The slowdown in the U.S. and Europe is affecting Asian economies, which have been reporting increasingly dismal numbers for the past few weeks.

Japan may soon be in a recession. The Ministry of Economy, Trade & Industry reported last week that industrial activity fell 1.9% in the second quarter compared with a year ago, the first such drop since 1998. Elsewhere in Asia, the Taiwanese government announced that second-quarter growth was the lowest in 26 years.

Blasting ahead with gross domestic product growth exceeding 7.5%, "China is the only market keeping its head above water," notes Richard Warburton, a Hong Kong-based consultant for Chemical Market Associates. But even Asia's growth dynamo is showing signs of strain. Salomon Smith Barney Chemicals Analyst Leslie Chow notes that China's textile exports grew only 6% in May, compared with 20 to 30% a year ago. "Asia depends on trade. This is affecting everybody," he says.

Slower U.S. demand for technology products is largely to blame for the Asian slowdown. "There was overinvestment in certain sectors, most notably information technology, in which, to some extent, Asia is producing all the subcomponents for export to the U.S.," says Michael Preiss, senior investment strategist at the private banking unit of Fortis Bank in Hong Kong.

The market for Asian chemicals is one of contrasts, says Yves Boisdron, president of Rhodia's Asian operations. He explains that companies exporting to the U.S. and Europe are particularly hard hit by lower demand. On the other hand, Asian consumer demand--especially in China--remains relatively strong, and this is sustaining sales of food additives and personal care product components. On balance, though, Boisdron says, "it is not a very happy atmosphere."

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