First normalise monetary policy, then adjust fiscal policy, it suggests
NOW that Asia is squarely on a V-shaped recovery path, it should be withdrawing the policy stimulus put in place during the recession, said the Asian Development Bank (ADB).
The Manila-based institution has upgraded its growth forecasts for the region in its latest twice- yearly Asian Economic Monitor, which it launched at the Singapore Marriott Hotel yesterday.
Growth in 'emerging East Asia', which the ADB defines as Asean, South Korea, China, Taiwan and Hong Kong, is now expected to come in at 8.1 per cent, up from the 7.7 per cent projected in April.
'The stronger-than-anticipated export rebound and much-improved consumer confidence have helped the region's economies recover faster than we expected,' said ADB's chief economist Jong-Wha Lee.
With the improved economic outlook, 'it is now time for the region to unwind the policy stimulus', said the ADB.
It recommended that the monetary policy be normalised first - that is, interest rates and exchange rates be raised to 'normal' pre-crisis levels - before the fiscal policy is adjusted.
This will allow economies in the region to continue using targeted fiscal measures to support domestic demand until it is clear that the private sector can take over, said Mr Srinivasa Madhur, senior director of ADB's office of regional economic integration, which produced the Monitor.
Economies such as Singapore, South Korea, Malaysia, Taiwan and Thailand have already begun tightening their monetary policy in recent months by raising their interest rates or, in Singapore's case, letting the exchange rate appreciate.
As DBS head of economics and currency research David Carbon said, the tightening of policy in the fast-growing region is 'bread and butter economics'.
'Output in Asia is now back far above pre-crisis levels. Inflation is nearly back to average and it is sure to rise above average in the coming few months,' he said in a recent report. 'But interest rates remain far below average. Central banks have much work to do.'
Economies that have already begun to slowly unwind stimulus should continue in that direction, and those that have not may need to start soon, said the ADB.
China, however, should accelerate policy normalisation by letting the currency appreciate, among other things, it added.
Still, the pace of unwinding the stimulus must factor in risks facing the overall global economy, Mr Madhur said.
These include a marked increase in capital flows, which can be destabilising, and uncertainty about the sustainability of recovery in the United States and Europe.
On the bright side, the threat of steeply rising inflation has yet to materialise in Asia, despite rapid growth.
This is partly due to the time lag between a rise in output and the subsequent spike in hiring and wage costs, said Mr Madhur.
'Inflation is still manageable but don't be complacent because that condition may not last long as labour markets tighten,' he added.
'Although we don't see huge problems of inflationary pressures as of now, the signs are there... (It's) time to unwind now rather than wait for that day to arrive and then get panicky.'
Source: Straits Times, 21 Jul 2010