Millennium Post

A vortex of global uncertainties

For the first time since the great recession of 2008-2009 and continuing financial turmoils since in the developed world, dynamic Asia seems to have entered a phase of generalised slowdown, with its major engines, China and India, losing the growth momentum of the past decade. The global outlook uncertainties have also, to some extent, thrown into relief vulnerabilities within BRICS, the strong inter-regional grouping which has been viewed as the future driving force of the world economy.

The highly stressed banking system and recession in eurozone - the epicentre of sovereign debt crisis - and the weakening of US economy in the current year so far, from manufacturing to consumer spending, and facing the grim prospect of a 'fiscal cliff' - a combination of expiring tax cuts and further budgetary tightening - at the start of 2013, have effectively drawn Asia into the vortex of global uncertainties.

A slew of economic data from EU, USA and Asia in July raised doubts over prospects of a revival during the latter half of the year and forced central banks around the world - EU, Brazil, China, Korea and other Asian economies - to reduce key lending rates, and growth projections for most economies have been revised down for 2012 and 2013. Barring China, which has fiscal space, countries have relied on monetary policy for rescue efforts.

As a result of global crisis, unemployment in developed economies has assumed grim proportions with millions of jobs already lost over four years in USA and EU. Latest estimates of unemployment are 8.25 per cent in USA and 11.1 per cent in eurozone and this, according to Organisation for Economic Co-operation and Development (OECD), has left in all around 48 million people out of work across those regions.

Monetary policy has been stretched to the utmost in USA but recovery remains stalled with sharp cuts in essential federal investments in the economy with the Republican-controlled house of representatives blocking proposals to help recovery. The US federal reserve, with its fund rate near zero per cent to prolong till 2014, announced at the end of June it would extend its own bond-buying programme until the end of the year, a milder version of its earlier quantitative easing [QE] in 2010-11, in the hope it would foster recovery.

Reflecting the spillovers from the advanced economies, the latest Asian Development Outlook from ADB says Europe’s worsening financial and banking crisis and a sluggish recovery in the United States are 'weighing on developing Asia’s growth prospects'. Economic growth in developing Asia moderated in the first half of 2012 as it faced reduced external demand for its exports to US and EU.

ADB says, apparently with countries like India in mind, worries over the economic strength of important developing economies have also emerged recently. Its latest estimates project Asia would expend 6.6 per cent in 2012 and 7.1 per cent in 2013, lower than its April figures. The region’s development in the first half of the year was hampered by slower growth in the two largest economies - China and India - as well as the effect of the unwinding of policy stimulus in some countries.

The OECD has said both the Chinese and Indian economies are entering more marked economic slowdowns in 2012. India’s growth would decelerate from the long-term average. It may be too early to draw a conclusion that both countries are now on a long-term structural trend of lower growth.

Latest ADB estimates are that China would grow by 8.2 per cent in 2012 and 8.5 per cent in 2013 [as against earlier estimates of 8.5 per cent and 8.7 per cent] while India’s growth is projected to slow to 6.5 per cent in 2012 [from earlier seven per cent] and 7.3 per cent in 2013.  Although China has seen a fall in net exports and industrial production and fixed asset investment, the authorities are beefing up the economy with extra spending on health, education and infrastructure to raise domestic consumption.

India’s outlook, ADB says, is clouded by a combination of high inflation and poor demand, both externally and internally. Inflation is expected to persist, primarily due to accelerating food prices.  Both high inflation and trade deficits make it difficult to ease monetary policy to stimulate demand. Government spending has been growing at 20 per cent annually for the past five years, while consumer price inflation exceeded 10 per cent since April 2011 as food prices continued to rise.

The growth weakness to 5.3 per cent in the last quarter of fiscal 2012 is reflected in the low growth of consumer durables, a decline in business optimism, and slow credit growth. Unlike China, India which runs an unsustainable budget deficit has no space for any stimulus. At the same time, the persistently high inflation leaves monetary policy little room to counter the slowdown in economic activity, according to ADB.

Asian developing countries have to rely mainly on domestic demand and infrastructure investments. The ADB Update, however, notes that a strong rebound in Thailand, healthy growth in the Philippines, and increasing consumer demand in Indonesia have helped the South East Asian sub-region as most governments have sufficient space to ease monetary policy and provide fiscal stimulus if needed. Southeast Asia’s economies are expected to post growth of 5.2 per cent in 2012 and 5.6 per cent in 2013 and weaker global demand is helping ease international oil and food prices, which is reducing inflationary pressures in the region.

China brought down its CPI [mainly food prices] from over five per cent to 2.1 per cent by June. Producing goods in excess of demand has led to tumbling of prices across the economy. Less ambitious about fixing growth targets, China hopes to achieve an average of 7.5 per cent in the 12th five year plan [2012-2016]. The economy expanded 7.6 per cent year-on-year in the second quarter of 2012, slowing from 8.1 per cent in the first quarter, the National Bureau of Statistics said 13 July.

In 2011, the target of eight per cent was exceeded at 9.2 per cent but was down from 10.3 per cent in 2010. Premier Wen Jiabao has said government would maintain stringent control on real estate speculation as property bubbles were often seen as a major risk for the economy.  But the rapid fall in consumer and producer prices would appear to strengthen the case for fresh economic stimulus and China has enough room for further monetary easing as well as fiscal stimulus.

International Monetary Fund (IMF) managing director M Christine Lagarde, speaking at Bangkok on 12 July, lauded Asia’s robust response to the global crisis so far and its growing power in the world economy. Stronger bank balance sheets and stronger fiscal positions had allowed Asia to avoid the downward spiral of weak sovereigns and weak banks that is threatening Europe, she said, but this does not mean that Asia is immune to fresh turbulence in the global economy.

The 'spillovers' from the heightened stresses in Europe have become more visible across Asia. Export growth has lost steam. Regional stock markets have suffered sell-offs as investors everywhere have become more risk averse. Capital inflows from earlier this year have reversed. 'So we cannot overlook Asia’s growing financial ties with the rest of the world. There are potential vulnerabilities. And yet, should they materialise, Asia is well placed to respond', she said.

On current trends, Asia’s economy would be larger than the G-7 by 2030, she predicted and cited a significant boost to the voting power of emerging market economies of Asia in the 2010 reforms [now being ratified by member-countries]. China, Japan and India would be among the ten largest shareholders of IMF. IPA
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