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Asia slows as weak North Atlantic economies damage export markets

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Australia’s key Asian trading partners are feeling the effects of softening external demand caused by Europe’s contraction and the United States’ tepid recovery according to an EFIC report. The report on World Risk Developments delves into economic problem areas and risks and considers the impact on Australia’s biggest export market, Asia. According to EFIC senior economist, Dougal Crawford,  Asian countries other than Japan grew by around 5 ½ percent year on year in the June quarter, compared to 7 ½ percent in 2011. "Slowing exports are one factor behind the GDP slowdown, but it also reflects slowing domestic demand in many Asian economies caused by tighter policy, weak confidence or falling investment," he said. "If Asia’s growth continues to slow, the direct effect on Australian exports could be noticeable as non-Japan Asia accounts for over 50 percent of Australia’s exports," he added. The figures aren’t all bad however, Indonesia’s economy continues to power along growing 6.4 percent thanks to a strong domestic investment and consumption. This strong domestic activity is a real contrast to the domestic softness in countries such as China and India, however Indonesia’s strong growth has obscured rising external vulnerabilities and the country’s challenging investment climate. Crawford says Indonesia’s widening trade and current account deficit means that after years of surpluses it is becoming more reliant on foreign capital to maintain external stability. Changes to Indonesia’s trade and investment policies could temper investor enthusiasm and slow foreign direct investment. "This could exacerbate the country’s current account deficit and put more pressure on the already weak rupiah," Crawford said. EFIC senior economist, Benjamin Ford notes that two of Latin America’s largest economies, Brazil and Argentina are struggling. In Argentina, tighter foreign exchange restrictions are making the country’s economic woes worse. "Industrial production fell 4.7 percent year-on-year in June, the biggest decline since January 2009,"  he said. "At the same time, inflation remains high,  private estimates put it at 24 percent a year. And despite the imposition of currency and import restrictions, the country continues to record current account deficits," he added. For the world’s six-largest economy, Brazil’s growth has also slowed sharply in recent quarters. According to Ford, much of this slowdown can be attributed to softness in China, however it may also reflect inadequacies on the economy’s supply side. "A combination of infrastructure deficiencies, an expensive and underqualified labour force, and regulatory red tape have raised the costs of doing business and discouraged companies from launching expansion plans," he said.

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