Asia prepares for economic blowback from Europe

HONG KONG -- As Europe teeters on the brink of recession, Asian nations are bracing for a sharp slowdown in exports to the troubled region.

"Europe is going into a recession, if not already in one," says Frederic Neumann, co-head of Asian Economic Research for HSBC. "The damage is probably done even if we get some miraculous solution (to Europe's debt crisis) in the next couple of weeks."

The European Union's growth nearly came to a standstill in the third quarter, with the economy expanding only 0.2%, excluding debt-ridden Italy and Greece. Because the region is a key export market for Asian nations, Europe's economic deterioration is serious matter for Asian exporters.

Small Asian nations with open economies will be most exposed. Exports to the E.U. made up 16% of Hong Kong's economy last year, nearly 13% of Singapore's and 8% of Malaysia's, according to Credit Suisse. Meanwhile, China's exports to the E.U. — its largest market — made up 4.7% of the country's gross domestic product in 2010.

Asia is already struggling with weakening exports. In October, Chinese exports grew at their weakest level in eight months, stymied by the European debt crisis. Singapore's exports dropped the most in 30 months in October.

Meanwhile, international air freight carried on Asia Pacific airlines fell 6.6% in September from the year before, according to the International Air Transport Association. Air freight is seen as a leading indicator of the health of global trade because, based on value, 35% of goods traded are transported by plane. Asia Pacific airlines carry the largest volume of air freight in the world because the region is a manufacturing hub.

As Europe's debt crisis lingers, the risk is also rising that European banks could sharply pull back on lending in Asia, including loans used to finance the shipment of goods to other countries. If Asian manufacturers can't get access to trade financing, it would affect their ability to export their goods around the world, says Alaistair Chan, an economist at Moody's Analytics in Sydney.

European banks are starting to pull back on these loans in Singapore, but local banks have stepped in to provide the credit, says Hak Bin Chua, an economist at Bank of America Merrill Lynch. Overall, European banks have lent a record of nearly $1.5 trillion to Asian banks and big businesses, about three times as much as U.S. banks, according to HSBC. As European banks aggressively withdraw capital, Asia could experience a "mild recession" as consumer confidence falls along with consumption, Neumann says.

The impact on Asian economies "really depends on how fast it happens and whether there are other players who will step in to fill the shoes," Chua says. "Deleveraging may not be disruptive if it's spread out over a period of time."

For now, Asian manufacturers are preparing for the worst.

Dennis Yau, director-general of the Hong Kong Federation of Industries, a trade group for Chinese manufacturers, says that members have already received 10% to 20% fewer orders this year than last year, amid the European debt crisis and the U.S.' loss of its top credit rating.

But Europe's downturn could hurt next year's orders, as well, if weak consumer confidence drags down retail sales during the holidays.

"If there's inventory build-up, and Christmas sales are not good, then we can expect a (further) slowdown" in orders for 2012, says Yau.