With exports slumping, it is no surprise that South East Asia's moreopen economies suffered contractions in GDP in the final quarter of2008. However, this cycle is not limited to the changes in expendituredecisions that drive export demand in regions outside SE Asia. Firms andhouseholds within South East Asia are also reacting to the excesscapacity generated by financial market turmoil and declining exportdemand.We find these decisions are already leading to reduced capitalexpenditure in several economies. And we expect more to come as theadjustment to excess capacity gradually works itself out - historicallythis adjustment process has been measured in years rather than months.However, the reduction in excess capacity that will have to take placein coming periods does not necessarily preclude a return to positivereal GDP growth - especially given the domestic and global policyresponse seen and promised. Even so, in coming periods pricing powerwill likely be at a premium in the corporate space and household incomegrowth expectations should be subdued for some time - favouringconsumption of staples rather than luxury goods.
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