ADB Forecasts ‘Healthy Rebound’ in Asia

21 April 2010

Developing country economies in Asia will rebound strongly this year and continue to strengthen in 2011, the Asian Development Bank (ADB) predicted in the "Asian Development Outlook 2010" report, its annual examination of trends and forecasts for the region.

Released on 13 April, the report expects "robust growth" of 7.5 percent in developing Asia this year, thanks in large part to the revitalisation of international trade and the implementation of various fiscal and monetary stimulus programmes. The ADB expects the "healthy rebound" to continue in 2011 at nearly the same annual rate of growth, 7.3 percent, decreasing slightly once the stimulus programmes conclude.

In contrast, the economies of the United States, Japan and the Eurozone are expected to grow by an average of only 1.7 percent in 2010 and 2.0 percent in 2011.

The expected growth rates for developing Asia fall below the record level of 9.6 percent experienced in 2007 but are still worthy of note, considering the region's 2009 growth rate of only 5.2 percent. Despite last year's slow growth, developing Asia was the first area to "emerge from the global turmoil," as the report states.

"Today many count upon Asia to help the world economy recover from the recession," said Deputy Director-General of the WTO Harsha V. Singh when opening a presentation of the ADB's report at WTO headquarters on 16 April.

The ADB's report expects investment to "remain strong" and private consumption to "improve." China, India and Indonesia, the three largest economies in Asia, have shown commendable "resilience" in investment and domestic consumption.

The strongest recovery within the region will occur in East Asia, where this year's expected economic growth rate is 8.3 percent, according to the ADB. China, Hong Kong, Taiwan and Mongolia are quickly regaining the economic ground they lost last year.

Upcoming challenges

The report included a section - labelled "the juicy part" by Ann Quon, principal director for the ADB's Department of External Relations - on the challenges facing Asian economies as the financial crisis fades.

An important task will be for Asian economies to continue to grow in the face of global uncertainty. "Now the question is how to shift from the monetary and fiscal policies' support to the robust private sources to sustain growth," said Dr. Jong-Wha Lee, Chief Economist of the ADB, at a press conference held for the report's release. "Asian governments must take the challenge of adjusting monetary, fiscal and exchange rate policies to prepare their economies for the changing environment in the post-crisis period."

The ADB's report encouraged a return to prudence and discipline in fiscal and monetary policy. "Unusually easy monetary policies throughout the region cannot be kept for too long, and there is a need to revert to a normal stance," said Lee. Without tighter monetary policy, inflation rates could become problematically high.

"Inflation pressures are now increasing, but are likely to be manageable in most of the region," Lee added, given proper management of monetary policy. The ADB expects inflation to return to its historical norm of 4 percent during the next two years.

Lee cited further threats to the momentum of the Asian recovery coming from global uncertainty and volatile capital flows.

Outside developing Asia, the rest of the globe may remain mired in recession. The pick-up in demand in major industrial countries has been sluggish, slowing recovery in the rest of the world. If this pattern continues, low levels of international trade will affect economic growth in Asia.

The swift recoveries of many Asian economies and their relatively high interest rates have attracted potentially volatile investment capital flows from other countries. Sudden changes in foreign investment flows could drastically impact the region and lead to macroeconomic uncertainty.

Additionally, the report cited worries that "a sharp increase in international commodity prices, deteriorating fiscal positions and the persistence of global imbalances" could disrupt Asian economic growth.

Recommendations

The ADB report made several recommendations to its member countries. According to Lee, the first suggestion is close coordination between monetary policy and financial regulations in order to better monitor and prevent price bubbles while still focusing on inflation.

An "excessive focus on export competitiveness" in exchange rate policy is inefficient and does not allow shocks to be easily absorbed. The report urges countries to move away from such a policy. "The greater flexibility of the Chinese yuan is in [China's] interest and the global economy's interest," said Lee in response to a question.

Sound fiscal policy to encourage domestic sources of growth ought to be continued in order to "secure adequate fiscal space for the future shocks," said Lee. This will help mitigate uncertainty and rebalance the economy.

The ADB also recommended close policy coordination to help diminish fears of losing export competitiveness. By coordinating exchange rate policies, Asian countries can boost the value of their currencies when necessary without losing export volume.

ICTSD reporting; "Developing Asia's Recovery from Crisis Takes Firm Hold - ADB," ASIAN DEVELOPMENT BANK, 13 April 2010.

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