Allianz held a press conference in Jakarta today at which the Chief Economist of Allianz Group, Michael Heise, presented a new study on the economic outlook for Asia.
The Asian emerging markets weathered the financial and economic crisis far better than many had expected only a year ago, and indeed played a key role in pulling the world economy out of recession in the spring of last year. As 2009 advanced, the economic recovery gradually permeated the entire region. The economic data for Q4 2009 clearly show that Asia's emerging markets closed the crisis year of 2009 with considerable economic momentum. And the economic indicators already available for the first quarter of 2010 suggest that the momentum has continued into this year as well. “All in all, the overall conditions for a continuation of the brisk economic development seen of late are looking good,” said Michael Heise.
The recovery in world trade continues apace. Having been run down appreciably, inventories are likely to be stocked up again, providing a further boost to growth. In addition, the various fiscal stimulus packages, which will run until the end of 2010 in the majority of countries, will continue to bolster domestic demand this year. Michael Heise: “Overall, we expect to see real economic growth of 8.1% for the entire region in 2010. Next year, the increase, at 7.3%, is likely to be less pronounced, mainly because the stimulus packages will have run their course by then.”
On the policy front, the challenges facing Asia this year are barely less demanding than they were last year. In 2009, economic policy focused on mitigating the negative impact of the global financial and economic crisis on individual Asian economies. In 2010 and 2011, the challenge now facing these countries will be to adapt economic policy to reflect the new (global) environment. For one thing, this will involve gradually reining in state stimulus and support measures. For another, however, economic structures will have to be realigned to a certain extent. With global imbalances now declining, the Asian emerging economies will have to focus more on domestic, and less on export demand if they want to continue to achieve strong growth in the future. These challenges will place demands not only on monetary and fiscal policy, but also on exchange rate policy.
Once the stimulus packages have run their term at the end of 2010, the Asian economies should return to the sustainable fiscal policy most of them were pursuing in the years before the financial and economic crisis. After all, it was precisely this fiscal discipline that allowed these governments to come up with swift and emphatic answers in the face of the economic slump, and confront the crisis by increasing government demand accordingly. Alongside a return to fiscal discipline, policymakers have various options open to them when it comes to helping to adjust the economy to reflect the new environment. One example would be to bolster automatic stabilizers: better protection in the event of unemployment could help to stabilize economic development and make a contribution to improved social security structures without jeopardizing the sustainability of public finances.
Although politically controversial, the Allianz study assumes a further flexibilization and therefore appreciation of the Asian currencies. For the countries concerned, this could indeed bring advantages for the domestic economy. First of all, there is the increase in purchasing power that goes hand-in-hand with currency appreciation. It boosts private consumption and, hence, domestic demand. The Asian economies would also benefit from the strengthening of their currencies thanks to the associated reduction in inflationary pressure as this would bring down the price of imported goods in national currency terms. In the overall context of the necessary changes to the Asia growth model, a gradual flexibilization of exchange rates would prove to be a key and, most importantly, an effective addition to other measures to broaden the base of the Asian economies.