In the light of looming risks in the global economy, economists say small and open economies such as Singapore, Taiwan and Hong Kong are most vulnerable.
Risks such as large fiscal deficits and high inflation remain potential dampeners of growth in the global economy, despite the strong economic rebound from the 2008 financial crisis.
One of the consequences of large fiscal deficits is mounting sovereign debt. If it goes unchecked, it could spark another financial crisis.
The United States fiscal deficit currently stands at an estimated $1.645 trillion (S$2.04 trillion), while household debt rose 0.3 percent to $11.5 trillion for the latest quarter ended March 31. The risk of a credit downgrade on US government debt instruments will be raised, if the deficits remain high.
“When that happens, there will be reduced consumption, spending and real income levels and, if that adjustment is too large a shock, it could lead to global imbalances and another financial crisis,” said Dr Joseph Cherian, practice professor of finance at NUS Business School.
If another economic downturn strikes, the impact on Asia will be mixed. Economists said economies such as Singapore, Taiwan and Hong Kong will likely see a sharper correction in gross domestic product growth.
However, other economies like India, China and Indonesia are expected to remain resilient as they have a big domestic market to rely on. Besides the sovereign debt situation, analysts cited inflation as another risk that may threaten global economic growth.
“We have seen that most of these countries in Asia have already tightened policies and they will continue to do so in order to put the inflation situation under control,” said Alvin Liew, an economist at UOB.
On the bright side, economists believe global inflation to be a transitory effect of high commodity prices. This is expected to ease in the second half of this year.
Other risks that could dampen global economic growth include geopolitical unrest and the strain of ageing populations on developed countries around the world.-by Linette Lim