Economic growth in emerging Asia is forecast to decline to 7% this year from 7.5% in 2005, as export demand eases in line with a slowing of the U.S. economy, says Fitch Ratings. Europe and Japan should help pick up the slack, however.

“Notwithstanding ongoing regional integration with China, growth in Asia remains highly leveraged to external demand, and particularly the U.S. consumer, whom we believe to be overstretched,” said James McCormack, senior director and head of Asia Sovereigns. McCormack was speaking at the Asian launch of Fitch’s Sovereign Hot Spots conference in Singapore, which addresses key sovereign developments in Asia, Europe and the U.S..

Fitch also indicated that Asia’s political backdrop had recently become less favourable for growth, with worrying developments in the Philippines, Thailand and Taiwan. “Those sovereigns in the midst of political turmoil also have the weakest growth rates in emerging Asia, and further downward revisions to the growth forecast may be necessary,” McCormack added. He went on to assess whether, after numerous upgrades in recent years, emerging Asian sovereign ratings now fully reflected the region’s strong external liquidity position. “For several sovereigns, it is probable that continued foreign exchange reserve accumulation would not necessarily be viewed as supporting further upward rating momentum,” said McCormack.

On the global economy, Fitch said its expected U.S. slowdown should be offset to some degree by a recovery in the Euro Area and Japan. In stark contrast to relatively recent history, economic prospects in Japan were among the most certain in the G7. “Consumption growth is running at 2% supported by a bottoming out of real estate prices and declining unemployment, while business investment is growing at around 7% as Japanese companies no longer need to devote cash flows to balance sheet adjustment,” said Brian Coulton, senior director and head of global economics and Western Europe.

Coulton added that optimism amongst businesses and consumers in the Euro area was rising and prospects for an acceleration in capital spending in Germany had grown thanks to impressive corporate restructuring efforts in recent years. These positives go some way towards moderating one of the key risks facing the world economy this year and next, which is the possibility of a sharper than expected reduction in U.S. household spending, along with renewed increases in oil prices.

Also, Coulton noted that emerging markets have been enjoying exceptionally favourable international borrowing conditions thanks to record narrow spreads and low global real interest rates. This was supported to some extent by the fundamentals which have driven emerging market sovereign credit ratings to new highs in 2005. But he added that this was also reflective of the strong global appetite for risk, which could, in an environment of ongoing and widespread global monetary tightening, rapidly unwind.

Speaking about eastern Europe, Edward Parker, head of emerging Europe Sovereigns, said robust GDP growth and real convergence of living standards with western Europe, supported by large FDI inflows, rising export market share and strong economic and democratic institutions, has been driving a rapid pace of credit rating upgrades in New Europe in recent years. “Nevertheless, even in such a favourable emerging market climate serious policy mistakes can still have negative repercussions for creditworthiness – as demonstrated by Fitch’s downgrade of Hungary in December,” warned Parker. He added that some sovereigns in the region like Turkey that are running very large current account deficits look relatively exposed to a potential tightening in global liquidity.