Growth of emerging East Asia likely to moderate next year

PETALING JAYA: The economic growth in emerging East Asia would likely moderate next year, with Malaysia posting a full-year growth of 5% against a weaker global economic outlook and the overall phasing out of fiscal and monetary stimulus plans, said Asian Development Bank (ADB).

In its bi-annual report on Asia Economic Monitor December 2010, ADB said external demand would remain subdued, given the weak and fragile recovery in advanced economies while export growth was expected to ease after a strong rebound early this year.

More trade-dependent economies such as Taiwan, South Korea, Singapore and Hong Kong are expected to be affected by weaker external demand.

The report said leading indicators such as industrial production, purchasing managers index and retail sales also suggested a moderation in growth trajectory.

Growth in emerging East Asia may reach 8.8% this year before moderating to 7.3% next year. ADB forecasts Malaysia's growth this year will be 6.8%.

Of the more open middle-income Asean economies, Thailand and Malaysia were said to have grown rapidly in the first half of 2010 partly due to low base effects, as both economies contracted in the first half of 2009.

Growth should moderate during the second half, with leading indicators such as industrial production and retail sales already moderating, the report said.

It also highlighted that the economic outlook for emerging East Asia remains highly uncertain and is subject to four major risks that include persistent weak growth in advanced economies, de-stabilising capital flows, inflation and asset-price bubbles in some economies, and protectionism.

A weaker and longer-than-expected recovery process in advanced economies would further delay policy normalisation, increasing economic distortions and lowering long-term growth prospects.

If the recovery in advanced economies falters, sluggish external demand could once again disrupt the region's robust growth, the report added.

ADB said global liquidity was bountiful, with central banks in major economies keeping interest rates close to zero and adopting more unconventional monetary policy measurers such as quantitative easing to stimulate their economies.

Interest rate differentials between emerging market economies and major developed countries are wider than before the crisis the rapid recovery and higher growth in emerging East Asian economies led authorities to unwind policy stimulus before advanced economies.

Moreover, limited exchange-rate flexibility in the region can draw capital inflows as investors anticipate currency appreciation, it said.

However, such capital flows could de-stabilise the real economy, causing major challenges for macroeconomic management. Another concern was that risk sentiment could change abruptly, leading to a sudden capital flow reversal.

ADB also said that for several economies, inflation could exceed targets with surging capital inflows fuelling asset-price bubbles while protectionism measures such as capital controls could emerge, given the unsynchronised global recovery.

The report highlighted that with spillovers from national policies and the growing interdependence of the region's economies, the next step for regional cooperation in East Asia could be on an exchange rate policy.

ADB said one of the initial steps towards having a regional exchange rate cooperation included that of being institution-lite rather than based on the full range of institutions created for Europe's monetary and economic union.

A realistic short-term objective would be to reduce intra-regional exchange rate variability while allowing exchange rates to respond to shocks outside the region, it added.

- The Star Online