Asia to stage strong growth, amid external challenges

Although the external environment is challenging, a soft landing is projected under the baseline forecast, given robust domestic demand, favourable financial conditions, and room for policy easing. Growth in the region is projected at 6 per cent in 2012 before gradually recovering to 6.5 per cent in 2013.
The Thai economy to show a strong rebound from the flood disaster. Gross domestic product is expected to expand by 5.5 per cent this year and by 7.5 per cent in 2013.
“In Thailand, a rebound following last year’s flooding is expected in the first half of 2012, supported by monetary easing and a large fiscal package in response to the floods,” the IMF said in the report entitled “Growth Resumes, Dangers Remain”.
 The IMF revised up the global growth forecast to 3.5 per cent this year, up by 0.2 percentage point from the January projection. The 2013 forecast is also raised by 0.1 percentage point to 4.1 per cent, while the US and Japan are expected to fare better.
Boosting Asia’s growth are countries in Developing Asia category. While China and India should show growth of 8.2 per cnet and 6.9 per cent, respectively in 2012; the 2013 figures are projected at 8.8 per cent and 7.3 per cent. Trailing closely behind are the Asean-5 countries, with growth projections of 5.4 per cent and 6.2 per cent.

GDP projections
item          2011/2012/2013
World    3.9/3.5/4.1
US          1.7/2.1/2.4
Asia   5.9/6.0/6.5
Euro Area    1.4/-0.3/0.9
- Germany   3.1/0.6/1.5
- France       1.7/0.5/1.0
- Italy            0.4/-1.9/-0.3
- Spain          0.7/-1.8/0.1 
Source: International Monetary Fund

In China, even with the drag from external demand, growth is projected to be above 8 percent in 2012 and 2013 because consumption and investment are expected to remain robust.
In India, while part of the expected slowdown to 7 percent in 2012 is a cyclical response to higher interest rates and lower external demand, policy uncertainty and supply bottlenecks are playing a role and will need to be tackled in the near term to ensure that potential growth does not decline.
With a timely boost from reconstruction spending, Japan is projected to grow at 2 percent in 2012. The crisis in Europe and problems regarding energy supply are likely to dampen Japanese economic activity and exports. Growth is expected to remain subdued at 1.25 percent in 2013, reflecting the weak global environment and a decline in reconstruction spending.
In Korea, a rebound in construction is expected to offset a muted outlook for private consumption and investment due to increased global uncertainty.
Exports from the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) were hit particularly hard, but strong domestic demand helped offset the external slowdown, especially in Indonesia.
The IMF warned in the report that European spill-over effects are imminent, which would lead to greater volatility of capital flows and possible impacts on Asian banks.
“Policy in the region needs to be set with an eye toward these risks,” it said. For economies with relatively low levels of public debt (ASEAN-5, China, NIEs), the pace of fiscal consolidation could be slowed if downside risks materialize. Many Asian economies could also advance their plans to boost social safety nets and increase investment in infrastructure if another round of fiscal stimulus is warranted—these policies have long-term positive effects on economic rebalancing and income inequality that are beneficial even in good times. However, fiscal consolidation remains a priority in India and Japan, to anchor confidence and rebuild room to meet future challenges.
Although monetary tightening has been appropriately paused in many Asian economies, and cautiously reversed in some, room for further easing is constrained in economies where underlying inflation pressures remain (India, Indonesia, Korea) and in those that are still working through previous credit expansion (China).
“If euro area bank deleveraging escalates, policymakers will need to ensure that the supply of credit is maintained for those vulnerable to credit rationing, such as small and medium-size firms. Programmes developed precisely for this purpose during the 2008–09 crisis could be reactivated as needed.”
The fragility of the external outlook highlights the need for the region to rebalance growth by strengthening domestic sources of demand over the coming years, it concluded. In many ASEAN economies and India, strengthening domestic demand will require improving the conditions for private investment, including by addressing infrastructure bottlenecks and enhancing governance and public service delivery.