For anyone who thought the Asian financial crisis already had hit rock bottom, economist Nariman Behravesh has some bad news: It's going to get worse - possibly much, much worse - before it gets better.
Behravesh, chief international economist and research director for Standard & Poor's DRI, told about 70 people at the 1998 Western States Economic Summit in Salt Lake City Monday that they should not expect a quick recovery in Asia.And Western states, which depend on exports to Asia more than their counterparts in other U.S. regions, have yet to feel the real impact of the economic crunch overseas, he said.
"It's a very complicated, very messy situation," Behravesh said. "After (a financial crisis in the) '80s, Latin America had a lost decade. . . . This could be the beginning of Asia's lost decade."
Even if the actual financial meltdown in Asia is just about over, the overall economic downturn there is just beginning, he said. The worst of it will not hit until late 1998 or early 1999, and that is when U.S. companies will take the biggest hits to their exports and earnings.
"This impact is going to worsen, even if the crisis itself doesn't," Behravesh said. "That light at the end of the tunnel is another freight train."
Asia's overall gross domestic product will probably have zero growth in 1998, with slight improvement in 1999. But Behravesh said there is a 20 percent to 25 per-cent chance Asia will slip into the kind of economic depression that hit the United States and the rest of the world in the 1930s.
Most likely to trigger that kind of catastrophe would be a full-fledged Japanese financial melt-down or a Chinese currency devaluation within the next few weeks, Behravesh said.
Japan's GDP is 70 percent of Asia's GDP. To pull out of its funk, Behravesh said, Japan should start a massive program of government spending and fix its banking system. But he questioned whether its leaders have the political will to do either.
"Without Japan's recovery, Asia can't recover," Behravesh said. "You've got Japan pulling out of the region at the time when Asia needs it most."
In the case of China, it is not a matter of if it will devalue but when, he said. If devaluation happens now, it could trigger the worst-case scenario. If the nation waits until next year, other countries may be starting their recoveries, and the effect may not be as drastic.
"By Western standards, the Chinese banking system is insolvent," Behravesh said. "China's economy is in serious trouble."
Asia's floundering has had some initial positive impacts on the U.S. economy, he said. For example, a stronger dollar means lower commodity prices and lower inflation. It also brings lower interest rates, giving people more disposable income.
The U.S. stock market also has seen some benefit, he said. As investors fled Asia, many sought safe haven for their money in the United States and sent its stock and bond markets soaring.
However, Behravesh said, U.S. exports to Asia already are taking a hit, and that will only grow worse later this year. That problem will be reflected in lower corporate earnings.
And he said it is possible that the money flowing to the U.S. stock market as a result of the Asian bubble bursting will build a bubble here, too. Behravesh said he already is concerned that the U.S. market is over-valued by 15 percent to 20 percent and could be headed for a major correction.
In the best case, the Asian problems could result in a one percentage point drop in U.S. GDP growth, he said. Under the worst case, they could push America into a recession.
And the impact may be worst in the Western states, including Utah, because about half of their exports go to Asia, Behravesh said.
"This crisis is very big and getting worse."