Developed world economic woes to dent Asia-Pacific growth which needs immediate stimulus and rebalancing over the coming years, says ESCAP

Asia-Pacific growth will slow down significantly in 2012 due to continuing uncertainty in the advanced economies, but the region has the means to offset the adverse impact, according to latest United Nations macroeconomic projections and policy advice released here today.

Growth in Asia-Pacific developing economies is forecast to slip from an estimated 7.2 per cent this year to 6.6 per cent in 2012, with major Asia-Pacific exporting economies being most affected, says the Economic and Social Survey of Asia and the Pacific 2011: Year-end Update, published by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

However, Asia and the Pacific will continue driving the global economy in 2012 and remains the world’s fastest growing region as it is in a position to sustain its economic dynamism due to strong macroeconomic fundamentals, according to ESCAP.

“If serious pressures on growth performance were to materialize, the strong budgetary positions of many countries would allow the enactment of short-term fiscal stimulus measures, as some countries have already begun doing,” said Nagesh Kumar, Chief Economist of ESCAP who launched the Year-end Update in Bangkok.

The other positive news for the region, coping with historically high and volatile prices, is a moderation in inflation levels in 2012 in the export-led economies, though this is partly due to “a reduction in demand emanating from the sluggish global environment,” according to the Update.
“However, some countries with relatively high inflation levels confront the dilemma of maintaining price stability in the face of slackening growth resulting from a deteriorating global environment,” Mr. Kumar said.

Divergent impact across region

The impact of the financial and economic crisis in the European Union and the United States will vary across the region with domestic demand-led economies relatively unaffected.

Among the major emerging economies, while global export powerhouse China is forecast to see growth decline from 9.3 per cent this year to 8.5 per cent in 2012, India is also forecast to see relatively constrained growth of 7.8 per cent in 2012. Indonesia is forecast to maintain robust growth performance of 6.5 per cent next year.

The Republic of Korea and Hong Kong, China, are forecast to see their 2012 growth decline to 3.5 per cent and 4.3 per cent, respectively, from this year’s 3.9 per cent and 5.0 per cent, respectively.

Singapore’s 2011 projected growth of 5.2 per cent will slip to 3.0 per cent next year, while Thailand’s 2011 flood crisis-reduced growth of 2.0 per cent is projected to more than double to 4.5 per cent next year on the back of a resumption of production and large-scale reconstruction projects.

There is considerable scope for supporting growth through government policy, says ESCAP. “Most countries in the region retain substantial fiscal space to be able to increase government spending. Interest rates, which are currently at relatively high levels across the region, can also be kept on hold or even decreased if necessary, which could greatly stimulate lending across the region.”

Risks from Euro zone debt crisis and US slowdown

The Year-end Update advises emerging Asia-Pacific economies to be on alert for financial turbulence, particularly caused by capital outflows due to risk aversion triggered by the crisis in the euro zone and suggests the need for stronger capital controls to deal with such risks.

A more fundamental challenge is shrinking demand for Asia-Pacific exports in traditional rich world markets. Although Asia-Pacific intraregional trade has been growing faster than its trade with the rest of the world, ESCAP sees limited scope of this in helping counteract the loss of developed world markets over the short term. “The shift from extraregional to intraregional trade and demand, although offering significant potential in the medium-term, will not be sufficient to make up for the slowdown in the markets of the developed economies in the short term,” the

ESCAP Chief Economist pointed out.

ESCAP medium-term policy advice for the region is to reduce export dependence on developed economies, which are expected to remain sluggish for an extended period, by continuing to rebalance growth through inclusive policies to boost demand within Asia and the Pacific.

Natural disasters to slash growth prospects in South-East Asia

The unprecedented flooding in South-East Asian countries this year is estimated to have caused a cumulative production loss of about $6.3 billion or 0.9 per cent of the combined gross domestic product (GDP) of Cambodia, Lao People’s Democratic Republic, the Philippines, Thailand and Viet Nam, says the Year-end Update.

Thailand was the worst hit, with flooding projected to lower the country’s 2011 GDP by 1.3 per cent, compared to flood-caused GDP reductions of 0.3 per cent each in Lao PDR, Myanmar and the Philippines. However, post-disaster economic recovery investments are projected to restore economic growth in these countries over 2012.

ESCAP recommends investment in social sectors in the disaster-hit countries as part of recovery and reconstruction efforts, new and strategic investments in the agriculture sector, as well as improvement in urban planning and land use to reduce disaster risks.

About ESCAP:
From its HQ in Bangkok, ESCAP provides a forum for its member States that promotes regional cooperation and collective action, assisting countries in building and sustaining shared economic growth and social equity.

ESCAP provides different forms of assistance to member States:
- ESCAP promotes rigorous analysis and peer learning through our core work areas: macroeconomic policy and development, trade and investment, social development, transport, statistics, environment and development, information communcations technology and disaster risk reduction;
- ESCAP translates these findings into policy dialogues and recommendations, and;
- ESCAP provides good development practices, knowledge sharing and technical assistance to member States in the implementation of these recommendations.