Emerging Asian Economies Recovering from Downturn Faster

Asia’s growth is forecast to accelerate to 5¾ percent in 2010 from 2¾ percent in 2009, both higher than previously projected, according to the International Monetary Fund’s Regional Economic Outlook (REO) for Asia and the Pacific, This is much higher than the 11⁄4 percent growth forecast for the G-7 countires next year, but still below the 6 2⁄3 percent average recorded over the past decade.

“Not only are they (green shoots) more prevalent, but they have also appeared earlier (in April in many cases), and have progressed further. The progress made by China, in particular, is striking. Alone among major countries, its key growth indicators were expanding in August at rates that are above their long-term trend. In contrast, indicators in key Western economies, such as the United States and Germany, suggest that output was only stabilizing in August after months of severe contraction.”

Overall in Asia, policymakers consequently face two major challenges, the IMF says.”In the near term, they will need to manage a balancing act, providing support to economies until it is clear that the recovery is sufficiently robust and self-sustaining, while ensuring that it is not maintained for so long that it ignites inflationary pressures or concerns about fiscal sustainability. Striking the right balance will be difficult. But the key is clear: policymakers will need to assess the state of private demand and the extent to which it can substitute for a withdrawal of public sector demand. ”

The other major policy challenge will be to devise a way to return to sustained, rapid growth in a new global environment of softer G-7 demand.

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. This type of successful rebalancing will require action on a broad front. Better social safety nets will be needed to reduce private precautionary savings and continued efforts at financial sector and corporate governance reforms would also allow households to offset higher corporate saving by increasing consumption. At the same time, structural reforms could raise productivity and allow for a smooth reallocation of resources across the economy to compensate for the lower momentum from exports. Finally, Asia will need to be willing to live with smaller current account surpluses and more flexible exchange rate management.