By Anoop Singh
Now here’s the puzzle: how is it that Asia has rebounded sooner and more strongly than the rest of the globe from the economic slump when the region is so heavily dependent on exports for its growth? This, and the future prospects for the region, are two of the key issues we analyzed in the latest Regional Economic Outlook (REO) for Asia and the Pacific, recently launched in Seoul and Tokyo.
There are three pieces to the puzzle of Asia’s rebound:
- Exports (in value added terms) account on average for about one-third of GDP in emerging Asian countries, while many of the region’s large firms depend on global capital markets to finance their investment projects.
- Recovery in the rest of the world has been unsteady.
- Yet Asia’s own GDP figures for the third quarter have been impressive: Korea grew nearly 3 percent in that quarter alone, Singapore grew even faster, and China’s growth accelerated to 9 percent year-on-year, propelled by booming investment.
How do these pieces fit together?
One part of the answer is the powerful measures the region took to counteract the crisis. Soon after the global downturn hit, Asian authorities boosted government spending, reduced interest rates sharply, and provided liquidity to strapped financial markets.
Their fiscal programs were, on average, even larger than those introduced by the Group of Twenty industrialized and emerging market countries. These measures have had a significant impact, boosting GDP by about 1¾ percentage points in the first half of the year.
Another part of the answer is that in this business cycle, international trade has fluctuated far more than the GDP of advanced countries. As you can see in the chart below, global trade collapsed at the end of 2008 — so output in Asia’s export-oriented countries fell further than that of countries at the center of the crisis.
But since February, trade has been normalizing rapidly, tracing out a pronounced V-shape, clearly visible on the graph. Unsurprising then that Asia’s recovery is duplicating that V-shaped.
How do we sustain Asia’s recovery?
So far, so good. But future recovery may prove more challenging. Over the coming quarters, the impetus from trade normalization will fade. Macroeconomic stimulus can continue to support growth for a while, but ultimately a self-sustaining recovery will require an improvement in private domestic demand, both external and domestic.
As we say in the REO, global conditions are expected to continue to improve … slowly. According to the IMF’s latest forecasts, output in the large G-7 economies will likely grow by just 1¼ percent next year, recouping only half the contraction estimated for 2009, because private demand in these countries remains constrained by the legacy of the crisis. So overseas demand for Asia’s products will remain subdued. This means the region’s growth will remain well below the 6²/3 percent average recorded over the past decade.
The current crisis has proved the resilience of Asia’s economy to the largest shock since the 1930s. But it also poses challenges including the need to nurture the recovery until it becomes self-sustaining, and how to return to rapid growth in a “new world” of softer G-7 demand? I’ll turn to these particular puzzles in subsequent blogs.