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NEWS UPDATES 9 July 2010

Bank calls for domestic demand boost

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Standard Chartered Bank said emerging markets like the Philippines should boost domestic demand to counter the inevitable slump in western consumption amid premature fiscal tightening in Europe, according to the Manila Times.

“Economies that are driven by strong private consumption, like the Philippines and Indonesia, need to sustain their recoveries with more infrastructure and private investment,” said Dr. Gerard Lyons, chief economist and group head of global research, in the bank’s Global Focus report.

The bank said domestic consumption in emerging markets will be supported by the ongoing recovery in the labor market.

“In Vietnam and the Philippines, robust remittance flows from overseas workers will also support domestic consumption,” Lyons said.

The bank earlier revised its growth expectations for the Philippines this year to 5.9 percent from 3.3 percent, taking into account the better-than-expected first quarter performance.

The UK-based lender said Europe’s action has raised the risk of a double-dip recession in the euro zone, where governments have rushed to cut spending and raise taxes in the aftermath of the Greek financial crisis.

“Although a double-dip recession is far from inevitable, any sign that the world economy is losing momentum may hurt confidence and become self-fulfilling, dampening consumption and deterring investment,” Lyons said.

He said the implications would be twofold: first, interest rates in the West are likely to stay below for quite some; second, it is now left to the emerging markets of Asia, Africa, the Middle East and Latin America to increase domestic demand for goods and services to counter the impact of an expected slowdown in Western consumption.

“In contrast to the West, the policy cupboard across the emerging world is far from bare, although inflation could be a worry for some. China is key. Much like the rest of Asia, China is expected to slow in the second half, but not to collapse. Challenges remain, prompting Asian economies to put more emphasis on domestic economic balances and regional integration,” Lyons said.

The bank also said that commodities have already priced in much of the downside risks stemming from a slowing China.

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