In 2011, Hard-Earned Resilience Will Carry Asia’s Economies through the Crisis
January 5, 2011
One year ago in this blog, Asia Foundation chief economist Bruce Tolentino expressed “cautious optimism” about the prospects for global recovery and Asian growth in 2010. His positive prediction for Asia was more than fulfilled, in spite of a dispiriting lag in U.S. recovery and severe economic crises in the Eurozone.
In 2010, Asia’s diverse economies demonstrated an impressive rebound from the global economic crisis. The first quarter saw booming overall growth across Asia, despite some lingering problems in weaker countries. This resilience was no doubt forged during the pain of the Asian Financial Crisis a decade ago, and reemerged in 2010 with robust Asian consumer spending, effective fiscal and monetary stimulus programs, and a boost to exports in response to gradual recovery in major industrial economies.
Standout Economic Performances in 2010:
- China surpassed Japan as the world’s second-largest economy.
- India grew at 8.2 percent in 2010, (even stronger than the 7.5 percent predicted in last year’s In Asia forecast).
- South Asia as a whole performed well in 2010, growing at 7.8 percent.
- Southeast Asia grew at 7.4 percent.
- East Asia grew at 8.6 percent.
Asian Consumerism Drives 2011 Forecasts
Positive growth forecasts for 2011 are driven largely by expectations of emerging Asian consumerism. The International Monetary Fund (IMF) and the Asian Development Bank (ADB) forecast average Asian growth of 7-7.3 percent, with the IMF showing the region’s greatest growth centering around the large domestic-demand-driven economies: China, India, and Indonesia.
China is expected to continue growing at just above 9 percent, while South Korea is expected to have just 3.9 percent growth in 2011, down from 2010’s 6.1 percent. While Japan’s growth improved in the third quarter of 2010, the country – heavily reliant on exports to the United States – will see its growth dampen from last year’s 3.5 percent to only 1.2 percent in 2011, reflecting both the effects of the global downturn and a strong yen.
In East Asia, Mongolia is a shining light. The Economist Intelligence Unit (EIU) predicts a dazzling 13.4 percent growth as the agricultural sector recovers from the 2009-10 summer drought, investment in the mining sector grows, and trade ties with China strengthen.
In South Asia, Indian growth is estimated to be around 8.7 percent, driven by high savings and investment rates, and a fast growing labor force. Bangladesh is set to grow at 6-7.5 percent. Sri Lanka, driven by private consumption, will grow at 6.8 percent. Nepal is forecasted to grow at a slower 3.8 percent due to the country’s continuing political impasse.
Experts predict that Southeast Asia, heavily reliant on exports, will grow at a relatively lower 5.4 percent. Vietnam will lead the region at 7 percent, followed closely by Indonesia at 6.3 percent (a result of its robust private consumption and recent boost in foreign direct investment). Malaysia is projected to grow at 4.3 percent, down from 6.8 percent in 2010 due to an expected shrinking of external demand in 2011.
Growth in the Philippines, which experienced a recovery in exports and strong consumption throughout 2010, will drop from 6.2 percent to 4.8 percent in 2011. Thailand is set to grow at a meager 4.3 percent and a recovering Cambodia will see 5.1 percent growth. Growth in Laos will slow slightly from 8 percent in 2010 to still a respectable 7.7 percent, due to the global surge in mineral prices.
Export Demand from the West
As the forecasts above indicate, dwindling global recovery – and even the prospect, albeit distant, of a double dip recession among major industrial economies – will contribute to slower overall Asian growth in 2011. IMF projected U.S. and EU domestic demand to be about 1.75 percent and noted they are “unlikely to return to pre-crisis trends in the foreseeable future.” Low growth rates among the world’s richest economies will hold down demand for exports from Korea, Japan, and Thailand, among others. Garment sector growth, crucial for countries like Cambodia, Bangladesh, and Vietnam, will depend heavily on U.S. conditions.
Coupled with fears over declining external demand for Asia’s exports are worries over currency appreciation – most notably in emerging economies like India, Indonesia, Malaysia, and Thailand, where currency values compared to the dollar neared 10-year highs by August 2010.
Regional Trade and Economic Cooperation
Fortunately, external demand from the West is only part of the Asian equation, as the majority of merchandise export destinations lie mostly within the region itself. In fact, according to the IMF, intraregional exports – mostly to China – took off during the recovery, rising twice as fast as Asian exports to the U.S. and the EU. Much of the Philippines’ growth will continue to be driven by demand for its exports to China. The EIU reports that China is soon likely to overtake Singapore as Malaysia’s largest export market.
However, Asia’s intraregional trade is still mostly made up of intermediate products; two-thirds of final product demand for Asia’s exports originates outside the region. It would be premature to rely on this trade to fuel Asian exports. Moreover, China’s domestic demand slowed in the latter half of 2010, hurting neighboring exporters. In general, Chinese growth is still being driven overwhelmingly by investment –contributing to nearly 60 percent of GDP in the first half of 2010 – so it’s too soon to count on Chinese consumption alone to feed Asia’s exporters.
2011 and Beyond
With a slower pace of recovery among major industrial economies anticipated in 2011, it is crucial for Asia to leverage alternative sources of growth through deepened intraregional trade and increased domestic consumption. The region’s recovery in 2010 has already illustrated the benefits of doing so. The World Bank’s first yearly assessment of the economies in South Asia identifies both the openness of Asian economies and their governments’ policy responses as having played a key role in boosting confidence and accelerating recovery in South Asia.
Even if growth in Asia is unlikely to reach its full pre-crisis levels in 2011, the case for optimism is significant. Increased regional interaction, led by China’s economic activity, with increased circulation of goods, more FDI, and the distributional effects of remittances, is likely to continue to support Asia’s resilience and capacity to recover. Improving business environments across the region are also encouraging local entrepreneurs to invest at home and create products and services for their domestic markets.
Asia’s future growth depends on regional economic integration as well as sustained domestic demand. Indeed, in 2011 and beyond, growth in Asia will need to be increasingly fueled by Asia itself.
The Asia Foundation’s Economic Reform and Development team can be reached via Director Bruce Tolentino, at [email protected].
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