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ECONOMIC DOWNTURN

Asia must adapt to new world: IMF

AFP, Seoul
Asia is leading the way out of the global economic slump but must adapt to a "new world” of softer demand in major Western export markets, the International Monetary Fund said Thursday.
In its latest economic outlook for Asia and the Pacific, the IMF' forecast an "Im pressive recovery" with regional growth speeding up to 5.75 percent in 2010 from a projected 2.75 percent this year.
The IMF said that while output in most of Asia was initially hit even harder than in countries at the centre of the crisis, "now Asia is leading as the world pulls out of recession".
"Just as the US downturn triggered an outsized fall in Asia's GDP (gross domestic product) because international trade and finance froze, now their normalisation is generating an outsized Asian upturn," its report said.
"For this reason, 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 also credited the region’s "rapid, forceful, and comprehensive policy response".
It said this was made possible by sounder government finances, more credible monetary policies and stronger corporate and bank balance sheets than in the past.
"These conditions gave Asia the space to cut interest rates sharply and adopt large fiscal stimulus packages," it said. "As a result, overall domestic demand has held up remarkably well, despite weak private demand."
The IMF reaffirmed its forecast for Chinese GDP growth of 8.5 percent this year and 9.0 percent next. It said Japan's struggling economy would contract by 5.5 percent this year, before rebounding modestly in2010by 1.75percent. The IMF cautioned that while world conditions would likely continue to improve in 2010, the recovery was expected to be sluggish.
It predicted that output in the large G7 economies would grow by just 1.25 percent next year since private demand remains hobbled by the legacy of the crisis.
"Households will find it difficult to spend and banks to provide credit since they must focus instead on repairing their balance sheets after the sizeable destruction of wealth that occurred during the recession."
The IMF said G7 consumption was likely to stay weak for some time, limiting demand for Asian exports.
Regional policymakers face two major challenges, it said. In a near-term "balanc-
ing act” they must support economies until the recovery was clearly self-sustaining, but avoid fuelling inflation or damaging fiscal sustainability.
"Striking the right balance will be difficult," the report said. But policymakers would have to assess the extent to which private demand could substitute for a withdrawal of public-sector demand.
So far, the IMF said, "private demand remains weak, and the outlook far from encouraging, both in Asia and abroad. Consequently, Asian countries will likely need to maintain policy support for some time."
Asia must also adapt to a "new world" of softer demand from G7 nations, and rebalance export-dominated economies to give domestic demand a bigger role in driv-
inggrowth.
The IMF said better social safety nets would be needed to reduce savings by private individuals. Continued reforms to the financial sector and to corporate governance would also persuade more Asian firms not to hoard cash, it said.
"Finally, Asia will need to be willing to live with smaller current account surpluses and more flexible exchange-rate management," the IMF said.
IMF Asia-Pacific director Anoop Singh also stressed the danger of a premature withdrawal of stimulus measures.
The recent recovery is not permanent," he told a briefing. "Therefore we need to maintain fiscal and monetary stimulus until we are fairly sure that recovery is firmly in place.”