|
Sars might ease deflation { May 9 2003 } Original Source Link: (May no longer be active)
http://www.reuters.com/newsArticle.jhtml;jsessionid=SUOLYHVKJZZHYCRBAEZSFEY?type=reutersEdge&storyID=2713341http://www.reuters.com/newsArticle.jhtml;jsessionid=SUOLYHVKJZZHYCRBAEZSFEY?type=reutersEdge&storyID=2713341
SARS Paradox: Virus Might Cure Deflation Fears
Fri May 9, 2003 10:41 AM ET
By Alan Wheatley, Asian Economics Correspondent
SINGAPORE (Reuters) - Call it the SARS paradox: while the killer disease is set to depress prices across Asia, it could have the opposite effect globally and so help allay growing fears of deflation in the United States and Europe.
Anecdotal evidence suggests the spread of SARS has so far had little impact on the Asian factories that form the critical links in global supply chains.
But as long as the outbreak goes unchecked in China, the point of final assembly for a plethora of manufactured goods, economists see a risk of output disruptions that would push up prices worldwide of everything from toys to televisions.
'If you really do have low-cost China no longer being a major supplier, even for a temporary period, that may actually have a positive ripple effect on inflation in the rest of the world,' said William Lee, the International Monetary Fund's representative in Hong Kong.
Apart from Motorola Inc's closure of its main office in Beijing, the impact of Severe Acute Respiratory Syndrome on multinational corporations has been conspicuous by its absence.
Economists worry, though, that exports will start tailing off if foreign engineers are unable to travel to China to rejig production lines. A failure to prevent SARS spreading to the Chinese countryside is another fear.
'Disruption to China-based factories could cripple some Western companies and trigger surging prices for certain products, particularly PCs and related IT equipment,' Richard Martin, managing director of International Market Assessment Asia, said in a report.
AVOIDING JAPAN'S FATE
Such an effect, though not the cause, would probably be welcomed in industrial countries worried about following Japan into a deflationary spiral.
China's role as price-setter for a growing array of goods in a world glutted with supply is sure to be on the agenda when Chinese President Hu Jintao attends a forum on development issues with the Group of Eight leading nations in France next month.
European Central Bank President Wim Duisenberg on Thursday vowed to guard against the risk of deflation, two days after the U.S. Federal Reserve fretted about the dangers of an 'unwelcome substantial fall in inflation.'
SARS was not detected until mid-March, so it is too early to deliver a verdict on the disease's economic impact on Asia.
Beyond decimated sectors such as tourism and restaurants, though, data paint a picture of resilience. Singapore's purchasing managers' index, for instance, edged up in April even though it remained below the no-growth threshold.
Still, economists remain cautious.
'The signal we got from the Singapore PMI, though encouraging, is simply not enough to relieve the global anxiety over the potential for the production chain to be disrupted,' said David Fernandez of JP Morgan Chase.
Whereas a supply-side SARS shock remains only a possibility, the impact on Asian demand and thus on inflation is all too real.
Deutsche Bank expects consumer prices in China to rise 0.6 percent in 2003 assuming SARS is contained in three months. But an outbreak lasting nine months would result in deflation of 0.4 percent.
Prior to SARS, Citigroup economist Joe Lo expected prices in Hong Kong to fall 1.5 percent this year. His forecast now is two percent.
Although the tumbling U.S. dollar should push up prices because of Hong Kong's peg to the U.S. currency, Lo said demand is so weak that retailers cannot pass on higher costs.
'The SARS shock will extend and deepen Hong Kong's deflation trend,' Lo said.
|
|
