Grounds for caution amid rapid growth

ONE of the big surprises in the global economic picture for 2010 so far is how strongly Asian economies have performed, despite lacklustre growth in the G-3 economies of the United States, Europe and Japan.

The International Monetary Fund (IMF) has just raised its 2010 growth forecast for Asia to 7.75 per cent, about 0.5 percentage point higher than it projected as recently as April. Private sector forecasts for the Singapore economy have also been progressively raised as the year has unfolded, with many economists now predicting double-digit growth. The Ministry of Trade and Industry might also raise the official growth forecast following the release of advance GDP estimates for the second quarter.

While all of this may sound like good news, there are reasons to be circumspect. As the IMF has cautioned, Asia is vulnerable to some significant downside risks.

The region's torrid growth in 2010 so far has been driven both by exports and private domestic demand. Exports have been powered partly by the inventory rebuilding in the advanced economies following the recession of 2008/09, during which inventories were substantially depleted. Private demand has been boosted by massive fiscal stimulus programmes, which were launched across the region, most dramatically in China. However, going forward, both these drivers of growth will be less conspicuous: the inventory restocking process is close to ending, and the impact of fiscal stimulus programmes will also wane from the second half of this year. After that, Asia can no longer rely on temporary growth drivers; it will have to look to traditional sources of growth - namely, demand from the G-3 and, to a lesser extent, sustained domestic consumption.

Unfortunately, neither of these can be taken for granted. While the IMF predicts 3.25 per cent growth for the US economy in 2010, the dismal US unemployment figures suggest that growth will slow in the second half of this year. Ditto for Europe, which is embarking on continent-wide fiscal austerity. There will be negative feedback loops from these developments on Asia's exports. Exports could suffer further as Asian currencies strengthen against the majors, which is very possible, especially if the Chinese yuan continues to rise. While Asian currency appreciation would have positive effects in boosting domestic consumption and helping to contain asset bubbles, in the short term it will lead to some loss of competitiveness.

Rapid growth also entails costs. In the Singapore context, these could include rising wage and business costs, further exacerbated by increases in foreign worker levies.

Thus, despite the glowing growth forecasts, there are grounds for caution in the months ahead. While Asia's economies might be on a roll for now, many of them face both internal and external vulnerabilities. Most importantly, the global economy is nowhere near out of the woods. And as we have learnt in 2008 and 2009, that counts for a lot.

Source: Business Times, 14 Jul 2010