As outside demand will be low, Asia will have to search for stronger domestic driver of growth
AS THE world climbs out of the deepest recession in recent history, Asia is leading the global recovery. By end-2009, output and exports had returned to pre-crisis levels in most of Asia, including the hardest-hit economies.
In our recently released Asia-Pacific Regional Economic Outlook, we envisage that, on average, Asia will grow by 7 per cent this year and next, buoyed by growth in China, India and other countries (see Figure 1).
While activity in advanced countries remains held back by high unemployment and weak household and bank balance sheets, in Asia the picture is much more encouraging.
Singapore is a case in point. The economy has rebounded strongly from the recession, benefiting from the turnaround in global trade and financial markets as well as forceful counter-cyclical policies.
It is now firmly on a recovery path, although the external environment remains key to near-term prospects. Against this backdrop, monetary, fiscal and macro-prudential policies are appropriately aimed at curbing risks in the goods and asset markets - and exits from the extraordinary policy support of yesteryear are underway.
In the near term, we expect that Asia will continue to lead the global recovery. What underlies this robust growth picture? The recovery of demand in advanced economies, particularly the United States, is expected to fuel a re-stocking of inventories through most of 2010 that will boost Asian production and exports.
And while public stimulus is being phased out in some countries, growth should be sustained by the momentum that has developed in private domestic demand. Private consumption is growing on the basis of high asset values, growing consumer confidence and good labour market prospects, and private investment is being boosted by increases in capacity utilisation to more normal levels.
At the same time, the fragile nature of the global recovery still poses a risk for Asia. The global risks remain tilted to the downside, and a turn for the worse in the outlook for advanced countries or renewed negative shocks in world financial markets would present problems for the recovery in Asia as well as other regions.
For the first time in recent history, Asia is leading a global recovery and contributing an increasing share to global growth (see Figure 2). Also historically unprecedented is the fact that, this time around, Asia's recovery is predominantly being driven by domestic demand.
Finally, capital inflows, which returned only slowly following previous downturns, are now surging into the region. These capital inflows partly reflect the extremely high levels of global liquidity, but are also a testament to Asia's improved resilience and growth prospects.
The strong capital flows do, however, carry risks that will need to be carefully managed. These inflows have the potential to lead to overheating in some economies and to an increase in vulnerability to asset price booms and busts, inflation and macroeconomic volatility.
Asset price inflation in most of Asia has so far been contained, but the increase in excess liquidity in many economies does raise some concerns. We, therefore, welcome the measures that many policymakers are continuing to take to ensure macroeconomic and financial stability against the build-up of imbalances in local asset and housing markets.
Still, more may be needed to be done in the future if the region's bright economic growth prospects and its widening interest rate differentials with advanced economies attract even more capital.
While the right package of measures varies across countries, in many of them it may be appropriate to allow more exchange-rate flexibility, which could forestall short-term inflows and help make financial conditions less accommodative.
Over the medium term, a key policy challenge for Asia will be to make private domestic demand a more prominent engine of growth and to rely less heavily on exports. In advanced countries, the recovery is likely to be sluggish by historical standards and domestic demand is likely to remain below pre-crisis levels for some time to come.
External demand will be smaller and Asia will have to search for a stronger domestic driver of economic growth. Since public stimulus cannot go on forever, that source will have to be private demand which will have to be nurtured through a package of policies, including many measures that are already being taken to strengthen and develop financial sectors, improve and widen social insurance systems and lessen the motivation behind precautionary saving.
Greater exchange-rate flexibility in the region should also be part of this package and would raise household incomes and consumption.
For our part, the International Monetary Fund (IMF) remains closely engaged with the region. Our policy dialogue with the Asian authorities is being deepened through initiatives such as a Regional Advisory Group which draws senior figures from Asia to advise us in our work in the region.
In addition, in July we will hold an important conference in Seoul, in partnership with the Korean government, to bring together senior figures from the region and draw lessons from Asia's success in managing this crisis for the future and for the rest of the world.
The writer is director of the IMF's Asia & Pacific Department
Source: Business Times, 19 May 2010