Asia to face difficult year, has ample policy space — IMF economists

January 6, 2012 11:36 pm 

WASHINGTON, Jan. 6 — Events unfolding far from Asia's shores could shape the region's economic outlook for 2012, but Asia's policymakers still have the room to respond aggressively to a deteriorating global economic scenario, say economists with the International Monetary Fund (IMF).

"Despite the prevailing global uncertainty, Asia has until now, proven to be very resilient. It has boasted strong domestic demand, low unemployment, and factories working at near-full capacity. While credit growth has slowed from the torrid pace of early 2011, it remains robust in most economies," IMF economists note in an article on the IMF blog on Thursday.

However, Asia's heavy reliance on trade is likely to make 2012 a difficult year. Asia is one of the world's most trade-dependent regions, exporting everything from commodities such as metals and rice to sophisticated electronic products and cars, caution IMF economists.

Regional growth has already started to slow due to weaker demand, although domestic factors such as tighter macroeconomic policy stances have also played a role,especially in India and China. Recent stresses in several regional financial markets suggest that financial channels of contagion also pose a risk for Asia, according to the article.

"Further financial turmoil in the euro zone would likely have a substantial impact on Asia by reducing access to credit. Euro zone banks are an important source of funding for many Asian banking systems, and play a crucial role in providing trade credit," note the economists.

But there is still sufficient policy space in the region, though less than at the start of the global financial crisis in some countries. Some economies have already started monetary easing. Fiscal policy consolidation could be appropriately delayed if external demand were to collapse, especially where low levels of public debt afford space for measures, suggest the IMF experts.

Asia remains home to some of the world's most dynamic economies, but several reforms are needed to sustain the region's excellent historical performance and reduce vulnerabilities to external shocks in the medium term, notes the article.

In China, further actions are needed for a sustained rebalancing of growth away from investment and exports towards private consumption. These include reform and liberalization of the financial system, fiscal support to household consumption, and a further expansion of the social safety net, suggest the economists. (PNA/Xinhua)

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