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Time for Asia to slow down rapid credit growth
By Anoop Singh |
November 3, 2009, Tuesday
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Print Edition
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ASIA'S impressive recovery from the global downturn, even as output elsewhere remains sluggish, has prompted some observers to revive the notion that the region has "decoupled" from the rest of the world.
The IMF's latest Regional Economic Outlook for Asia and the Pacific, which was launched in Seoul, South Korea, on October 29, examines this hypothesis, and finds that the opposite is true.
The primary driver of Asia's recovery has actually been a return towards normalcy following the abrupt collapse in global trade and finance at the end of 2008.
Just as the near-collapse in international trade and finance triggered a super-sized fall in Asia's GDP, now the normalization of the global economy is generating an out-sized Asian upturn.
The other key driver behind Asia's recovery has been the region's rapid, forceful, and comprehensive policy response. This was made possible by the fact that, in many countries, government fiscal positions were sounder, monetary policies more credible, and corporate and bank balance sheets sturdier than at any time in the past.
These initial conditions gave Asia the scope to cut interest rates sharply, and adopt large fiscal stimulus packages. As a consequence, overall domestic demand has held up remarkably well.
However, the global recovery is expected to be a tepid one. Output in the G7 economies will grow by just one and a quarter percent next year, meager compensation for the 3.5 percent contraction in global growth in 2009.
Private demand in the large industrial countries will remain hobbled by the legacy of the crisis, limiting external demand for Asia's products. The scope for China to offset sluggish demand from the industrial countries is limited. China remains a relatively small importer of consumer goods, and the composition of its imports remains very different from those of currently major import markets.
Going forward, Asian policy makers thus face two major challenges. In the near term, they will need to carefully balance, providing support until the recovery is sufficiently robust and self-sustaining while ensuring that such support is not maintained for so long that it ignites inflation pressures or concerns about fiscal sustainability.
In China, a key concern is related to the risks posed by the extraordinary pace of loan growth in terms of increasing idle capacity and creating non-performing loans in the banking system.
The other major policy challenge will be to find a way to return to sustained, rapid economic growth without relying on strong G7 demand. This will require action on a range of fronts, including financial sector reforms and better social safety nets.
The IMF has been helping countries to meet these challenges. We are contributing financially, having recently provided Asian central banks with US$54 billion.
The current crisis has proven the resilience of Asia's economy to the largest shock since the 1930s. It also poses challenges to the region to re-orient its growth model.
(The author is director, Asia and Pacific Department, IMF. The views are his own.)
The IMF's latest Regional Economic Outlook for Asia and the Pacific, which was launched in Seoul, South Korea, on October 29, examines this hypothesis, and finds that the opposite is true.
The primary driver of Asia's recovery has actually been a return towards normalcy following the abrupt collapse in global trade and finance at the end of 2008.
Just as the near-collapse in international trade and finance triggered a super-sized fall in Asia's GDP, now the normalization of the global economy is generating an out-sized Asian upturn.
The other key driver behind Asia's recovery has been the region's rapid, forceful, and comprehensive policy response. This was made possible by the fact that, in many countries, government fiscal positions were sounder, monetary policies more credible, and corporate and bank balance sheets sturdier than at any time in the past.
These initial conditions gave Asia the scope to cut interest rates sharply, and adopt large fiscal stimulus packages. As a consequence, overall domestic demand has held up remarkably well.
However, the global recovery is expected to be a tepid one. Output in the G7 economies will grow by just one and a quarter percent next year, meager compensation for the 3.5 percent contraction in global growth in 2009.
Private demand in the large industrial countries will remain hobbled by the legacy of the crisis, limiting external demand for Asia's products. The scope for China to offset sluggish demand from the industrial countries is limited. China remains a relatively small importer of consumer goods, and the composition of its imports remains very different from those of currently major import markets.
Going forward, Asian policy makers thus face two major challenges. In the near term, they will need to carefully balance, providing support until the recovery is sufficiently robust and self-sustaining while ensuring that such support is not maintained for so long that it ignites inflation pressures or concerns about fiscal sustainability.
In China, a key concern is related to the risks posed by the extraordinary pace of loan growth in terms of increasing idle capacity and creating non-performing loans in the banking system.
The other major policy challenge will be to find a way to return to sustained, rapid economic growth without relying on strong G7 demand. This will require action on a range of fronts, including financial sector reforms and better social safety nets.
The IMF has been helping countries to meet these challenges. We are contributing financially, having recently provided Asian central banks with US$54 billion.
The current crisis has proven the resilience of Asia's economy to the largest shock since the 1930s. It also poses challenges to the region to re-orient its growth model.
(The author is director, Asia and Pacific Department, IMF. The views are his own.)
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