ADB underlines Western risks to Eastern economies

The euro zone crisis and a weak recovery in the United States are the most significant threats to East Asian economies, including China, the Asian Development Bank (ADB) warned on Tuesday, while drawing down its aggregate gross domestic product (GDP) forecasts for the region from 7.5 per cent to 7.2 per cent growth next year.

In its “cautiously optimistic” outlook for emerging East Asia, the Manila-based bank said that there were now greater downside risks compared to just a few months ago including a “deep recession” in the euro zone and the US, protectionism or overly restrictive financial policies, destabilising capital flows and rising inflation.

Although the euro zone’s sovereign debt crisis and anaemic US recovery have had limited impact on the region’s economic growth so far, “both the US and euro zone are major markets for the region’s exports and significant sources of financial capital,” the ADB said in its Asia Economic Monitor released on Tuesday.

“Hence, any shock to both will have strong repercussions on the region,” added the report, which covers China, South Korea, Hong Kong, Taiwan and the 10-member Association of Southeast Asian Nation (Asean).

In a scenario where the US economy goes into recession, as a result of the crisis in the euro zone, the impact on East Asia would range between 0.5 to 2.5 percentage points below the baseline, the report predicted, adding that if there were to be a new global crisis with both the euro zone and the US GDP falling to 2009 levels, the implications for this region “would be much more serious, though still less than in 2008/09”.

While differences in economic expansion will be influenced by the extent of “openness to trade and capital investments as well as the capacity of domestic demand to sustain growth,” the bank felt that the shift in Japan’s reconstruction effort, “from publicly-funded infrastructure to private business recapitalisation”, and the restoration of supply chains in flood-hit Malaysia and Thailand will benefit certain Asean economies.

At the same time, the ADB also underlined the need for East Asian countries to continue with structural reforms and implement supply-side policies to sustain long-term growth.

“The region’s future depends on developing new growth sources or drivers of the economy, and policymakers must be allowed to prioritise policies that foster factor accumulation and productivity growth. In particular, four areas stand out—human capital, infrastructure, financial development, and promoting small and medium enterprises,” the report added.

Moreover, pushing for closer economic integration in the East Asia region — an issue that was raised at the Asean and East Asia Summits in Indonesia last month —the report noted that economies here will increasingly have to rely on domestic and regional demand, given that the crisis in euro zone and the US is likely to persist.

“It may help for East Asia to consolidate many bilateral and plurilateral free trade agreements into a single, region-wide agreement and to in part accelerate the rebalancing process. Further investment in cross-border infrastructure — transport, communications, and energy systems — will provide the backbone for fostering greater integration,” it said.