IMF raises forecasts for Asia's economic growth

The Jakarta Post

The Associated Press, Hong Kong | Thu, 10/29/2009 2:35 PM

Asian economies from China to India will grow faster than expected through next year, far outpacing recoveries in the West, thanks to aggressive government stimulus spending and a pickup in global trade, the International Monetary Fund said Thursday.

But the region's rapid expansion will remain below the levels seen in the decade before the economic crisis as consumers in the U.S. and other large industrialized nations curtail their spending on Asian-made electronics, cars and other goods in the face of rising unemployment and other legacies of the downturn, the fund said in a report.

"Asia has not decoupled from the rest of the world," the IMF said, wading into a broader debate over whether the region's prospects hinge on the West. "In fact, Asia's fortunes remain closely tied to that of the global economy."

The fund raised its forecast for Asia, saying the broader regional economy that spans countries from New Zealand to India would grow 2.75 percent in 2009 and 5.75 percent in 2010. That's still below the average of 6.7 percent over the past decade. Both projections were about 1.5 percentage points stronger than those estimated by the fund in May.

Economies in the seven leading developed countries, meanwhile, were seen as shriveling by about 2.5 percent this year and growing only 1.25 percent next year.

Asian countries have been leading a recovery in the world economy, with growth accelerating since governments across the region loosened monetary policies and unleashed a torrent of spending to help shelter their companies and consumers from the drop-off in global trade and finance.

China's economy, the world's third largest, expanded at an 8.9 percent pace in the third quarter on the back of lavish government stimulus and bank lending. In South Korea, the economy grew last quarter at its fastest rate in over seven years.

Looking ahead, China was expected to outperform, its economy growing 8.5 percent in 2009 and 9 percent in 2010, the IMF said. Japan, the world's No. 2 economy, was set to contract 5.5 percent this year before turning around next year to grow 1.75 percent.

With only about half the region's stimulus carried out so far, government measures will continue to buoy local economies over the next several quarters, the IMF said.

Unwinding those measures will require Asian governments to walk a fine line between supporting economic activity and fighting inflation.

Except for China, India and Australia, whose economies are staging quicker recoveries than most, Asian countries should ensure government policies continue to prop up their economies next year, the fund said. Steps to restrain the easy flow of money, through interest rate hikes and other monetary tightening, won't be necessary anytime soon because recoveries are still fragile and risks of inflation low.

Once the effects of stimulus programs fade, however, Asia will ultimately need to find ways to make up for weaker demand in the West by increasing its local private consumption with the help of a broader social safety net and other reforms, the IMF said.

Asia's history of high savings and low consumption reflects a lack of state pension systems and affordable health insurance. Knowing there's no safety net, Asia's workers save more than they otherwise would while also using part of their incomes to support their parents.

Over the longer run, the fund said Asian countries will have to let their currencies appreciate. China, for example, has long held down its currency, a policy that's boosted demand for exports but which analysts say has contributed to economic imbalances that hinder broader and sustainable growth in the region.

The IMF also warned against raising interest rates too soon. Doing so might not only sap the tentative rebound in most countries but exacerbate this year's surge in prices of equities, real estate and other assets in Asia.

That's because investors would be encouraged to borrow money from countries with rock-bottom interest rates, such as the U.S. and Japan, and direct it toward nations with higher interest rates, a practice known as the carry trade.

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