S. Korea Crisis Continues Ripple Effect

By ART PINE

Dec. 13, 1997 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

When the Asian financial turmoil burst into full force a few months ago, U.S. economists were reassuring: The American economy, they predicted, would hardly even feel a draft.

Now, with South Korea teetering on the brink of bankruptcy and Japan unable to bail itself out of its troubles, forecasters are going back to their drawing boards and returning with a decidedly more pessimistic view.

While most still bet that the U.S. economy will avoid a serious slump, they are forecasting significantly slower economic growth than they did just a month ago--and even contemplating a possible recession in 1999.

“If everything goes on track, you can still make the case that the U.S. will be OK,” says Alan K. Stoga, analyst at Zemi Investments. But, he warns, “this is very much a moving target.”

Two reasons explain the increased pessimism:

First, the Asian financial problem has proved far more widespread--and deeper--than initially expected, dashing earlier hopes that the difficulty would be contained to one or two countries that could rebound quickly.

As the situation in South Korea is demonstrating, restoring confidence in the markets is going to take some stringent measures that are likely to prevent any real recovery for a least two or three years.

Second, economists are just beginning to take full account of the aftershocks and so-called ripple effects that are likely to hit both the Asian countries and the U.S. economy.

Some big U.S. corporations with large operations in Asia, such as IBM and Coca-Cola, are already trimming expectations for 1998 profits. Stock prices of high-technology firms are falling. And U.S. consumers are growing wary.

If that continues, and the U.S. stock market begins to slide, it could force businesses and consumers alike to cut back their spending and investment, trimming economic growth here more sharply.

Most of the preliminary assessments of the crisis’ impact were broad calculations based on presumptions: Trade is a relatively small part of the U.S. economy, and the portion involving Asia is smaller still.

But that did not include the possible impact on corporate profits and stock prices, or the battering that Asian countries would undergo in the financial markets as they moved toward restructuring their economies.

The South Korean won, for example, has lost more than 25% of its value in the last few days alone, as the foreign exchange markets drove down its value in the face of fears that the Seoul government would run out of cash.

As a result, economists anticipating a more substantial impact from the Asian turmoil are changing their forecasts to show slower economic growth in the United States than they previously predicted for 1998.

David M. Jones, economist at Aubrey G. Lanston & Co., one of the first to recognize the full implications of the Asian turmoil, is now forecasting a growth rate of 1.5% to 1.75% for 1998, down from 2.75%.

He also is considering the possibility that the U.S. could suffer a mild recession in 1999. “Before the Asian crisis, I thought the odds were 10%,” he says. “Now I put them at triple that.”

Jones is not alone. Randell Moore, who compiles Blue Chip Economic Indicators, a publication containing predictions from 50 leading economists, says most analysts have continued to trim their forecasts for U.S. growth.

“The consensus in early December was for a 2.5% growth rate, but we expect to see that move in January,” he said. “I can only imagine additional reductions because of the continued deterioration in Korea.”

Indeed, there are some early signs that the retrenchment in Asia is beginning to cut into the economy’s momentum here.

Retail sales began to sag in November, according to the latest figures. Corporate profits are less ebullient. And a University of Michigan survey made public this week shows Americans once more worried about job losses.

Moreover, while analysts were figuring on a falloff in U.S. exports to Asia, they are now pondering the impact of an expected new push by the Asian economies to sell more goods in the United States.

Although importers such as Pier 1 Imports and Sears, Roebuck & Co. may do quite well in the coming year, firms such as the major U.S. auto makers will be facing stiff competition. Analysts expect more factories to move abroad.

To be sure, some slowdown in the growth rate may be just what the doctor ordered. Policymakers have been worried that the U.S. economy is overheating and may require additional credit-tightening to avert renewed inflation.

Lynn Reaser, economist for Barnett Bank in Jacksonville, Fla., said the expected “hit” from Asia is almost certain to ease some of that pressure, and may even prompt the Federal Reserve Board to lower interest rates.

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South Korea’s Slide

Stocks have plummeted as investors fled South Korea’s teetering economy, and the benchmark Kospi index Friday hit the lowest level since April 1987.

Friday: $350.68

Sources: AP, Reuters