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CONNECTING THE DOTS

How is economic growth shaping up in Asia?

A. R. Chowdhury
IT was beginning to feel like somebody had turned the clock back twelve months. With the first quarter of 2012 bringing a renewed sense of calm to global markets and a rebound in activity across the region, the policy debate in Asia had started to shift back to some familiar concerns: the strength of the region's currencies, fears about overheating and worries over the unbalanced nature of growth in the region. Asia is well placed to withstand the impact
ot any major shocks to the global economy. The health of economic fundamentals and policymakers' room for stimulus should enable the region to grow by just below trend this year, even though global growth looks set to disappoint. However, if global risk aversion returns, currencies and equity markets are likely to weaken despite the strong start to the year.
Economic growth in emerging Asia slowed in the fourth quarter of 2011 mainly due to weakness in external demand. This lowered the export potential of a number of countries in the region. However, the recent improvement in the United States economy, a pick-up in Asia's production and the easing of supply-chain disruptions arising from Thailand's floods suggest most of the region fared better in the first quarter of 2012.
Weak global demand and the uncertain situation in the Euro-zone will continue to weigh on the region's prospects this year. Even though global growth may disappoint this year, the region should still grow by only slightly below trend in 2012.
Three main factors are likely to support growth in Asia. First, a rebound in growth in countries like Thailand and Japan as well as Pacific Rim countries Australia and New Zealand. This is particularly true for Japan after natural disaster caused its economy to weaken last year. Second, reduced dependence on exports to the developed world where growth prospects are weaker than before the 2008-09 global financial crisis. Third, expansionary monetary and fiscal policy pursued by the policy makers has helped to stimulate the economies.
Central banks in Asia have held back their interest rate cutting cycle in recent weeks due to the improvement in the global outlook and fears that the increase in the oil price could cause inflation to rise. However, in addition to weak global growth, commodity prices will decline and inflation will continue its downward trend across the region. In addition, I expect central banks in most countries to resume their interest rate cuts later in the year.
It needs to be pointed out that the region faces a number of major risks this year. The biggest worry is the uncertain outlook in the Eurozone. No country in the region would be immune from a disorderly break-up which causes a slump in global demand. The countries most vulnerable are the region's trade-dependent economies such as Hong Kong and Singapore. Economic activity in the region's bigger, less trade-dependent economies such as China and India would hold up much better.
Another risk is capital inflows, which have surged since the beginning of the year due to an increase in risk appetite. Risk aversion will return before the end of 2012 and capital outflows will reverse. However, the resulting capital inflows could push up the exchange rate, harming exporters, while also fuelling inflation and asset price bubbles.
High oil prices are another risk. If oil prices remain at their current levels they could cause significant economic damage. Brent crude oil is currently selling at $120 per barrel. Most of Asia's economies are net oil importers, so a sharp rise in oil prices would lower real incomes.
Higher oil prices would also prevent inflation from falling much lower. Inflation could increase sharply if high oil prices force governments in the region to scale back their expensive oil price subsidies. Thailand's high oil intensity and large net imports mark it out along with India as the most exposed countries in Asia to an oil price spike.
Nonetheless, a wobble in global markets at the start of the second quarter of this year is a timely reminder that the external backdrop to Asian economic growth remains extremely fragile. Here the case of the Euro-zone debt crisis should be pointed out. A spike in Spanish bond yields earlier in the month was a warning that, despite the apparent success of the European Central Bank's recent steps, the region's fundamental problems are still unresolved.
The Euro-zone debt crisis would most likely escalate further this year. This will impact Asia's growth via a sharp slowdown in capital inflows into the region and lower commodity prices. Furthermore, after a small rebound in the second quarter, I expect Chinese growth to slow again over the second half of the year, weighing on other Asian countries.
More generally, growth in many of the region's economies also continues to have a rather unbalanced feel, making them more vulnerable to a renewed global crisis than in 2008. The strength of commodity prices and foreign capital inflows has underpinned robust domestic demand growth. However, a concurrent appreciation of real exchange rates has squeezed the competitiveness of domestic industry.
Crucially, though, the growth prospects for most of Asia's economies remain brighter than many countries in the developed world. Public balance sheets are in generally good shape, banks are fairly well capitalised and there is significant scope for policy stimulus to offset the impact of weaker external demand.
The writer is Professor and Chair, Department of Economics, Marquette University. Email: abdur.chowdhury@marquette.edu
***Growth prospects for most of Asia's economies remain brighter than many countries in the developed world. Public balance sheets are in generally good shape, banks are fairly well capitalised and there is significant scope for policy stimulus to offset the impact of weaker external demand.***