THE ASIAN ECONOMIC OUTLOOK IN 2011
WILL HOT MONEY FLOWS DERAIL ASIAN GROWTH?
|The global economic outlook has improved
at the outset of 2011. Continued
growth momentum in the world’s two largest economies – the U.S. and China - is helping to underpin the global economic
outlook for 2011, supporting prospects for world trade and investment flows.
In the U.S., the outlook has been helped when President Obama signed the tax cut package in December 2010. As a result, U.S. gross domestic product (GDP) growth in 2011 is expected to exceed 3 percent, underpinning global economic growth momentum. In China, which became the world’s second largest economy in 2010, strong economic growth is forecast to continue in 2011, at a pace of around 9.5 percent.
|>> The risks are that if significant
tightening in Chinese monetary
policy and credit conditions are
required, this could result in a growth slowdown that would
have effects throughout
sia-Pacific region. <<
However, there are still significant risks and vulnerabilities to the global economic outlook over the year ahead. The Eurozone has numerous economic problems due to the sovereign debt crisis and banking sector
woes that have engulfed a number of member countries. As a result, Eurozone GDP growth in 2011 is forecast to be sluggish,
at a rate of around 1.5 percent, less than half the expected GDP growth rate of the U.S. economy this year. In Japan, economic
growth momentum is also slowing sharply, with GDP growth in 2011 expected to be around 1.2 percent.
Against this global backdrop, prospects for the Asia-Pacific region are for a second year of economic recovery, with the export-dependent East Asian economies helped by the positive growth outlook of the U.S. and China. The Asia-Pacific will continue to be the fastest-growing region of the world in 2011, according to IHS Global Insight’s latest economic forecast. Overall economic
growth for emerging Asia (excluding Japan) is expected to be around 7.1 percent in 2011, still maintaining strong growth momentum after an 8.2 percent growth rate was achieved in 2010.
However, this multispeed global economic expansion in 2011, with rapid growth continuing in emerging Asia while recovery in the US, EU and Japan remains fragile with mounting sovereign debt problems. It also gives rise to increasing concerns about the impact of excessive liquidity in
|Source: IHS Global Insight forecasts
the global financial system. The Fed, European Central Bank and Bank of Japan are expected to maintain very loose monetary policies to support economic recovery and underpin their financial systems. Thus, there are growing concerns among Asian central banks about volatile international capital flows entering their domestic financial systems, with fears that this could trigger rising inflationary pressures
and asset bubbles.
These concerns about hot money flows have been compounded by the upturn in global commodity prices during 2010 and early 2011. Further monetary policy tightening is expected to be implemented to varying degrees in 2011 by many Asian central banks, as they try to curb domestic inflationary pressures due to rising food and oil prices. With Asian interest rate differentials increasing vis-à-vis the U.S., Eurozone and Japan, this is also increasing
the attractiveness of Asian currencies and fixed income asset classes. This gives rise to further concerns from Asian central banks about asset bubbles as well as potential deterioration in export competitiveness.
Rising Inflation: Inflationary pressures were generally low throughout much of emerging Asia in 2010. There are signs of increasing inflation in some economies as global commodity prices rise and stronger
domestic demand conditions support higher wage rises, resulting in rising unit labor costs. Rising inflation in China is of particular concern, given the importance of the Chinese economy as a global and regional growth engine. The risks are that if significant tightening in Chinese monetary policy and credit conditions are required,this could result in a growth slowdown that would have effects throughout the Asia-Pacific
region. Inflation in India is also a key macroeconomic vulnerability, as inflationary
pressures had already been high during 2010, forcing the Reserve Bank of India to tighten monetary policy significantly last year. With signs of continued persistent inflationary pressures due to higher food and energy prices, the Indian central bank is expected to tighten monetary policy further
Volatile Capital Flows: With interest rates expected to remain on hold in the U.S., Eurozone and Japan during 2011 and the Fed’s QE2 plan for quantitative easing injecting liquidity into financial markets, there is a significant risk that further significant
capital flows will enter emerging Asian capital markets in 2011. Given their positive medium-term growth outlook and expected rising interest rate differentials, many Asian central banks may continue to tighten monetary policy. ........................
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