A decade after the great Asian crisis was born, grew and left no country untouched; the region is the engine room of the world economy.
China, India, Indonesia, the other Asean tigers, South Korea and Taiwan are surging, dragging the US, Australia, New Zealand, Japan and even Europe along in their wake.
We saw last month how world markets shook when China’s Shanghai stock market took fright.It is now settling down but the rest of the world watches China, India and other emerging powerhouses warily, wondering if these so-called emerging markets will be a source of gain or pain.
The most important agency in the region is the Asian Development Bank and its annual outlook which is a report card on the year gone by and the year ahead.
On both counts the scoreboard is looking healthy.
The area covered in the report is Asia excluding Japan and Australasia and the ADB says it grew at its fastest pace in 11 years in 2006; that is from the year before the 1997 crisis erupted.
The ADB believes the 43 economies in Asia excluding Japan and Australasia, will grow 7.6 per cent in 2007 and 7.7 per cent in 2008, down from 8.3 per cent in 2006.
Unlike 1996 growth currently in the 43 economies covered in the report, appears to be better balanced and more robust, while the financial footings of the region is dominated by the huge trade surpluses which have been built up in the past five years in particular.
China of course dominates with a surplus of around $US1.1 trillion, but the other 42 economies share in the remaining $US1.2 trillion.
Some would argue that these huge surpluses are unbalancing the rest of the world, and China’s is the greatest imbalance of all with its currency in a virtual straitjacket with no way to escape and rise against the currencies of its trading partners.
But then some would argue that the huge trade deficits the US has been running against the rest of the world represents its own imbalance, especially given the continuing importance of the US dollar to world trade and values.
Asia (excluding Japan and Australasia) had a current account surplus of 5.3 per cent of gross domestic product in 2006 (Australia’s deficit is around 5.6 per cent of our GDP, while Japan has massive surpluses of its own).
Surprisingly, given these huge trade surpluses and robust growth, inflation hasn’t really been a worry, even in China until the last couple of months when some concerns about an overheating economy have been expressed.
India is probably the only regional economy where inflation is looming as a serious concern with the boost to food prices which is worrying the government.
Inflation in the 43 countries covered by the ADB has eased to 3 per cent in 2007 from 3.4 per cent last year.
The bank said its projections imply that “growth will move onto a more sustainable footing and that overheating pressures that surfaced in 2006 will gradually abate”.
The ADB bases its case for a slowdown on an easing in global export volumes to 7.5 per cent this year from 9.7 per cent in 2006.
Slowdowns in the U.S. and Europe (not yet apparent in Europe) reduce demand for Asian manufactures.
But rising consumer spending across Asia will replace this lower demand from traditional western markets and there should be a higher rate of growth in inter-regional trade and export volumes.
But some analysts wonder if the region itself is depending too much on China and India (as are other economies, such as the US and Australia).
Last year China and India accounted for 70 per cent of the region’s growth.
China reported a 10.7 per cent increase in its GDP and India 9.2 per cent.
China is trying to moderate its rapid growth with interest rate rises and other measures to cut investment and try and control stock market speculation and asset price inflation.
Growth has been estimated by the government at 8 per cent this year (but the ADB puts China’s growth at 9.8 per cent). The Chinese government is trying to ease growth down to where it will average 7.5 per cent annually in the current five-year plan from 2006 to 2011.
Next year China has the Olympic Games which are fuelling an investment boom around Beijing and some coastal cities. Can China avoid the slowdown after the games that Sydney, Athens, Los Angeles, Montreal and other games cities all experienced?
In India, with economic growth at an eight-year high, an overheating property sector and rapid credit growth has led inflation to surge to over 6 per cent. The central bank has hiked interest rates and moved to restrain property lending.
The ADB believes the Indian government will further tighten monetary policy and permit a small rise in the rupee over the rest of this year to try and take the heat out of booming construction and home lending. That will see growth ease back to 8 per cent in 2007 and 8.3 per cent in 2008.
The bank projects that economies in Southeast Asia, including Indonesia, Cambodia, Laos and Vietnam, will grow at a 5.6 per cent pace in 2007 and 5.9 per cent in 2008.
Economic prospects for some countries in the region are expected to remain uncertain as they grapple with downside political risks. The Thai economy could be sluggish due to the impact of capital controls introduced in December.
“Business and consumer confidence in Thailand is slipping and growth is expected to slow down. The introduction of capital controls in December 2006 rattled the markets, and policies are still being changed. Clarity about the future direction of economic policies should strengthen the economic outlook,” according to the ADB.
The bank sees stock market volatility as a threat to the region’s prosperity.
“The recent volatility in global equity markets is a timely reminder of looming risks. If asset values crumble, then developing Asia may have to bear disproportionately high costs,”
