Insights and Analysis

Cautious Optimism Dominates 2010 Economic Outlook

January 6, 2010

By V. Bruce J. Tolentino

As nations emerge from the grips of a global recession, numerous economic reports reveal some unexpectedly good results from the Asia-Pacific region. The region looks to lead the global economic recovery, with a 2010 growth rate forecast at 6.3 percent, the highest in the world. Early signs of new hiring and rallies in regional stock markets have lifted hopes for a quick economic recovery across Asia and the globe in 2010 – appropriately marked, the “Year of the Tiger” in the Chinese zodiac.

Recent reports from Singapore, the Philippines, Australia, and China lifted hopes for quick recovery – not only in Asia, but across the international economy – some assessments fueling a sense that Asia’s recovery track will well-outpace Europe and the United States.

Japan’s Central Bank Governor Masaaki Shirakawa even managed to strike an upbeat note, even though Japan remains mired in its deepest recession in decades, when he said: “Asian economies seem to be growing at a faster pace. Since the spring, the financial system has also been improving.”

In December, the Asian Development Bank (ADB) raised its GDP forecast for 2009 across emerging Asia to 4.5 percent, up from the 3.9 percent forecast in September 2009. The World Bank raised its projected real GDP growth in developing East Asia in November 2009 to 6.7 percent, 1.3 percent higher than in April 2009. The combined GDP of the 10 largest economies in emerging East Asia (including China, South Korea, and Indonesia) grew 5 percent in the third quarter of 2009 – well above the rates in the previous three quarters, according to the ADB.

China is forecast to experience the fastest growth in 2010 at 9 percent, overtaking Japan to become the world’s second largest economy. The domestic demand-led economies of India and Indonesia are forecast at 7.5 percent and 5 percent, respectively. Retail and automotive sales saw a rise in the last quarter of 2009, particularly in China, India, and South Korea. The major export-led economies are expected to experience significant growth in 2010: Singapore, the Philippines, and Taiwan all at 3.5 percent, followed by Thailand (3 percent), and Malaysia (2.5 percent).

Sustained Recovery Not Yet Guaranteed

However, hope and optimism remain relatively muted. So far, analysts aren’t willing to take on the title of “prophet of boom,” cautioning that early signs of growth do not necessarily guarantee long-term recovery.

Asia’s growth is still very much linked to the recovery of developed countries, and there aren’t yet any definitive indications that the U.S. and European economies are on the mend.

As the chief economist of ADB Jong-Wha Lee said: “The recovery of the G3 countries (U.S., Japan, Germany) is still soft and there are a number of downside risks.”  Lee added that while recovery is underway, it is essential that fiscal and monetary stimulus remain accommodative, as uncertainty about the extent and durability of the recovery remains.

Analysts also worry that governments may withdraw favorable policies before their economies have fully recovered. Fiscal stimulus packages are quite costly, and some developing countries may be unable to continue funding them.

The UN reports that recovery to pre-crisis levels in the Asia-Pacific region hinges on developments outside the region, particularly recovery of consumer demand in developed countries to absorb the region’s exports.

Even if stimulus policies continue, world GDP is forecast to grow only 2.4 percent in 2010, lower than the average of 3 percent enjoyed over the past decade. Serious unemployment, inflation, rising trade protectionism, and stubborn global imbalances are also projected to pose grave challenges for sustained global recovery.

The unemployment rate in the U.S. has doubled since December 2007, topping 10 percent, the highest in 26 years. While there was an uptick in U.S. employment in November, no bets are yet being made that this can be sustained.

Not surprisingly, in China and other developing countries most job losses are in the export sectors. Increased unemployment in developed countries underlies growing trade protectionism, contributing to an even less-favorable international economic environment. Many countries, both developed and developing, have increased protectionist policies, such as tariffs and non-tariff walls and increased subsidies. These populist, short-term measures will certainly make sustained recovery more difficult to achieve.

International Cooperation Crucial for Long-term Recovery

A stark lesson of the ongoing financial crisis is that the world’s economies are more interlinked and interdependent than ever and, therefore, global solutions to shared problems are required.

Imbalances in global production, consumption, and finance have become more obvious in the aftermath of the financial crisis. As the bulk of the world’s economic and trade activity shifts from North America and Europe to Asia, the need for a more balanced approach is recognized. To do so, strengthened cooperation among Asia’s most important conglomerations – the Association of Southeast Asian Nations (ASEAN), the ASEAN Plus Plus, the Asia-Pacific Economic Cooperation (APEC) forum, the South Asia Association for Regional Cooperation (SAARC), as well as the G-20, is a must. Deepening ASEAN and international integration are critical for joint intelligence and action for sustained global growth.

In the wake of the crisis, all countries, especially members of the G-20, have strong incentive to deepen cooperation and coordination to prevent the world economy from falling into a depression. As the crisis ebbs and we head into a new decade, cooperation in international economic governance is ever more crucial for shared intelligence, joint action, and mutual benefit.

V. Bruce J. Tolentino is The Asia Foundation’s Director for Economic Reform and Development Programs. He can be reached at [email protected].

Related programs: Inclusive Economic Growth



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