Growth in Asia is forecast to slow to 2.7 percent in 2009, dragged down by the global economic and financial crisis, but the region should see a sharp recovery once the world economy regains its footing, the IMF says.
Managing Director Dominique Strauss-Kahn said (Feb 3, 2009) Asia is not at the epicenter of the global turmoil but it has been hit hard. ‘Growth is decelerating quickly’. Outward orientation is Asia’s USP but it has now ‘exposed’ the region to external shocks.
Latest GDP releases show that the pace of activity fell substantially at the end of 2008 in nearly all Asian countries. The slowdown is being led by a slump in exports—the result of weakening external demand, particularly in advanced economies—and some dislocations in trade financing.
Against this background, the IMF has downgraded its growth projections for the region. Average GDP growth for Asia in 2009 is projected to decline to 2.7 percent, about 2¼ percentage points lower than the IMF’s November forecast.
However, in developing Asia, growth should remain stronger at 5½ percent—and well above that in other regions.
Chinese growth is forecast to be around 6.7 percent, although Strauss-Kahn said it may be possible for China to hit its target of around 8.0 percent. India is forecast to post growth above 5 percent.
RECOVERY FACTORS
Strauss-Kahn expects Asia to bounce back quickly but says good policy framework is a pre-requisite for a durable rebound. Gradual recovery is what he foresees in 2010 aided partly by recovery of global economy and partly by expansionary fiscal and monetary policies in the region.
About China, the IMF diagnosis is that there is still room to strengthen domestic demand and to protect the economy from fall out of external shocks. One area that needs targeting is private consumption which needs to be boosted. Another area is support to those displaced from the export sector.
China is now reducing reliance on exports which is its main growth engine. Instead it is strengthening domestic demand. The shift would be a difficult and protracted process though the country may benefit in the long term, according to the IMF chief.
RESIST PROTECTIONISM
Strauss-Kahn warns against a possible protectionist backlash as the crisis unfolds. Protectionism was wrong in the past, but it’s even more wrong today. ‘When you’re in a globalized economy, there is no way to find a domestic solution … beggar-thy-neighbor policy will never provide good results’
But in a globalised down turn, advanced economies will worry about themselves and may forget their commitments to low-income countries.
It is for this reason the World Bank is creating a ‘Vulnerability Fund’ to held the poorest nations during the on-going meltdown. IMF is supporting the Bretton Wood twin with
Strauss-Kahn saying, ‘It’s not because the richest countries are in a mess that we should forget our commitment to low-income countries’.
BLUNT SPEAK
In a note to the G-20 meeting ( held in London, Jan 31-Feb 1, 2009), the IMF has urged the industrialized and emerging market countries to bolster demand and clean up the financial sector through ‘a more decisive policy action’
‘The dramatic worsening of the financial crisis since mid-September has generated historic declines in confidence and severe disruptions in credit intermediation. The precipitous decline in activity across the globe is in turn further damaging the financial sector’, the IMF warned.
The actions taken so far are ‘not enough’ and the risks remained ‘substantial’, it said bluntly.
‘The overarching risk revolves around the possibility of further corrosive interaction between more severe contraction in global economic activity and even greater and more prolonged financial strains than currently envisaged, particularly if policy implementation falls short’, the IMF note, made public on February 5, said.
The IMF cautioned against protectionist solutions to the crisis, saying that raising barriers to imports and subsidizing exports would undermine prospects for global recovery.
The G-20 comprises the seven major industrialized nations—Britain, Canada, France, Italy, Japan, Germany, and the United States—plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey, along with the European Union.
