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Sustaining the ASEAN+3 Recovery: Outlook, Risks, and Policy Issues
Speech by Haruhiko Kuroda, ADB President, at the 13th ASEAN+3 Finance Ministers' Meeting, Tashkent, Uzbekistan
Your Excellencies, ladies, and gentlemen:
It is a privilege to be with you again.
Last year, we discussed the next steps needed on the road to the region's economic recovery. Today, I am proud to report that the recovery in ASEAN+3 and in Asia generally is gaining significant traction. Economic growth this year is expected to be above 2008 levels for most of the region—hence, a better than V-shaped recovery.
Today, I will address four questions: first, what does the external environment look like for ASEAN+3 this year; second, how robust is the region's recovery; third, what possible risks we should prepare for; and, lastly, what policy options can ensure recovery's sustainability.
II. External Environment
Over the past few months, recovery in advanced economies has broadened and global financial markets have stabilized. Together, these developments have given sufficient confidence to authorities in advanced economies to begin rolling back the extraordinary measures introduced to stabilize financial markets at the height of the crisis.
In the US, the "Great Recession" appears to have ended, and a gradual recovery is underway, even if unemployment remains high. The eurozone economy is also recovering, although the recent debt crisis in Greece remains a concern.
World trade, after collapsing in 2009, is now rebounding strongly and should normalize further as the global recovery deepens. And inflation, although edging up, remains tame in advanced economies, given excess capacity and stabilizing commodity prices.
III. Outlook and Risks for ASEAN+3
With the improving external environment—and the swift policy responses from ASEAN+3 authorities—economic recovery in the region is taking hold. Taken together, ASEAN+3 economies are expected to post an average growth of 5.0% in 2010, much higher than the 3.5% and 0.9% in 2008 and 2009, respectively. However, the speed of recovery will likely vary considerably across economies. More open economies, who were hit hard by the global crisis, are likely to rebound faster and stronger than others.
After a sharp decline in 2009, the Japanese economy should return to growth in 2010. Growth, thus far, has been broad-based, industrial production has been healthy, and exports are coming back.
China grew at 11.9% in the first quarter of the year, and remains the driving force within the region. Aggressive fiscal and monetary stimulus packages continue to add to growth—enough for authorities to begin stimulus exit strategies. Inflation will be carefully monitored, as the government is well aware of the effects of overheating and the creation of asset bubbles. We also see GDP growth this year rebounding significantly in Korea.
ASEAN's aggregate growth is forecast to rebound to 5.1% in 2010, based in large part on the recovery in global trade and investment. Five ASEAN economies—Brunei Darussalam, Cambodia, Malaysia, Singapore, and Thailand— contracted in 2009, but will return to growth in 2010.
Inflation is slowly rising, but should remain manageable, particularly where excess production capacity exists. The balance of payments across the region is expected to strengthen on stronger exports and rising capital inflows.
The economic outlook, however, is subject to four major risks: first, a reversal in growth in advanced economies; second, a loss of economic momentum in China; third, destabilizing capital inflows; and, finally, unintended policy errors over when and how to exit economic stimulus.
A reversal in growth or slower recovery in the US and the eurozone needs careful monitoring. There remain many uncertainties in the global recovery. The effects of fiscal stimulus could fade. Slack demand could slow inventory replenishment. Deleveraging by households could cut into consumer spending. Sovereign debt problems could derail the eurozone's recovery.
Closer to home, there could be a loss of growth momentum in China. First quarter growth was above expectations. It may have to try to control growth more actively to prevent overheating. Investment powered China's economy in 2009, contributing over 90% of 2009 GDP growth on the demand side. 2010 might see this drop more than currently expected, as authorities have said that they will cut new bank lending significantly.
There is also the issue of destabilizing capital inflows. Robust growth across Asia suggests it must exit stimulus earlier than other regions. The higher yields that result and the currency appreciation we are already seeing could encourage carry trades. Subsequently, capital inflows to Asia could surge again, complicating macroeconomic management and adding uncertainty to growth prospects.
As the recovery gains traction, how to time and craft exit strategies takes center stage. While ASEAN+3 countries implement exit strategies from fiscal and monetary stimuli, poor timing or an inappropriate monetary and fiscal policy mix could derail their recovery.
IV. Policy Issues
The multi-speed recovery in ASEAN+3 suggests that exit strategies from policy stimulus will naturally differ among countries—both in timing and policy mix.
In economies such as China and Viet Nam—where recovery is strong and inflationary pressures are emerging—it is time to begin "normalizing" macroeconomic policies. Economies where recovery is firming and inflation pressures are subdued need to prepare for exiting stimulus policies; the newly industrialized economies, along with Malaysia and Thailand, may fall into this category. For other ASEAN+3 countries, where macroeconomic conditions are improving yet recovery remains somewhat fragile, policies could remain accommodative for some time.
Within each country, coordination between fiscal and monetary authorities—and, perhaps, financial regulators as well—is key to implementing effective exit strategies. Central banks and finance ministries must not work at cross purposes.
With the possibility of resurgent capital inflows, it is also essential to manage inflows effectively. Responses should address currency flexibility, clear and stable monetary and fiscal policies, an appropriate regulatory and supervisory framework, and even carefully crafted temporary capital controls.
There is also merit in collaborating and coordinating exit strategies among ASEAN+3 members, with the ASEAN+3 Economic Review and Policy Dialogue process moving beyond information sharing, to discussing how to coordinate macroeconomic policies. Discussion on coordinating foreign exchange policies would also aid ASEAN+3 members in their economic decisions. It is encouraging that the ASEAN+3 is expediting the establishment of the regional surveillance unit to support the multi-lateralized Chiang Mai Initiative. This should strengthen the economic review and policy dialogue, and contribute to the better coordination of macroeconomic policies.
In closing, the global crisis has given Asia the opportunity to rebalance its sources of growth towards greater domestic and regional demand and to increase economic cooperation to previously unforeseen levels. And it has given the region the chance to play a larger role in helping reform the global economic architecture. The challenge facing ASEAN+3 is keeping up the momentum of regionalism, as the concept expands toward an eventual Asian economic community.