Asia
According to the IMF latest update on global economic outlook, Asia is set for slower but still robust economic growth despite a US recession unless the global financial crisis worsens. Emerging Asian growth is expected to be 7.5 per cent in 2008, rising to 7.8 per cent next year, propelled by expansion in China and India. The emerging and developing economies have so far been less affected by financial market developments and have continued to grow at a rapid pace, led by China and India, although activity is beginning to slow in some countries.
The challenge in some nations was still to avoid overheating with strong domestic demand and rising food and energy costs stoking inflation. But its emerging Asia forecast is notably slower than 2007’s 9.1 per cent expansion as the US sub-prime mortgage crisis bites. The crisis could lead to worldwide losses of up to $945 billion. . The international body expects 9.3 growth in China and 7.9 per cent expansion in India this year and similar levels in 2009, down from 11.4 and 9.2 per cent respectively in 2007.
Emerging and developing economy growth was set to ease modestly but remain robust in both 2008 and 2009, reflecting the global slowdown, weaker commodity prices and efforts to stop overheating such as interest rate hikes. Projecting a mild US recession, the IMF said emerging Asia’s prospects turned on how resilient its markets and economies were to “financial market dislocation and the associated slowdown in the advanced economies.” Emerging Asia’s stock markets in early 2008 surrendered on average 40 per cent of gains made last year but so far “the direct impact on regional financial systems has been limited”.
Lower demand for Asian exports as global economic growth slows was another risk. Exports to the US and western Europe were likely to be most affected but the impact should be cushioned compared with past downturns because of growing trade within Asia and to emerging markets elsewhere. The overall effect on regional growth of slowing exports is further mitigated by the strength of domestic demand in most countries of the region, which continue to experience strong consumption and investment growth.
A worsening in the global financial crisis and a sharper than predicted slowdown in rich economies posed a risk that could hit investment and exports. Unexpectedly resilient Asian domestic demand was possible too but downside risks were more prominent. In light of the greater uncertainties associated with the outlook, policymakers face a difficult task in balancing the trade-offs between growth and inflation. Among richer Asian economies, Japanese growth would slow to 1.4 per cent this year, down from 2.1 per cent in 2007, with exports to emerging Asia set to help if growth in the region holds up.
The growth momentum in Australia and New Zealand remains robust, and the turbulence in global financial markets has so far had only a limited impact. Booming demand for commodities has boosted growth in resource-rich Australia. Commodity prices were set to fall this year and next, but generally only by a small amount. Commodity demand has also helped Southeast Asia, including countries such as Indonesia and Malaysia. The IMF forecasts 2008 growth of 5.8 per cent in the region, down from 6.3 per cent last year. It sees growth of four per cent in the newly industrialized economies of South Korea, Taiwan, Hong Kong and Singapore, against 5.6 per cent in 2007.China will lead Asia-Pacific sovereigns in economic growth in 2008, followed by India. Though Japan is still the largest economy in the region, China’ growth could position the country as the biggest economy in Asia-Pacific and the second-largest globally within the next five years. The Indian growth story is expected to continue, with the country at number two in the regional league according to Standard & Poor’s Ratings Services. In the global growth ranking, dominated by resource-rich nations benefiting from high commodity prices, China and India are still among the top 10 fastest-growing economies. Strong domestic demand is likely to support their economic performances even if demand from the US and Europe weakens.
S & P Services expect regional growth dynamics to be less robust in 2008, with an unweighted average growth rate among rated sovereigns of about five per cent compared with 5.8 per cent in 2007 and a record 6.6 per cent in 2004. While the US slowdown and the tight credit conditions are expected to impact Asia-Pacific but these concerns are partly mitigated by the expected stronger domestic demand and intra-regional trade that should substantially counter the weaker US import demand, the analyst added. Inflation across the region is likely to remain high by recent standards. Driven by a demand-side oil shock, escalating food prices, and China’s unwavering appetite for commodities, even countries such as Singapore -- with historical inflation rates of about one per cent -- are expected to tip the five per cent mark for the first time.
India
The country’s central bank and most other forecasts have pegged growth in Asia’s third-largest economy at 8-8.5 per cent in the 2008/09 financial year as the global economic slowdown and monetary tightening takes its toll. The Indian economy is estimated to have grown at 8.7 per cent in 2007/08, slower than the previous year as higher interest rates hurt consumer demand. An independent New Delhi-based economic think-tank said the economy is expected to grow by 8.5-8.8 percent in 2008/09, if interest rates remain stable, while average annual inflation may be higher than last year.
The National Council for Applied Economic Research (NCAER) said an expansionary fiscal policy would help India weather the adverse effects of a global slowdown during 2008/09. While still strong the economy has lost altitude from scorching 9.6 percent expansion in 2006/07, which was the highest in 18 years. The government wants growth of nine per cent or above to reduce widespread poverty and create jobs. The finance minister says 9-plus percent growth -- with 4 percent inflation -- is the ideal rate although a ministry report has said just sustaining 9 percent growth would be a challenge due to inflation pressures and infrastructure constraints.
The government and the central bank have taken fiscal and monetary steps to calm price pressures ahead of key state elections later this year and federal polls next year. The Asian Development Bank expects inflationary pressures in India to persist for the next few months, and recent import duty cuts on food items to have some impact on prices after 2-3 weeks. The Indian economists did not expect the central bank to ease policy before a drop off in inflation. India has recently scrapped import duties on crude edible oils and banned exports of non-basmati rice amid a raft of measures to stem rising inflation, which hit a 14-month high in mid-March and has alarmed policymakers.
Indian inflation accelerated to close to six per cent in early March, a ten-month high far above where the central bank wants it, and analysts said the unexpected spurt meant more months of tight monetary policy despite signs of slowing growth. Wholesale inflation has shown a rising trend since early December 2007, driven largely by higher food prices, posing a major policy headache against the backdrop of slowing growth in the broader economy and general elections due by May 2009.A modest rise in retail fuel prices in mid-February has also contributed to higher inflation. The central bank has kept its main lending rate unchanged at 7.75 per cent for almost a year, after raising it five times between June 2006 and March 2007 to stem price pressures in a fast-growing economy. Earlier, an ADB report had forecast India’s inflation at 4.5 percent in 2008/09 and then climb five per cent in 2009/10. ADB said India’s economic growth could moderate to eight per cent in the 2008/09 fiscal year and then rebound to 8.5 per cent in 2009/10
The IMF has warned that investment would be more affected than consumption on account of the tight monetary conditions and fall in global economy following the US sub-prime crisis. Spare capacity in the economy remains very low and overheating remains a risk, despite monetary policy tightening. Unlike China, India has little fiscal space to keep up the growth, mainly on account of high public debt. World economies are more correlated now with the US economy than in the early 1990s. India’s correlation is, however, a moderate 0.14 per cent, much lower than Japan’s 0.41, but little higher than 0.08 percent of China’s.
India unveiled its Foreign Trade Policy that sets an export target of $200 billion for 2008-09 and bans export of cement with a twin focus of curbing price rise and boosting trade. India achieved merchandise exports worth $155 billion - albeit short of the target of $160 billion - in 2007-08 despite setbacks on account of rupee appreciation, high interest rates and spiraling prices of inputs.
The remarkable achievements in trade and commerce of the past four years gives confidence to spell out an even more ambitious target - that of achieving a five percent share in world trade by the year 2020. Ambitious it may be, but achieving it is not impossible. It means that the government would have to ensure an average annual growth rate of 25 per cent consistently for the next 12 years.
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