WHILE the European Union grapples with the risk of a contagious sovereign debt crisis and Japan with deflation, most Asian economies are growing at a rate where their very success is threatening them with problems of possible overheating and inflation, according to the International Monetary Fund.
For the first time, Asia's contribution to global economic recovery has outstripped that of other regions, the IMF said in its latest Regional Economic Outlook for Asia and the Pacific.
The stark contrast between Asia's performance (led by China, India and Indonesia but excluding Japan) is underlined by looming fiscal crises in Europe and also by high unemployment, weak household balance sheets and anaemic bank credit in advanced economies, the IMF noted.
'Asia's faster recovery relative to the rest of the world seems to mark a break from the past. Although Asia's GDP trend growth has exceeded that of advanced economies over the last three decades, this is the first time that Asia's contribution to a global recovery has outstripped that of other regions.
'In past recessions Asia's recovery generally was driven by exports, this time it has also been reinforced by resilient domestic demand, particularly household consumption.'
Asia is expected to continue leading the global recovery, the IMF said. The global and domestic inventory cycle is likely to boost Asia's industrial production and exports further for most of 2010 as demand finally recovers in advanced economies.
In many Asian economies, 'private domestic demand appears to have sufficient momentum to sustain near-term growth, as high asset values, strong consumer confidence, and a gradual improvement in employment conditions are expected to sustain consumption.'
Meanwhile, net capital inflows to the region have surged, the IMF said. This is 'a reflection of extremely high levels of global liquidity but also a testament to Asia's improved resilience and economic framework.'
But it warned that 'Asia's relatively strong cyclical position may pose near-term risks, particularly if bright growth prospects and widening interest rate differentials with advanced economies lead to further capital inflows to the region.
'These could lead to overheating in some economies and increase their vulnerability to a strong upswing in the credit and asset price cycles, with the propensity for a subsequent abrupt reversal.
'Although asset-price inflation in Asia has so far been generally contained, the increase in excess liquidity in many regional economies over the course of 2009 raises concerns' especially in asset and housing markets.'
The IMF report added that over the medium term, Asia's main policy challenge will be to ensure that private domestic demand becomes a more prominent engine of growth.
Source: Business Times, 30 Apr 2010