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Asia is calibrating a soft landing

Publication Date : 10-10-2012

 

The International Monetary Fund (IMF) has lowered 2012-13 growth forecasts for Asia, cutting its April forecasts by 0.5 percentage point on both years to 5.5 per cent and 5.75 per cent respectively.

Overall, growth in the Asean-5 (Indonesia, Malaysia, the Philippines, Thailand and Vietnam) is projected to accelerate slightly to 5.75 per cent in 2013, up from about 5.5 per cent in 2012. The Thai economy in particular is expected to expand 5.6 per cent this year thanks to post-flood reconstruction, before rising to 6 per cent next year.

Though the growth rate is above the average global forecast of 3.3 per cent and 3.6 per cent in light of the euro area crisis and US "fiscal cliff", the IMF reckoned the near- and medium-term outlooks were less buoyant.

This view reflects weaker anticipated external demand resulting from the tepid growth prospects in major advanced economies and a downshift in China's and India's growth prospects, with a return to double-digit growth in China's gross domestic product unlikely given the policy objectives laid out in Beijing's 12th Five-Year Plan.

"Weaker external demand is the main factor underpinning generally modestly weaker growth in the Asean-5 economies in 2012. The main exception is Thailand, where growth has bounced back sharply, led by reconstruction and investment after the devastating floods in October 2011," the IMF said in the latest "World Economic Outlook" (WEO) launched yesterday in Tokyo ahead of the IMF-World Bank annual meetings.

GDP growth in China is projected to be about 7.75 per cent this year and then to strengthen to 8.25 per cent in 2013 as domestic demand growth, especially investment growth, picks up with the policy easing now under way.

Growth in India is projected to average 5-6 per cent in 2012-13, more than 1 percentage point lower than in the April WEO.

In Japan, growth is expected to reach almost 2.25 per cent in 2012. Much of the recent strength is attributable to reconstruction activity and some rebound in manufacturing activity in the first half of the year after the supply shocks associated with the March 2011 earthquake and tsunami and the Thai floods late last year.

The effects of these factors will fade, however, and GDP growth is projected to moderate to 1.25 per cent in 2013.

"The balance of risks to the near-term growth outlook is tilted to the downside, reflecting external and, to a lesser extent in the near term, internal risks to the region," the IMF said.

In the short term, a further escalation of the euro-area crisis and failure to address the US fiscal cliff are the main external risks for the region. If these risks were to materialise, Asia's open, trade-oriented economies would be faced with lower external demand and other spillovers, for example, on confidence, and growth could be substantially lower.

However, emerging Asia, like other emerging markets, has become |more integrated with global financial markets.

With increased exposure, volatility in global capital markets also can have larger effects, including through-effects on exchange rates as illustrated by safe-haven effects and the recent appreciation of the yen.

Among internal risks to the region, lower-than-expected growth in emerging Asia in the medium term is a key risk.

The housing boom and similar temporary factors in the major advanced economies may have contributed to the recent strong growth performance in the region. China experienced booms of its own in residential real estate and investment, which accelerated during 2009-10 subsequent to macroeconomic policy stimulus actions taken in response to the global financial crisis.

Strong credit growth has supported demand across emerging-market economies more broadly, including in Asia, but cannot continue at its recent pace without creating large financial stability risks, the report said.

"In the event of simultaneous lower potential growth in emerging Asia and in other regions, the impact on growth would be sizeable in Asia, as would be the outward spillovers on commodity exporters.

"A related risk is that the recent surge in investment in China could be reversed and result in a sharper-than-expected investment slowdown in the future. Such a shock would strongly affect economies in the highly interlinked Asian supply chain - for example, Korea, Malaysia, Taiwan and Thailand - including indirectly through the large effects on other major manufacturing exporters, especially Germany and Japan."

The IMF urged policy-makers to strike the right balance between managing external and internal risks and orchestrating a soft landing.

External risks have been more pressing, and the recent shift towards monetary easing across much of the region seems appropriate for most economies, given decelerating inflation in both advanced and emerging Asia.

The IMF also took the view that some economies - Asean-5, mainland China and South Korea - still had fiscal space to allow automatic stabilisers, should risks materialise.

Structural fiscal-policy reform is needed in a number of economies in the region. In a number of Asian economies - including mainland China, South Korea, Malaysia, Singapore and Thailand - current-account positions are stronger and currencies are weaker than they would be with a more desirable set of policies.

Against the risks of deteriorating credit quality while growth is slowing, the report said, policy-makers in many Asian economies are advised to guard against financial-stability risks arising from recent rapid credit growth, including by closely monitoring balance-sheet health and funding conditions in the banking and shadow banking systems. In the event of global or local liquidity shortages, central banks should stand ready to backstop liquidity.

 

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