Developing Asia's Recovery from Crisis Takes Firm Hold - ADB

News Release | 13 April 2010

HONG KONG, CHINA - Developing Asia's strong recovery from the effects of the global economic crisis is expected to continue through the next two years, the Asian Development Bank (ADB) says in a new major report.

ADB's annual flagship economic publication, Asian Development Outlook 2010 (ADO 2010), released today, forecasts robust growth of 7.5% in 2010, well up from 5.2% in 2009, supported by a modest recovery in global trade and the ongoing effects of fiscal and monetary stimulus. Growth should moderate slightly to 7.3% in 2011 as effects of those expansionary policies dissipate.

"Developing Asia's recovery has taken firm hold and a return to stronger and sustainable growth is now in sight if the region can meet the challenge of strengthening domestic demand," says ADB Chief Economist Jong-Wha Lee.

Prospects improved after better-than-expected growth in the second half of 2009, helped in particular by strong performances in the People's Republic of China (PRC) and India. The stimulus measures of last year will continue to fuel investment in the region, while private consumption is likely to increase as income prospects pick up and unemployment declines.

As the recovery lifts domestic demand, it is also likely to boost consumer price inflation to about 4% in each of the next two years. The overall current account surplus is predicted to decline further this year and next as external demand only slowly picks up and domestic demand strengthens.

But as the recovery proceeds, says the report, the region faces several risks, including a slower global recovery, with the outlook for the industrialized economies still somewhat uncertain. There is concern that as stimulus measures are unwound, particularly in the major economies, the strength of private demand is not healthy enough to take over.

Other potentially unsettling issues to watch out for include a sharp increase in international commodity prices, deteriorating fiscal positions, and the persistence of global imbalances.

Developing Asia faces the additional concern that its early and relatively strong recovery and higher interest rates are already attracting potentially volatile capital flows, complicating macroeconomic management. Rising food prices, which disproportionately impact the poor, also pose a risk.

As the report points out, government policy makers must face the challenge of sustaining growth in this still uncertain environment through a faithful, yet timely return to sound and responsible fiscal and monetary policies. These served the region well when the crisis broke, and authorities need to adapt them appropriately as recovery takes hold and the crisis recedes.

There is also plenty of scope for longer-term improvements to Asia's monetary, exchange rate, and fiscal policy frameworks. Such adjustments, the report outlines, will enable the region to better adapt to the post-crisis world.

In East Asia, where recovery is strongest, growth is forecast to accelerate to 8.3% in 2010, from 5.9% in 2009, with solid recoveries in the three economies that shrank last year (Hong Kong, China; Mongolia; and Taipei,China). The gross domestic product (GDP) growth will also remain buoyant in the PRC, where huge government stimulus measures will continue to have their effect. The Republic of Korea is expected to rebound to a 5.2% expansion, driven by stronger private investment and consumption and the pickup in global trade.

In Southeast Asia, aggregate growth is likely to rebound to 5.1% in 2010, from just 1.2% in 2009, when five of ten economies contracted (Brunei Darussalam, Cambodia, Malaysia, Singapore, and Thailand). The bounce back is due in large part to the revival of global trade and rising investment. The pace of growth is likely to quicken a bit in 2011.

South Asia, too, will pick up in 2010, led by a projected 8.2% performance in India, but also strong growth in Sri Lanka (6.0%), as it continues to benefit from its recent return to peace after a long civil conflict. Pakistan is likely to pick up, with growth of 3.0% reflecting better domestic economic fundamentals, while growth is likely to ease slightly in Bangladesh and Nepal.

Economic growth is also expected to edge up in 2010 in Central Asia, from 2.7% in 2009, as higher oil prices and a recovery in the Russian Federation underpin economies. But ongoing weakness in Kazakhstan's non-oil economy will hold its overall growth down to 2.5%, while Armenia and Georgia will eke out only meager growth of about 2%.

In the Pacific, the overall growth rate is forecast to rise to 3.7% in 2010, from 2.3% in 2009, buoyed mainly by a stronger Papua New Guinea and Timor-Leste, both of which benefit from higher export demand and prices for natural resources. However, GDP in the Fiji Islands is expected to contract again, and most of the smaller economies will grow by less than 1%.