By Shamim Adam
May 6 (Bloomberg) -- Asian economies face a “long recovery ahead” from the global slowdown and “forceful” fiscal measures are still needed to lift the region out of the recession quickly, the International Monetary Fund said.
Growth in Asia including Japan, Australia and New Zealand will probably slow to 1.3 percent this year, from 5.1 percent in 2008, the Washington-based lender with 185 member nations said in a report today. The economies may expand 4.3 percent in 2010, even as the recovery is expected to be “tepid,” the fund said.
Economists are raising their estimates for the region’s growth this year amid expectations of a recovery in China and as indicators show production declines may have bottomed. Asian governments have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending.
“The synchronized nature of the global downturn and Asia’s strong reliance on external demand weigh against the prospects of a speedy turnaround of economic activity in the region,” the IMF said. “Despite governments’ efforts to invigorate domestic demand, the prospects of a recovery at this stage hinge critically on a rebound in global activity.”
The IMF last month lowered its world economic growth forecasts and said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The world economy will contract 1.3 percent, it predicts.
‘Swifter and Sharper’
The slowdown, which slashed demand for Asian goods and forced companies to fire hundreds of thousands of workers, has affected the region with “considerable speed and force,” the IMF said. Global trade may contract for the first time since World War II this year, the World Trade Organization predicts, as U.S. and European demand slumps.
“The impact on Asia has been even swifter and sharper than in other regions,” the IMF report said. “For the rest of 2009, the external shock is expected to continue to spill over into private investment and consumption, causing many countries to register negative growth rates.”
The lender forecasts economic contractions in Japan, Australia, New Zealand, Hong Kong, South Korea, Singapore, Taiwan, Malaysia and Thailand this year.
Recent reports have showed the pace of declines in economic activity in Asia may be easing. In South Korea and Japan, industrial production increased in March, while China’s urban fixed-asset investment surged by almost a third the same month.
Stocks Gain
“Even if these nascent trends continue, stabilization is far from recovery,” the IMF said.
The MSCI Asia-Pacific excluding Japan Index has rebounded 20 percent this year amid investor optimism about the region’s economic prospects, after slumping a record 53 percent in 2008. Chinese stocks are the region’s best performers this year, as a 4 trillion yuan ($586 billion) government stimulus package shielded the economy.
Asian central banks and governments must maintain “forceful countercyclical policies” to help the region exit the recession more quickly, the report said. Inflation is not a concern in a majority of Asian economies, allowing central banks to cut interest rates further, it said.
“It will be important to sustain the stimulus injected in 2009 into next year, not least as an insurance policy against risks that have yet to reveal themselves,” the IMF said. “On the monetary policy side, many central banks still have scope to reduce policy rates.”
China, India
China will expand 6.5 percent in 2009, from 9 percent last year, the IMF said. India will grow 4.5 percent this year, down from 7.3 percent in 2008, it predicted.
China’s “aggressive policy response is expected to support domestic demand and maintain growth at rates close to the level authorities consider necessary to generate jobs consistent with social stability,” the IMF said. “India will be particularly affected by the financial shock as the strong investment growth in recent years owed much to favorable credit conditions.”
The so-called newly industrialized economies including Hong Kong, South Korea, Singapore and Taiwan will experience “a long and severe recession,” the lender said. South Korea will rebound faster than the rest as its exports benefit from a weaker currency and as its fiscal stimulus plan spur demand, according to the report.
Domestic Demand
The IMF reiterated an earlier call for Asian governments to implement more policies to increase domestic consumption and shift away from export-led growth because demand for goods from advanced economies is unlikely to recover to pre-crisis levels.
The shift can be achieved through strengthening social safety nets which will reduce precautionary savings, as well as exchange-rate appreciation which will eventually boost demand in domestic markets and increase incomes and spending.
“Households in advanced economies have started repairing their over-leveraged balance sheets as the era of easy credit to finance purchases of consumer durables could well be over,” the IMF said. “In that case, the growth rate of Asian manufacturing could be structurally lower for many years and Asia’s export-led strategy may no longer pay the same dividends as in the past.”
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net.
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