Asia Must Continue Stimulus as Economies Rebound, IMF Says

By Jacob Greber

Oct. 29 (Bloomberg) -- Asian economies are “rebounding fast” from the global crisis, helped by fiscal support that the region’s governments must maintain due to sluggish world export demand, the International Monetary Fund said.

Growth in Asia including Japan, Australia and New Zealand will probably accelerate to 5.8 percent next year from 2.8 percent this year, “well below” the 6.8 percent average over the past decade, the Washington-based lender said today.

Asian governments have pumped more than $950 billion into their economies by cutting taxes, distributing cash and boosting spending after the global credit crunch cut world demand for the region’s exports from cars to flat-panel televisions. A rebound in shipments may be slow as consumer spending in the U.S. and Europe is “likely to remain weak for some time,” the fund said.

“Consequently, Asian countries will likely need to maintain policy support for some time,” the IMF said in its regional economic outlook published today.

Asia’s biggest customers, the Group of Seven economies, are forecast by the IMF to expand just 1.25 percent in 2010 as households and businesses in the U.S. and Europe remain “hobbled by the legacy of the crisis.”

The region’s leaders will need to manage a balancing act by supporting Asian economies “until it is clear that the recovery is sufficiently robust and self-sustaining” without stoking inflation or “concerns about fiscal sustainability,” the report said.

Striking Balance

“Striking the right balance will be difficult,” the IMF said. “Policy makers will need to assess the state of private demand and the extent to which it can substitute for a withdrawal of public-sector demand.”

Evidence is mounting that Asia’s economies are strengthening, prompting central bankers to signal they may soon begin raising rates in coming months, following the lead of policy makers in Australia, Norway and Israel.

China, the world’s third-biggest economy, expanded 8.9 percent in the third quarter, a report showed last week, stoking speculation government officials may be preparing to reduce monetary stimulus. Indian central bank Governor Duvvuri Subbarao said two days ago “it may be appropriate to sequence the ‘exit’ in a calibrated way” from record monetary stimulus.

Reserve Bank of Australia Governor Glenn Stevens this month became the first Group of 20 policy maker to increase borrowing costs since the height of the global recession after his nation’s economy expanded 1 percent in the first half of the year amid a surge in household spending.

Japanese Manufacturers

South Korea’s economy expanded 2.9 percent in the third quarter, the fastest pace in seven years, and Japan’s manufacturers increased production in September for a seventh month, recent reports showed.

“Asia is rebounding fast from the depths of the global crisis,” the IMF said. “The rebound in economic activity has been fastest in the export-dependent Asian economies that were hit most severely at the end of 2008.”

The IMF raised its forecast this month for world economic growth in 2010 as more than $2 trillion in stimulus packages and demand in Asia pull the world economy out its worst recession since World War II. The global economy will expand 3.1 percent, more than a July forecast of 2.5 percent, the fund said Oct. 1.

The lender forecasts China will lead the region, expanding 8.5 percent this year and 9 percent in 2010. India’s gross domestic product will gain 5.4 percent and 6.5 percent respectively, the report said.

Australian Economy

Japan’s economy will emerge from this year’s recession, when GDP will fall 5.4 percent, to expand 1.7 percent in 2010. Australian GDP will gain 0.7 percent this year and 2 percent in 2010, and New Zealand’s economy will expand 2.2 percent after shrinking 2.2 percent this year.

The so-called newly industrialized economies including Hong Kong, South Korea, Singapore and Taiwan will expand between 3.5 percent and 4.3 percent in 2010, after shrinking this year, the fund predicts, helped by a rebound in consumer confidence and “continued buoyancy in exports.”

A key challenge facing the region’s leaders “will be to devise a way to return to sustained, rapid growth in a new global environment of softer G-7 demand,” the IMF said.

“In this ‘new world,’ Asia’s longer-term growth prospects may be determined by its ability to recalibrate the drivers of growth to allow domestic sources to play a more dynamic role.”

The region will also need to be “willing to live with smaller current account surpluses and more flexible exchange rate management.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net