Rising Risk of Deep Eurozone-US Recessions Poses Threat to Asia

MANILA, PHILIPPINES – Economic growth in emerging East Asia will continue to moderate into 2012 as growing sovereign debt problems in Europe and an anemic US economy raise the spectre of a deep global economic downturn, says the Asian Development Bank’s latest Asia Economic Monitor.

In the event that both the eurozone and the US economies contract sharply, the impact on emerging East Asia would be serious yet manageable, the report says.

“The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia; so the region’s policymakers must be prepared to act promptly, decisively, and collectively to counter what could be an extended global economic slowdown,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration, which produced the report.

The semi-annual report released today assesses the 10 ASEAN economies – Brunei Darussalam; Cambodia; Indonesia; Laos PDR; Malaysia; Myanmar; Philippines; Singapore; Thailand; and Viet Nam – as well as those of the People’s Republic of China (PRC); Hong Kong, China; the Republic of Korea; and Taipei,China.

ADB cut its forecast for the region's growth in 2012 to 7.2% from the 7.5% forecast in the September Asian Development Outlook 2011 Update. Growth is still forecast at 7.5% for this year.

In a special section—Can East Asia Weather Another Global Economic Crisis?—the report describes the events that could lead to a recession in the eurozone and a new economic downturn in the US. It examines how a new global economic crisis would affect the region under differing scenarios. East Asia comprises emerging East Asia plus Japan.

In the worst case scenario—with the eurozone and US contracting as much as they did in 2009—emerging East Asia would grow by 5.4% next year. That would be 1.8 percentage points below the current forecast but not as severe as the impact of the 2008/09 global crisis. This is due in part to diversification of the region’s export markets and increased domestic demand as a source of growth.

Nonetheless, the region’s financial systems remain just as vulnerable as they were in 2008. The report notes that heightened risk aversion would see investors slash holdings of Asian financial assets while highly leveraged European banks would cut lending, leading to tighter credit conditions.

To cope with a potentially prolonged global crisis and a slow subsequent recovery, Asia’s policymakers can use available financial, monetary, and fiscal tools. These include mechanisms in place to safeguard financial stability and ensure sufficient credit is available regionally. Monetary policy must remain flexible while exchange rate coordination would avoid competitive devaluations. And the region still has sufficient fiscal space to apply stimulus gradually and judiciously where needed while avoiding too much budgetary strain.

The report forecasts the eurozone economy will expand 0.5% next year with the US economy growing by 2.1%. For 2011, ADB is still forecasting growth of 1.7% and 1.6% for the two economies respectively.

Growth in the PRC is likely to moderate even as domestic demand continues to rise, and is now forecast at 8.8% in 2012 after expanding 9.3% this year. In September, ADB had forecast growth of 9.1% in 2012.

The newly industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China, will see slower growth both this year and next year in large part because they are more dependent on international trade than their neighbors. This leaves them highly vulnerable to an economic contraction in Europe and the US.

ASEAN’s economies will also grow more slowly than previously expected. Thailand, hit particularly hard by the recent floods, should recover from supply disruptions next year. ADB now sees Thailand’s economy growing a smaller 2.0% this year, but is maintaining its 4.5% growth forecast for 2012.

Japan’s economy is forecast to bounce back from the effects of the recent natural disasters as supply chains are rebuilt, but the strong yen will likely hurt exports while domestic demand is likely to remain weak. As such, ADB continues to forecast a contraction of 0.5% this year followed by a 2.5% expansion next year.