Yearender: Developing Asia leads global economic recovery

By Prime Sarmiento, Cai Ordinario

In the first quarter of the year, several Asian-based manufacturers had to cut production and their labor force, as orders from abroad dried up. In Cambodia, for instance, numerous garment companies closed shop owing to the sharp decline in garment exports to its main market -- the U.S.

MANILA, Dec. 22 (Xinhua) -- Developing Asian economies are leading the global recovery from the worst recession since the Second World War thanks to swift government response that allowed the region to keep most of its hard-won economic gains.

Multilateral lenders have upgraded their growth forecast for the region, impressed by its resiliency amid the meltdown. In its report issued December, the Asian Development Bank raised its GDP forecast for this year to 4.5 percent, up from the September forecast of 3.9 percent.

In November, the World Bank revised its projection for real GDP growth in developing East Asia to 6.7 percent, or 1.3 percentage points higher than its April forecast.

"Developing Asia, in general, is already on the way to recovery. The year 2010 should see faster growth compared to this year," Cayetano Paderanga, economics professor at the University of the Philippines and former Philippine Socio Economic Planning Secretary said in an interview with Xinhua.

The global recession, which started late 2008, slowed the U.S. and Western European economies, shrinking demand in these countries. This hurt Asia most as its economies were powered by its manufacturing sector that exports most of its produce -- from electronics to garments -- to industrialized economies.

In the first quarter of the year, several Asian-based manufacturers had to cut production and their labor force, as orders from abroad dried up. In Cambodia, for instance, numerous garment companies closed shop owing to the sharp decline in garment exports to its main market -- the U.S.

Thai automotive industry's exports and production fell 40 percent in the first quarter, pushing the car manufacturing firms to retrench 100,000 workers. In Malaysia, where electronics account for nearly 40 percent of total exports, electronics manufacturers laid off contract workers and reduced working hours to stay afloat amid declining shipments.

Joblessness, wage cuts and freeze hiring expanded poverty incidence and reduced demand. Consumers tightened their purse strings, dampening growth in consumption-driven Asian economies.

Thailand, Singapore and Malaysia fell in to recession. South Korea's GDP contracted to an 11-year low of 4.3 percent in the first quarter. The world's fastest growing economy -- China -- only expanded by 6.1 percent, its worst performance in nearly two decades.

Others may have been more resilient, as they're less dependent on exports, but growth rates slowed nonetheless. The Philippines registered a nearly flat growth, while India slowed to 6.1 percent.

The succeeding months, however, were a time for rebound. As Jong-Wha Lee, ADB's Chief Economist stressed in a statement issued December, the global economic situation is "changing rapidly."

"The prospects for much of the region look rosier than they did in September when we (ADB economists) last did a full study of the region. Fiscal and monetary stimulus policies and a moderate improvement in the G3 economies of Europe, Japan and the U.S. helped East Asia and Southeast Asia in particular," Lee said.

Increased public spending -- to finance big ticket infrastructure projects and social welfare programs -- provided jobs and much needed cash to those retrenched by the crisis.

This bode well for the mostly consumption-driven Asian economies. As the British banking giant HSBC noted in its Asian chartbook released December 8, "the Asian consumer is back."

"After a deep slump in growth and confidence, households have opened their wallets again and are becoming an important driver of economic growth for the region," the HSBC said.

This is evidenced by increasing retail and vehicle sales especially in Asia's biggest economies including China, India and South Korea. These three economies also laid down huge stimulus package and an accommodative monetary policy.

The slight recovery in exports also helped in the region's rebound. Companies in the U.S. and Europe had to replenish their dwindling inventories, spurring them to revive imports from Asia.

The growing economic power of China also saw a more dynamic intra-regional trade. Chinese manufacturing firms went on a buying spree as prices softened and stockpiled on electronics and raw materials they procured from South Korea and Southeast Asian countries.

"Developments in East Asia remain strongly influenced by China. Take China out of the equation, and the rest of the region is recovering with less vigor," the World Bank said in the East Asia and Pacific Update issued November.

"As companies began replenishing depleted inventories, those based in China as part of global supply chains restocked parts and components used for the assembly of electronics products bound primarily for the G-3 countries," the World Bank said.

The rebound in exports and domestic consumption pushed the region towards recovery. The ADB estimates that the combined gross domestic product (GDP) of the ten largest economies in emerging East Asia (including China, South Korea and Indonesia) grew 5 percent on year in the third quarter of 2009 -- well above growth rates in the previous three quarters.

But analysts noted that the early signs of growth won't necessarily translate to a long term recovery. As U.P.'s Paderanga noted, the growth of export-led Asian countries is still "hinged on the recovery of developed countries in 2010." There are no indications yet that the crisis that crippled U.S. and European economies is finally over.

"The recovery in the G3 is still soft and there are a number of downside risks," ADB economist Lee said.

Analysts are also concerned that Asian governments' may withdraw favorable policies even if their respective economies have not fully recovered. Fiscal stimulus packages are quite costly, and those with inadequate fiscal space may not be as willing to continue with the stimulus package.

"Developing Asia is heading towards full recovery. What could blunt this would be an early exit to stimulate fiscal and monetary policy," said Victor Abola, economics professor at the University of Asia and the Pacific.

ADB's Lee said that while a V-shaped recovery is now underway, it's essential that fiscal and monetary stimulus "remain accommodative where possible to put economies on a sound footing."

"A key challenge for each economy will be to carefully time when best to rollback the stimulus to ensure sustained recovery but avoid both excessive inflation and hefty fiscal shortfalls," he said.