June 27 (Bloomberg) -- ``The worst is over.'' One hears some variation of this view constantly when traveling around Asia.
It's a comforting one, predicated on the idea that the U.S. economy will avoid the recession that markets have priced in for some time. It's also a view that could be in for some serious revision as the year unfolds, and not in a good way.
The latest sign comes from a Harvard University report. Growing foreclosures and tighter lending standards are creating an environment that ``is shaping up to be the worst in a generation,'' Harvard's Joint Center for Housing Studies said on June 23.
``The slump in housing markets has not yet run its full course,'' said Nicolas Retsinas, director of the center.
The U.S. market seems likely to remain mired in a recession. And as Retsinas pointed out, housing markets historically recover only after an economy contracts and prices fall enough to improve affordability.
That's a bigger problem for Asia than many investors may want to admit.
There's much relief that Asia is holding its ground as the U.S. economy slows and credit-market woes humble Wall Street's biggest names. While asset markets are heading lower from Tokyo to Jakarta and Shanghai to Mumbai, healthy economic growth has confounded the pessimists -- so far.
The knock-on effects are coming, just more stealthily than many expect. Asia is unlikely to get off easy even if the U.S. skirts a recession. The region hasn't decoupled from America as much as some would say.
The worst-case scenario -- a prolonged U.S. decline -- could be devastating, particularly at a time when record oil and food prices are hurting Asian households. Billionaire investor Warren Buffett laid it out in a June 25 Bloomberg interview. He's unsure when the U.S. will recover.
``It's not going to be tomorrow, it's not going to be next month, and it may not even be next year,'' said the chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.
The idea that Asia will continue to display an impressive immunity to U.S. events ignores how dependent China is on the American economy. It also ignores how reliant Asia is on China's 10 percent growth. Slowing U.S. demand will chip away at that country's export-driven expansion exponentially.
China is one of several Asian economies with negative real interest rates. With its annual inflation above the central bank's benchmark lending rate, China would be hard-pressed to stimulate growth with lower borrowing costs or increased government spending.
Monetary quandaries abound in Asia. Bank of Japan officials, for example, are making it clear interest-rate deliberations have become increasingly challenging over the last two months.
``At the time of the June meeting, both downside and upside risks had risen compared with when we met in May,'' BOJ policy board member Seiji Nakamura said yesterday in Asahikawa, Japan.
The credit crisis that began with U.S. subprime loans is just one force crimping U.S. spending. A new Bloomberg/Los Angeles Times survey shows most Americans are feeling the pain from rising gasoline prices and many are tightening their belts. Seven in 10 of those surveyed said higher gas prices have caused them ``financial hardship.''
That may mean less spending on cars, flat-screen televisions, cellular phones, name-brand clothing items and other goods manufactured in Asia. With U.S. consumers accounting for 70 percent of gross domestic product, any pullback would have an outsized impact on global economies. Housing is arguably the key to all of this.
The U.S. will expand 1.4 percent in 2008, the weakest performance since 2001, according to a Bloomberg survey. U.S. growth may be cut by a half to a full percentage point if consumers spend less and save more, according to Deutsche Bank AG economists. For Asia, that is decidedly bad news.
So is Harvard's housing report and Buffett's concern that the U.S. is heading for stagflation. Rising home prices and easy access to credit have been the major drivers of U.S. growth in recent years. If U.S. housing remains weak, Asia's export- dependent economies are particularly vulnerable.
Here, recent comments by Federal Reserve officials are both good and bad for Asia.
The Fed this week left its benchmark rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Further rate cuts seem unlikely, something that could disappoint some investors. The specter of continued rate moves supported optimism about Asia's export markets.
Yet easy Fed policies also cause problems in Asia. Much of the liquidity that U.S. officials create ends up in Asian markets, increasing so-called hot-money flows. That has made it harder for Asian central banks to control money supply and inflation. Taking a longer-term view, an end to Fed rate cuts isn't a bad thing.
The catch is that with Asia's most important customer in trouble, the region's growth outlook is dimming. Here, the U.S. housing market is more of a linchpin than many in Asia think.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)