Hit hard by the global economic crisis, Asia is set for a sharp deceleration in growth this year and would see a tepid recovery in 2010, the International Monetary Fund said Wednesday.
In its latest report, the Washington-based lender said Asian economies, including the emerging Asia, Japan, Australia and New Zealand, may require forceful countercyclical monetary and fiscal policies to emerge out of recession more quickly and vigorously.
The IMF expects Asian growth to fall sharply to 1.3% in 2009 from 5.1% in the previous year. The region's growth is expected to rebound in 2010 at a rate of 4.3%. In February, the lender had predicted 2.7% growth for 2009.
The spillovers from the global crisis have impacted Asia with unexpected speed and force, the IMF said in its Regional Economic Outlook for Asia and Pacific released Wednesday.
Though there are some signs of stabilization, the situation is far from recovery, the report said. According to IMF, a sustained recovery in Asia will need to await an improvement in the global economy, that the lender does not expect before the middle of 2010.
The synchronized nature of the global downturn and Asia's strong reliance on external demand weigh against the prospects of a speedy turnaround of economic activity in the region, the report said.
On April 22, the IMF lowered its global economic view saying the world economy would shrink 1.3% this year, while in January, the lender had predicted 0.5% growth.
Historically, Asia has relied on a strong rebound in exports to return to the recovery path. However, this time around, exports are expected to remain depressed globally. In March, the World Trade Organization said the collapse in global demand due to the economic slowdown was expected to drive exports down by roughly 9% in volume terms in 2009, the biggest such contraction since the Second World War.
Asia will eventually need to rebalance its growth from exports to domestic demand, since consumption in advanced countries may remain weak for years to come, the IMF warned. Rebalancing can be achieved by adopting measures like reforming tax and financial systems, and building strong social protection systems that will reduce the need for precautionary savings, the lender said.
Private investment is expected to remain low and consumption is likely to be hurt by rising unemployment, the IMF said. Further, the lender said fiscal stimulus provided in 2009 could be sustained into next year, while being placed in a medium-term framework that ensures a gradual return to fiscal rigor.
Asian economies also need to ensure foreign exchange liquidity, the IMF said, and urged them to draw on bilateral swap lines when required and to tap the lender's new Flexible Credit Line. The IMF facility supplies qualifying countries with large upfront assistance with no policy conditions.
Regarding monetary policy measures, the lender noted that there is room for reducing rates further in many Asian economies and for adopting unconventional policies.
The IMF sees GDP declines in Japan, Australia, New Zealand, Hong Kong, South Korea, Singapore, Taiwan, Malaysia and Thailand this year. The worst decline is forecast for the city-state economy of Singapore, which is expected to shrink 10% this year.
China is forecast to grow 6.5% this year, while India is seen expanding 4.5%. The aggressive policy response by Chinese authorities is expected to support domestic demand and maintain growth at rates close to the level authorities consider necessary to generate jobs consistent with social stability, the lender said. India will be particularly affected by the financial shock, because the strong investment growth in recent years owed much to favorable credit conditions.
Indonesia and Vietnam are set for 2.5% and 3.3% growth, respectively, the report said.
Japan, worlds' second largest economy, is expected to suffer a severe recession this year, with a 6.2% fall in GDP, the IMF said. Sustained positive growth will re-emerge only in late 2010. Others in industrialized Asia, Australia and New Zealand, are forecast to see negative GDP this year, but are expected to return to positive growth towards the end of the year.
Among the newly industrialized Asian nations, which are set for a long and severe recession, South Korea is expected to rebound earlier and more strongly in 2010.
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