Slowdown expected in 2011: New challenges confronting the region

The Asia-Pacific region made impressive recovery in 2010 after the Great Recession of 2008-09, led by China and India, but faces new challenges in 2011 from weakening growth in the developed economies, a new UN assessment released today said.

With developed countries increasingly turning to monetary policy to stimulate growth, many developing economies in the region are facing a heavy influx of short-term speculative capital flows causing exchange rate appreciation and building up inflationary pressures, especially in food prices, notes The Year-end Update Economic and Social Survey of Asia and the Pacific 2010 published by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

Increased spending on poverty alleviation to boost domestic demand within the region and sustain the economic dynamism seen in 2010, is a key recommendation of the report to strengthen regional economic growth which is likely to slip to 7.0 per cent next year from 8.3 per cent in 2010.

“The Asia-Pacific region has recovered strongly from the severe 2008-2009 recession… However, it is not yet out of the woods and new challenges have emerged that could adversely affect its performance in 2011,” notes the Update released by ESCAP Chief Economist Mr Nagesh Kumar.

These challenges include slowing economic growth in developed countries and their effort to revive this with large-scale liquidity injections, which has triggered huge capital inflows into the region causing “significant exchange rate appreciation in a number of countries” and added to inflationary pressures, particularly in basic food commodities,” says the report.

While weakening growth in most developed countries has impacted the more export-driven economies of the region, low interest rates and the “enormous liquidity injections known as quantitative easing in many developed countries” have given rise to huge inflows of capital into the Asia-Pacific region.

“This is causing exchange rates to appreciate, asset bubbles to emerge and inflationary pressures to build up.” Food inflation is especially worrisome, given the weight of food in the household expenditures of the poor in the region.

The Update lists two key messages for policymakers in the region to consolidate economic recovery. The first is to strengthen domestic demand through “greater investment in poverty alleviation (such as narrowing MDGs gaps in the region), on physical and social infrastructure in which the region has substantial ground to make up and through the promotion of agriculture and rural development virtually across the entire region”.

The second is sustaining the economic recovery by boosting intraregional trade and promoting greater economic cooperation and integration taking advantage of the large number of subregional economic cooperation and trade liberalization agreements as well as the growing number of bilateral free trade agreements.

The Update recommends speeding up implementation of the agreed time-tables of these agreements including, among other things, by “accelerating progress towards a broader seamless regional market in both goods and services, reducing non-tariff barriers and improving connectivity in trade-related transport services”.

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