economist at Macquarie Research.

Asian exports to Japan and the US have been crimped this year, but rising demand from China and Europe has helped offset that. Inflation has been benign in most places, barring China and India.

But US crude oil prices are now just two dollars short of the $100-mark, having risen a third since late August.

Such a heady price for fuel could hit Asian pockets just as they are already feeling the impact of soaring prices for bread and meat. Higher credit costs would hit disposable income more.

Worse still, high oil prices mixed with falling house prices could dampen consumer spending in the West and that could hurt Asian exports.

"It squeezes them a little bit, but luckily they are a bit chubby this time around. They can handle it for a while," Belchere said.

He estimates that every $10 rise in the price of oil sets emerging Asia's trade surplus back by some $30-$40 billion - not a major concern for a region with combined annual output of $6 trillion and currency reserves of $2.8 trillion.

But the inflation dynamics are different.

Oil has less than a 20 per cent weighting in most Asian consumer price index baskets, but food accounts for up to 50 per cent. A combination of rising food and fuel prices could cripple consumers and industries.

"We're in a fairly late-cycle expansion, meaning that utilisation rates for manufacturing and labour market rates are rising," said JPMorgan Chase economist Sin Beng Ong. ( Gulf )

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