Resilience of Asia
By Dilip K. Das
The continuing sovereign debt crisis in the eurozone and prolongation of an anaemic, erratic and jobless recovery in the U.S. during 2011 has had a decelerating effect on the Asian economy and the global economy more generally.
Economic and financial woes in the U.S. and the EU, two of the largest economies in the world, were the cause of enormous uncertainties and financial stress in the global economy leading to a decline in the global GDP growth.
While the Asian economies certainly felt the severity of the problematic economic and financial issues in these two economies, their relatively sound fundamentals moderated the negative impact of the crisis in the region.
Private consumption in Asian economies is trending up. Asian economies are supported by rising domestic consumption in maintaining a healthy GDP growth in spite of the eurozone crisis. They appear to be making a structural shift towards sustainable growth premised on domestic demand instead of exports.
The dynamic Asian economies played a stabilizing role during the global financial crisis. They provided a pull force to the global economy. They could again have a stabilizing effect over the global economy and financial markets, which were rocked by the eurozone sovereign crisis.
When the crisis struck, fundamentals in the Asian economies were strong and sound. As a result the Asian economies were not vulnerable. The region was able to endure the crisis without suffering from a serious downturn, albeit downside risks persisted even at the beginning of the second quarter of 2012.
Due to a challenging global environment, the growth momentum of the Asian economies, including China, no doubt diminished, but the slowdown was benign.
Asian economies were affected by two transmission channels, financial and trade. Notwithstanding the pruning of GDP growth projections for 2012, forecasts by institutions of global economic and financial governance showed that the Asian economies were likely to have a healthy GDP growth.
This group of economies was resilient during the global financial crisis and continued to be so during the eurozone crisis that was not resolved until the second quarter of 2012. There were preliminary indications that in most Asian economies the GDP slowdown was bottoming out at the beginning of the second quarter of 2012.
During 2011, Asian policymakers were, inter alia, having to grapple with menacing rates of inflation. Inflation remained worryingly high in early 2011.
There were two factors stoking the inflationary fires ― first, firmness in global commodity prices and second, sustained domestic demand pressures. Firming food prices were also an important driver of inflation in many Asian economies. Even after the world market commodity prices lowered, inflationary pressures persisted.
Given the persisting high inflation rates, in most Asian economies real interest rates turned negative. Also, in the face of global uncertainties Asian central banks could not hike interest rates, something they would normally have resorted to in the absence of the persisting uncertainties in the global economy.
Given the openness, interdependence and global and regional integration of the Asian economies, it was only natural that the external shocks would affect the region. However, the Asian economies have withstood the crisis.
Due to a challenging global environment, the growth momentum of the Asian economies, including China, has slowed, but the slowdown was not fatal. An important point is that the sound foundations of the Asian economies provided a cushion against negative effects.
Strong domestic demand continued to support the Asian economies. This variable had a meaningful role in protecting Asian economies from the eurozone crisis and ameliorating the severity of its impact. They were better prepared to face the crisis than the other regions of the global economy.
The sovereign debt crisis began in Greece in May 2010 and until the second quarter of 2012, it was far from resolved. Along with the eurozone crisis, prolongation of an anaemic, erratic and a jobless recovery in the U.S. during 2011 had a profound effect on the global economy as well as the Asian economy.
Some eurozone economies and their financial markets were badly affected by the global financial crisis. Many Mediterranean members of the EU were highly indebted. By early 2010, there was a serious question mark on the sustainability trajectory of the public finances, particularly fiscal imbalances, in this group of economies.
This concern assumed crisis proportions in the second half of 2010. Greece, Ireland, Italy, Portugal and Spain spent a good part of 2011 in a precarious financial and economic state, adversely affecting not only the eurozone but also the ongoing global economic recovery.
Among the basic causes behind the crisis were an unsound macroeconomic framework and excessive borrowing by governments. Also, the eurozone banking system was heavily leveraged.
Other than this, some of the long-term causal factors included poor budgetary policies, lax fiscal management and overspending derived from the availability of cheap credit in several eurozone economies.
There were also long-standing structural deficits or structural rigidities in the labor and product markets of many Mediterranean economies. Attempts to resolve them were either slow or inapt.
Due to these long-term limitations, several southern economies of the eurozone have suffered from a long-term loss of competitiveness. In this crisis scenario, there were multiple exacerbating crises in many of the EU economies, which were also interrelated.
The institutional structure to deal with the crisis was deficient. Policy coordination among the 17 disparate countries proved to be more difficult than ever visualized by those who conceived the economic and monetary union.
A lack of credible policy action from the EU and member governments sapped the confidence of households, businesses and financial institutions. Misdiagnosis of the real troubles and lack of political will rendered solutions difficult. Political leaders continuously disagreed and wrangled.
The risk to the global economy and financial markets was high, particularly in late 2011.
At this juncture, the eurozone crisis posed the biggest menace to the global economy. There was a real danger of a double-dip recession. The contagion engendered by these multiple crises was taking its toll on global and regional economies.
In September 2011, the Global Financial Stability Report gave its first negative assessment since September 2008. Recovery from the global financial crisis had slowed and become fragile.
Asian economies are aptly known for their resilience. However, growth rates of the Asian economies can be reasonably expected to moderate in the short term as a result of the eurozone crisis.
This deceleration in growth will largely be caused by the deteriorating outlook for Asian exports to the EU as well as the effects through the financial channels.
During the last decade foreign participation in the Asian financial markets has increased steadily. This exposed Asia’s financial sector to the volatilities in the international capital markets.
Towards the end of 2011, net flows of private capital to Asia stopped completely. Setbacks to the global economy had a strong detrimental effect on multilateral trade. International trade began slowing globally in the latter half of 2011.
In 2012 it is projected to decelerate further to 3.7 percent. In the last quarter of 2011, several dynamic Asian exporters recorded steep decelerations in their export growth rate. This deceleration has continued in 2012. These two factors essentially had a deteriorating impact on the GDP growth rate in Asia. However, due to the lower vulnerability of the Asian economies, the slowdown in growth momentum has been moderate.
Asian economies began well in 2011 and maintained their growth momentum during the first half, although the same cannot be said of the second half.
Asian economies began to be affected by the eurozone crisis and financial strains elsewhere in the global economy.
The World Economic Outlook Update of January 2012 forecasted a deceleration of the global economy in 2012 to 3.3 percent. However, in April 2012 it was revised marginally upward to 3.5 percent.
The GDP growth rate for the Asian economies was also revised downward, but only slightly. GDP growth in China moderated to 6.8 percent in the last quarter of 2011 and further down to 6.1 percent in the first quarter of 2012. This was the worst quarterly growth since the Asian crisis of 1997 and 1998. Notwithstanding the crisis, Asia’s economies have by and large been able to continue with a healthy growth rate.
Dilip K. Das is professor of international economics and international finance and Director of the Institute of Asian business (IAB), SolBridge International School of Business, Woosong University in Daejeon.