Asia must build domestic demand as West reels: IMF

Asia’s resilient economies are on a strong growth track, but must build up demand from their newly affluent consumers to offset shrinking exports to the crisis-hit West, the IMF said Tuesday.

In its latest World Economic Outlook, the International Monetary Fund also warned of the dangers of inflation in much of Asia, where some central banks are having to tighten monetary policy or hinting at rate rises to come.

The twice-yearly IMF report envisaged a modest slowdown in China, and said Japan would contract this year but bounce back in 2012 as reconstruction from its March 11 disasters begins to trickle through and sentiment picks up.

Asia’s exports have eased with the key markets of the United States and Europe consumed by debt crises, although the Fund said accommodative policies by several governments had lifted demand at home.

It said that while developing economies would expand this year, led by China and India, growth would slow in 2012 while more needed to be done to lessen the region’s reliance on external trade.

“Growth is expected to remain strong, with weaker external demand offset by still-solid domestic demand.

“That said, there has been limited progress in external rebalancing that would durably enhance the role of domestic demand in growth,” the report said.

High prices, led by the surging cost of food, have led to monetary tightening steps across Asia, with India hiking interest rates 12 times in 18 months and China raising the cost of borrowing five times since October.

The tightening measures have added to the drag on some economies.

The Fund said price rises would be higher in economies with “sustained strong credit growth, positive output gaps, and/or relatively accommodative policies – for instance India, South Korea or Vietnam”.

The IMF downgraded its forecast for gross domestic product in China – the world’s second largest economy – to 9.5 percent in 2011 and 9.0 percent in 2012, after double-digit growth for most of the past decade.

But China’s long battle to bring prices down would eventually pay off, it said.

It gave an upbeat outlook for Japan next year, despite the impact of a strong yen, predicting a strong reverse from this year thanks to a huge rebuilding programme after the March earthquake-tsunami disasters.

“Reports from Japan confirm a rapid recovery in both output and domestic spending. Industrial production is now growing rapidly, business sentiment is improving sharply, and household spending is recovering quickly.”

The report said Japan’s economy would shrink 0.5 percent over the whole of 2011, slightly less than the 0.7 percent forecast by the IMF in June, and hit 2.3 percent in 2012.

The IMF, however, warned that Tokyo should bring down its huge public debt, which at approximately 200 percent of GDP is the industrialised world’s biggest and has led to several credit downgrades.

Growth in Southeast Asia’s five biggest developing economies was seen at 5.3 percent this year and 5.6 percent next year, still healthy but much slower than the 6.9 percent seen in 2010 as exports ease.

However strong domestic demand in the five countries – Indonesia, Thailand, Malaysia, the Philippines and Vietnam – is expected to take up the slack from slowing exports, the IMF said.

Singapore, which is part of Southeast Asia but is classified by the IMF as a newly industrialised economy, was forecast to grow 5.3 percent this year and 4.3 percent next year, down sharply from its rapid-fire 14.5 percent in 2010. -By Danny McCord

 

Category: FinanceAsia