Asia to see sharp slowdown in economic growth

Sources: IMF Survey-Asian Growth to Slow Sharply in 2009

Bloomberg.com: Asia to Slow 'Substantially' as Exports, Demand Ebb, IMF says

The IMF today released its economic outlook for Asian and Pacific economies in 2009 and the news was not good.  IMF analysts expect to see growth slow from 7.6 percent in 2007 to 4.9 percent in 2009 as a result of the global effects of the financial crisis. 

Jerald Schiff, a senior advisor in IMF’s Asia and Pacific Department, said that the “recent intensification” of the crisis has made it clear that Asia, once thought to be somewhat isolated from western economic slumps, will not escape the crisis “unscathed.”  In October, the IMF had predicted a less severe slowdown – to just 5.6 percent, but the indefinite status of the financial turmoil has economists feeling far more pessimistic.  This news marks the first simultaneous economic contraction in the United States, Japan, and the euro region since World War II.

The IMF cited two main reasons for the downturn: reduction in global demand for Asian exports and an “extremely challenging” financial environment (meaning weakening currencies, scarce financing, and large capital outflows).  Asia exports most of its goods to the areas hit hardest by the financial crisis and subsequent economic malaise: the United States and the Euro Zone.  With these two major consumers in the midst of severe recessions with no end in sight, the outlook for rising consumer demand seems bleak, at least through 2009.  Both China and Japan are hoping to reduce their reliance on American and European consumers by increasing buying power amongst their own citizens through massive ($9.3 bn and $19 bn respectively) stimulus packages.

The IMF analysts said that governments must “remain vigilant...and be prepared to respond quickly and flexibly to a sharp slowing of domestic activity” and central banks must act “decisively” to maintain stability and growth.  In that regard, China, India, South Korea, Taiwan, and Vietnam have all recently employed monetary tools to reduce borrowing costs.

At the moment, IMF economists predict the beginning of recovery in the second half of 2009, but were careful to say that there are still significant downside risks to this outlook.  In particular, if the global slowdown is deeper or more protracted than currently predicted, the Asian outlook would remain negative for a longer period of time, barring a significant rise in domestic demand. 

 

Discussion: Will the severe reduction in consumer demand from the U.S. and Europe lead to a fundamental rethinking of policy in nations with large export businesses as well as large domestic populations, such as China and India?  Is that a viable solution for Asian nations to gain greater independence from the West in the future?