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Asia Economy Last Updated: Aug 23, 2010 - 8:24:15 PM

Emerging East Asia's V-shaped recovery firmly on track; Time to unwind policy stimulus
By Finfacts Team
Jul 20, 2010 - 2:58:43 AM

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The strong V-shaped economic recovery in emerging East Asia means it is time to unwind monetary and fiscal policy stimulus across the region, says the July edition of the Asian Development Bank’s (ADB) Asia Economic Monitor (AEM) released today.

ADB has upgraded its 2010 growth forecast for the 14 economies of emerging East Asia to an aggregate 8.1% from the 7.7% projected in ADB’s Asian Development Outlook 2010 published in April. The forecast for the region’s economic growth in 2011 remains at 7.2%.

“While most emerging East Asian economies are assured of a sharp V-shaped recovery this year, it is too early to say that the ‘V’ stands for victory,” said Srinivasa Madhur, Senior Director of ADB’s Office of Regional Economic Integration, which produced the AEM. “Ensuring the sustainability of the recovery depends heavily on the correct timing, policy mix, and pace at which economic stimulus is withdrawn. The private sector must be strong enough to take over,” he said.

Emerging East Asia comprises the 10 economies of the Association of Southeast Asian Nations, plus the People’s Republic of China (PRC); Hong Kong, China; Republic of Korea; and Taiwan.

An impressive first-half performance suggests China will continue its strong growth momentum by expanding by 9.6% this year. Measures announced to prevent overheating will likely temper growth in 2011 to 9.1%. These forecasts are unchanged from ADB’s April report.

After being badly hit by the global crisis in early 2009, the newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taiwan are forecast to grow a solid 6.2% this year, tapering off to 4.5% in 2011. Led by Singapore’s rapid 12.5% growth, these economies should benefit from a rebound in investment and rapid export growth.

Economic prospects for the Association of Southeast Asian Nations (ASEAN) are also good for 2010 after a tough 2009. Leading indicators continue to improve, with strong industrial production growth and rising consumer confidence. Together, ASEAN is forecast to expand 6.7% this year before moderating somewhat in 2011.

ADB has revised its 2010 growth outlook for East Asia to 8.1% from 7.7%. Srinivasa Madhur, principal director at ADB speaks to CNBC's Maithreyi Seetharaman, Chloe Cho & Yousef Gamal El-Din about the three key risks that could derail this growth projection:

The AEM points to three major risks to the positive outlook for emerging East Asia: a disruption in the recovery in advanced economies; destabilizing capital flows; and unintended policy errors while unwinding the stimulus measures.

With a few exceptions, the ADB says it is now time for the region to unwind policy stimulus. In terms of policy mix, a strategy of normalizing monetary policy first and consolidating fiscal policy subsequently is more appropriate for most of emerging East Asia. Considering the need to rebalance the region’s sources of growth, the bank says there is merit in normalizing monetary conditions through a mix of currency appreciation and interest rate adjustments rather than entirely through policy rate hikes. The pace at which economies unwind stimulus should depend on the speed of recovery as well as evolving risks.

In Korea; Malaysia; Singapore; Taiwan; and Thailand tightening has already begun, and should continue at what appears to be an appropriate pace.

Building on recent measures to slow credit expansion, China should accelerate policy normalization by, among other things, letting the currency appreciate at a pace appropriate to domestic economic conditions.

And in Indonesia, Philippines, and Viet Nam, unwinding policy stimulus may need to start soon.

“It’s critical for each country to withdraw the stimulus at an appropriate pace but greater regional coordination, especially on exchange rates, could spur regional demand and help global economic rebalancing,” said Madhur.

In a separate special assessment, also released today, ADB raised its growth forecast for all developing Asia to 7.9%, from April’s 7.5% projection for this year. The 2011 forecast remains at 7.3%. Developing Asia comprises 45 member countries of ADB.

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