News Room - Business/Economics

Posted on 30 Nov 2009

Asia faces up to five years of weak growth

Asian economies are likely to experience weak growth over the next five years as the financial crisis has reduced consumer wealth in the region's key export markets, says Joshua Felman, assistant director of the Asia and Pacific Department at the International Monetary Fund.

 

The financial crisis and the corresponding collapse in equities and house prices effectively sliced one year's income from the total savings of US consumers.

 

"[The American] people have lost the equivalent of one year of work income [from the reduction in gross domestic product]," he said. "Let's say people want to replenish it. And we consider how long and the kind of savings risks they will take. I would say it would probably take 10 years to recover 100%.

 

"We expect consumption in the US to be subdued for a long time."

 

The modest rebound in Asian exports since July has been driven by US companies replenishing their inventories after freezing orders since September 2008. But the trend is only temporary as US consumers are likely to spend less, Mr Felman said at a seminar held by the Sasin Graduate Institute of Business Administration in Bangkok.

 

He said Asian consumption and business expansion were driven mainly by international trade, making the region highly sensitive to the downturn in global markets. The IMF estimated investment in Asia would fall by half of the degree of the decline in exports.

 

China's huge stimulus spending helped trigger an investment boom, but its consumers still could not match those of the US and Europe, he said.

 

China mainly imports materials to serve demand for consumer goods that it then exports. Asian firms will have difficulty shifting markets from the US to China because its has a different set of demands for goods.

 

"Asian exports to China were highly negative in the first half of the year. They have improved over the past few months but are still negative compared to last year's average. China is too small in the world," Mr Felman said.

 

Apart from the resumption in imports by the US, Asian exports also benefited from the easing of the global downturn, improved investor sentiment and economic stimulus measures.

 

The tightening of lending by US and European banks further dampened sluggish consumption and investment, he said. The financial crisis in the US and Europe sent Asian exports into free-fall in the final quarter of last year and the first half of this year.

 

The Thai economy shrank by 2.8% in the third quarter from the same period last year, the National and Economic and Social Development Board announced last week. Authorities expect a full-year contraction of 3%.

 

Mr Felman said the global economy was currently in an "exceptionally uncertain environment". As a result, Asia will face challenges in planning its stimulus measures and then in scaling some of them back.

 

"[Asia] needs to formulate an exit plan gradually by seeing whether private demand can substitute [for stimulus spending]," he said. "But the prospect is so unclear. The global recovery has no fundamentals in the beginning. And the underlying problem has not been resolved."

 

Mr Felman said Asian economies underwent more severe contractions than the US as a result of the global recession because, they were more heavily dependent on global trade.

 

"Asia was the hardest hit from the crisis, but it also has had the strongest recovery in the world. The export rebound, however, concentrated on IT goods," he said.

 

Economic stimulus packages in Asia have helped reduce the recession's impact by 1% since last year. The fact that Asian employers avoided mass layoffs prevented the labour market from being gripped by panic, he said.