Tuesday, July 20, 2010

ADB says time for emerging East Asia to unwind policy stimulus

KUALA LUMPUR: The Asian Development Bank says the strong economic recovery in emerging East Asia means it is time to unwind monetary and fiscal policy stimulus across the region.

In its July edition of the Asia Economic Monitor (AEM) released on Tuesday, July 20 it upgraded its 2010 growth forecast for the 14 economies of emerging East Asia to an aggregate 8.1% from the 7.7% projected in ADB's Asian Development Outlook 2010 published in April. The forecast for the region's economic growth in 2011 remains at 7.2%.

'While most emerging East Asian economies are assured of a sharp V-shaped recovery this year, it is too early to say that the 'V' stands for victory,' said Srinivasa Madhur, Senior Director of ADB's Office of Regional Economic Integration, which produced the AEM.

'Ensuring the sustainability of the recovery depends heavily on the correct timing, policy mix, and pace at which economic stimulus is withdrawn. The private sector must be strong enough to take over,' he said.

Emerging East Asia comprises the 10 economies of the Association of Southeast Asian Nations, plus'' China; Hong Kong, China; South Korea; and Taiwan.

ADB said an impressive first-half performance suggests China will continue its strong growth momentum by expanding by 9.6% this year.

However, measures announced to prevent overheating will likely temper growth in 2011 to 9.1%. These forecasts are unchanged from ADB's April report.

The AEM points to three major risks to the positive outlook for emerging East Asia: a disruption in the recovery in advanced economies; destabilizing capital flows; and unintended policy errors while unwinding the stimulus measures.

"With a few exceptions, it is now time for the region to unwind policy stimulus. In terms of policy mix, a strategy of normalizing monetary policy first and consolidating fiscal policy subsequently is more appropriate for most of emerging East Asia," it said.

"Considering the need to rebalance the region's sources of growth, there is merit in normalizing monetary conditions through a mix of currency appreciation and interest rate adjustments rather than entirely through policy rate hikes," it said.

The pace at which economies unwind stimulus should depend on the speed of recovery as well as evolving risks.

In Korea; Malaysia; Singapore; Taiwan and Thailand tightening has already begun, and should continue at what appears to be an appropriate pace.

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