Optimism around Asia is fading with growth in its biggest economies slowing considerably this year, compelling central banks to keep policy accommodative for longer, though the worst of the downturn may be over, a Reuters poll showed yesterday.
As Europe’s debt crisis drags on and the US economy slows, weighing on Asia’s exports, economists are cutting their growth forecasts for most of the economies in the region.
However, they remain cautiously optimistic that Asia would start to recover by the end of this year, even if some are skeptical about the pace at which it would do so.
“It is going to be a long hard slog back up,” said Vishnu Varathan, economist at Mizuho Corporate Bank in Singapore, who feels that this time around Asia is not going to see the V-shaped rebound it experienced after the 2008 to 2009 global crisis.
When compared to previous Reuters quarterly surveys, analysts seem more pessimistic about Asia’s ability to shield itself from the headwinds from the Europe and the US.
With external weakness likely to persist, policymakers in much of Asia are looking to ramp up domestic demand with fresh fiscal or monetary stimulus.
While growth in China’s economy is expected to weaken to 8 percent this year, a level many consider the borderline between a potentially severe slowdown and a mild one, the growth outlook for India was slashed to 6.3 percent this fiscal year, which would be the slowest pace in a decade.
China’s economy will likely recover modestly as Beijing intensifies its policy fine-tuning to boost growth. Analysts predict it probably bottomed out last quarter, when growth cooled to 7.6 percent from a year earlier, the slowest pace in more than three years.
Yet the story looks much worse for India. Even as growth falters, the rupee has been hitting all-time lows against the US dollar, the Indian government is struggling with bloated fiscal and current account deficits and inflation has remained stubbornly high, giving policymakers less room to maneuver.
Taiwan, Singapore and South Korea, all heavily exposed to trade with the West, are set to take a hit this year as the situation worsens in Europe.
The IMF on Monday trimmed its forecast for economic growth in emerging countries and warned that the outlook could dim further if policymakers in Europe do not act with enough force.
Even though India and China will no longer provide enough steam to drive Asia’s growth to pre-crisis levels, Southeast Asia is a bright spot in the otherwise gloomy scenario.
“Where Southeast Asia is in good stead is it doesn’t have the domestic problems like India does,” said Daniel Martin, economist at Capital Economics in Singapore.
“The fundamentals look good. They don’t have issues with inflation like in India and there have been far fewer question marks over governance,” he added.
The Philippines, Malaysia, Thailand and Indonesia are all expected to have steady growth rates and with inflation showing signs of cooling policymakers across the region can shift their focus to spurring growth.
The survey showed Asian economies will either cut rates or leave them on hold for this year. Analysts as a whole have also delayed their expectations for rate hikes in the region.
Unlike their counterparts in the West, most of Asia’s central banks still have plenty of room to cut interest rates and most Asian governments are in a fairly good position to roll out fiscal stimulus measures to help their economies. However, analysts said such steps can only do so much to shield the region from what looks to be a prolonged global downdraft.