Asia leading world recovery - IMF
Asia is leading the recovery of the world economy even though the
region needs to remain attentive to downside risks, the International
Monetary Fund (IMF) said in New Delhi in its presentation of the
Regional Economic Outlook (REO) for Asia and the Pacific.
The IMF also said India is likely to maintain its strong growth
momentum driven by the robust domestic demand.
Higher corporate profitability and favourable financing conditions in
the country will support its private investment while its consumption
growth will also remain strong on the back of better employment
prospects and lower uncertainty.
"One year after the deepest recession in recent history, Asia is
leading the global recovery," IMF's Asia and Pacific Department Director
Anoop Singh told a seminar presentation hosted by Indian Council for
Research on International Economic Relations (ICRIER).
"Key economic indicators are now growing at or above long-term trends
not only in China, but also in emerging Asia's other economies with a
large domestic demand base, like India and Indonesia."
Underpinning Asia's strong performance are two factors, the global
and domestic inventory cycle is likely to boost Asia's industrial
production and exports further for most of 2010 as final demand recovers
in advanced economies.
Although macroeconomic policies may become less accommodative in the
region, private domestic demand is expected to remain robust thanks to
sustained consumer confidence, high asset values, and a return of
capacity utilization to more normal levels. Risks to the baseline
forecasts, however, remain tilted to the downside, the REO cautioned.
They include the still fragile global recovery and Asia's strong
dependence on external demand.
The regional report also noted that a more immediate risk is that
market concerns about sovereign liquidity and solvency in the euro zone
periphery may turn into a potentially contagious sovereign debt crisis.
Key economic indicators are now growing at or above long-term
trends not only in China, but also in emerging Asia’s other
economies. |
While Greece's sovereign debt situation has so far not had a major
impact on flows to the region, "the increase in global risk aversion and
renewed pressures to deleverage could pose particular risks to Asian
corporates and banks" that face relatively higher refinancing needs than
in other regions, the report noted. Asia's relatively strong cyclical
position may also ironically pose near-term risks to the outlook, the
REO said, in particular if brighter growth prospects and widening
interest rate differentials with advanced economies lead to further
capital inflow to the region.
"This could lead to overheating in some economies and increase their
vulnerability to credit and asset price booms with the risk of
subsequent abrupt reversals".
"While asset-price inflation in Asia has "so far been generally
contained," policymakers "will need to be attentive to safeguarding the
macroeconomy and financial system against the buildup of imbalances in
local asset and housing markets," the report warned.
The key near-term challenge for policy makers is, therefore, judging
the appropriate pace for normalizing monetary and fiscal policy, the
report said.
On the monetary policy, policymakers will need to consider: the
degree of monetary accommodation that is still in place; the pace at
which output gaps are closing; and the emergence of inflationary
pressures in a few regional economies, including India.
On the fiscal front, policy is expected to remain accommodative in
most of Asia, despite the planned withdrawal of part of the fiscal
stimulus during the crisis in many regional economies.
As few Asian economies face debt sustainability challenges of the
same order than in many advanced economies outside the region, and given
the still significant downside risks to the outlook, maintaining
targeted fiscal measures would appear to be a relatively affordable form
of risk management.
At the same time, the report stressed, "it is important to ensure
that fiscal policy is expected to move to a more neutral stance over the
medium term," in order to help safeguard fiscal space to deal with
future shocks, as well as provide greater policy credibility and
effectiveness of the current stimulus and reduce negative spillovers
from higher debt in advanced economies-in particular from an increase in
long-term interest rates.
Over the medium term, Asia's main policy challenge will remain to
achieve a rebalancing of growth from external to domestic sources, the
report noted.
Giving a closer look at the issue, Chapter III, entitled "Does Asia
Need Rebalancing?", concluded that rebalancing efforts by Asia toward
domestic demand will require many regional economies to act across a
range of areas.
"Some economies may need to increase consumption, others will need to
increase investment, and many will need to boost productivity in service
sectors," the report said.
"A comprehensive package of measures adopted in the region-including
fiscal measures, reforms in product, labour, and financial markets and
more exchange rate flexibility-will crucially contribute to the
rebalancing of global demand".
"As for India, with demand already well balanced between external and
domestic sources, the country would benefit from financial reform and
fiscal consolidation to catalyze private sector participation in
infrastructure investment and support faster growth, the report noted. |