Global engine room chugging along

ASIA WILL REMAIN the engine of global economic growth, despite the slowdown in China, the International Monetary Fund (IMF) said last week, and policymakers in the region have room to ease monetary policy to support their economies if necessary.

However, risks remain if the crisis in the freshly announced Nobel Laureate, the European Union, should worsen and if the US fails to deal with the “fiscal cliff” of tax rises and federal spending cuts.

Despite “less buoyant” growth in the near and medium term in the region, China’s economy, which is the world’s second biggest, is expected to have a “soft landing”, expanding by 7.8 per cent this year and 8.2 per cent next year, with interest rate cuts expected in June and July.

The government’s official target is for growth of 7.5 per cent this year.

“The balance of risks to the near-term growth outlook is tilted to the downside,” the IMF said in its semi-annual World Economic Outlook. “In the short term, a further escalation of the euro area crisis and failure to address the US fiscal cliff are the main external risks.”

The region’s increased reliance on China means investment growth in that country is crucial to the wellbeing of everyone in Asia, the IMF said. Every percentage point decline in investment growth in China translates into more than half a percentage point drop in growth over four quarters in economies including South Korea, Malaysia and Taiwan.

“While relatively strong economic and policy fundamentals have helped buffer Asian economies against adverse market spillovers, aggressive deleveraging by euro-area banks and flight of capital to traditional safe havens could also severely disrupt Asian financial systems,” the IMF said.

China was one of five regional countries, along with South Korea, Malaysia, Singapore and Thailand, that were running stronger trade surpluses and weaker currencies than desirable.

As the World Bank pointed out, the East Asia and Pacific region’s share of the global economy has tripled in the past two decades, from 6 per cent to almost 18 per cent today.

Growth in Asia is balanced right now. “Many Asian economies have now reached a development stage that exposes them to the risk of falling into the ‘middle-income trap’, which is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries,” the IMF said.

Inflation is generally expected to fall in the region, except in India, where price pressures were elevated.

Asia’s third largest economy is expected to grow 4.9 per cent this year, down from a forecast in July of 6.1 per cent, while Indian growth next year is seen at 6 per cent, down from a previous forecast of 6.5 per cent.

However, some regional political differences remain difficult to solve and threaten to overshadow efforts to find accord on financial issues in the region. The governor of the People’s Bank of China, Zhou Xiaochuan, and finance minister Xie Xuren both pulled out of IMF and World Bank meetings in Japan, for example.

IMF projections show a one in seven chance that Asia’s growth will slow to less than 4 per cent next year, which is close what the rate was in 2009.