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2012 – A Challenging Year Ahead For Asia
Malaysia Perspective | 09 February 2012
By:

By Predeeben Kannan

The year 2011 was gloomy for many countries, with a snail’s pace US economic recovery, the expanding Eurozone debt crisis, the Japanese Tsunami and earthquake, the floods in Thailand and the cooling down of the Chinese economy, due to inflation. The situation was further worsened by the uncertainties in the Middle East and ballooning budget deficits in many Asian nations. So, will 2012 be any better?

If one were to focus on East Asian growth alone, it would have seemed quite a challenge. According to the World Economic Situation and Prospects 2012 (WESP), an annual United Nations (UN) report, East Asia’s growth is projected to decline to 6.9 percent both in 2012 and 2013, down from the 7.2 percent registered in 2011. We must remember that East Asia is the engine of growth in Asia. A slowdown in East Asian growth will have repercussions throughout the rest of Asia, as most countries in the region are very much dependent on East Asia as their main export market and production base. In addition to this, a deep and prolonged recession in major developed economies could have severe impact on growth across the region, with falling exports and increased uncertainty possibly triggering a downturn in private investment and consumption.

Just recently, China announced a 8.9 percent GDP growth rate, higher than the expected 8.7 percent expected by the market. The market took the news positively and it resulted in rallies in most South East Asian bourses and strong support for base metals and mining stocks. As long as China’s economy continues to grow at 9 percent annually, the prospects of a global recession are reduced and the prospects for South East Asian nations are better, even if Europe does sink into a recession. The CEO of Malaysia’s Maybank Investment Bank, YM Tengku Dato’ Zafrul Tengku Abdul Aziz, in an interview with Xinhua news agency conveyed his belief that China is doing well enough to contain fears within the region;

“China is slightly opposite of Europe as they are trying to cool down the economy and calm the inflation rate. So we feel more positive about China than the rest,” he said.

However, should China’s growth slow down to about 7 percent in the next two years, experts believe, the rest of East Asia would see a more pronounced slowdown than currently expected.

Domestic Demand Versus Export Driven

The year 2012 should also be favouring countries with large domestic demand bases, notably China, Indonesia and even India, despite all the constraints faced by the South Asian nations in 2011. These countries are expected to be in a better position to maintain robust growth than the more export-oriented economies. According to the WESP, real wages continued to move up in 2011 on the back of productivity gains and policy measures such as minimum wage hikes. This trend is expected to continue in the outlook period, especially in the economies with lower per capita incomes and larger domestic demand bases such as China, Indonesia and Vietnam.

The International Monetary Fund (IMF) and the World Bank believes that in 2012, central banks are expected to ease monetary policy further unless global economic conditions improve significantly. As demand in developed regions such as Europe, the US and Japan is projected to remain sluggish in 2012 and 2013, East Asia’s imports are expected to grow faster than its exports and lead to a slight narrowing of external surpluses across the region.

The UN report indicated that Indonesia, the Philippines and Thailand announced moderate-sized fiscal stimulus measures in the fourth quarter of 2011 to mitigate the impact of slowing exports. It added that in the Philippines, the Republic of Korea and Singapore, budgets strengthened further in 2011. Countries that did not do too well in budgetary terms were Indonesia, Malaysia and Thailand, all of which had their deficits widened in 2011, as government spending increased markedly. The situation is expected to be similar in 2012, as the global economy slows down and export growth reduces across the region.

Greater Cooperation Crucial

It has to be remembered that the European Union (EU) is China’s major trading partner. The same applies for EU’s exports to China. Therefore any slowdown in the EU economies will have far reaching repercussions on China’s growth rate for 2012. Such a slowdown would not benefit the rest of Asia, when other export markets are depressed. Therefore, the key to continuous growth for Asia in 2012 lies in greater cooperation between Asian nations to contain the effects of the European debt scenario and its effects on the rest of the world’s economy.

Haruhiko Kuroda, president of the Asian Development Bank is however “cautiously optimistic” about the developments in Asia. Despite the economic slump and uncertainties, he believes that developing Asia will still show robust growth in 2012. He also predicts that the regional economy will perform better this year than in 2011, although its exports might drop due to the falling demand from developed countries. His view was shared by David Lipton, first deputy director of the IMF.

“Despite the spillover from crises, Asian economies have remained committed to free trade, and closer financial and economic cooperation,” Lipton said. “So it is neither a coincidence nor a surprise that Asia has led the global recovery over the past three years.”

South East Asian nations can take comfort in the fact that they have an excellent business and cultural relationship with China. As the Chinese economy continues to grow, it allows the regional economies to benefit from the spillover effects. A case in point, ASEAN has recently surpassed Japan to become China’s third-largest trade partner following establishment of the China-ASEAN free trade zone in 2010. As long as the Asian economies maintain their healthy growth and remain competitive, they should not worry too much about an impending recession, but instead a weaker economic growth compared with the last two years.

*The views expressed in this article are strictly those of the writer. Predeeben Kannan has more than 15 years senior level experience at various media organisations in Malaysia and Singapore. For more dialogue, please e-mail predeeben@gmail.com


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