East Asian economies face greater downside risks on global slowdown


HONG KONG (AFP) ― The Asian Development Bank trimmed its 2012 growth forecast for emerging East Asian economies including China, as the eurozone turmoil threatens to drag the global economy back into crisis.

The Manila-based bank on Tuesday cut its gross domestic product growth forecast to 7.2 percent for the 10-country Association of Southeast Asian Nations plus China, Hong Kong, South Korea and Taiwan, from 7.5 percent in September.

It also mapped out an “extreme scenario” of European and U.S. meltdown, which could shave 1.2 percent off growth next year in East Asia including Japan, from a forecast 5.4 percent to 4.2 percent, bank officials said.

“The worst-case scenario is for both the U.S. and eurozone to fall back into recession, pushing the global economy into a deep slump,” the ADB’s Emerging East Asia regional economic update said.

With headwinds blowing out of Europe, the bank said its “cautiously optimistic” outlook for the Emerging East Asia region excluding Japan was under a thickening black cloud compared to its September forecasts.

“The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago,” it said.

“The global economic recovery could flounder if the eurozone and the U.S. fall back into recession, causing another global financial crisis.”

It said “major downside risks” included a deep recession in Europe and the United States, higher protectionism and persistent inflation.

If the eurozone’s troubles turned into a full-blown crisis for the global economy, the impact on East Asia would be “serious yet manageable” as long as governments responded decisively and collectively.

“Emerging East Asia must prepare for a prolonged crisis and weak post-crisis recovery by implementing appropriate short-term macroeconomic responses and pursuing necessary long-term structural reform,” the report said.

Government spending could help maintain the growth momentum while central banks would have to deftly manage the monetary levers to keep inflation “anchored.”

“With the eurozone’s sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent,” it said.

The ADB said a defense against trouble in Western markets lay in “increasing intra-regional trade and financial integration, and expanding links with other emerging economies.”

China was the strongest performer in the region but even the world’s second biggest economy was feeling the pressure, posting 9.1 percent growth in the third quarter compared to 9.6 percent in the first half of 2011.

ASEAN’s four middle-income economies ― Indonesia, Malaysia, Philippines, and Thailand ― are expected to grow 4.5 percent in the second half compared to 4.9 percent in the first six months of the year.

The ADB said intra-regional trade and domestic consumption would shield the region from the worst of the global fall-out.

“While the region’s economic expansion has moderated this year, it remains robust roughly in line with recent historical trends,” it said.

“Exports and industrial production, while slowing, have continued to grow. The economic resilience is partly due to rebalancing sources of growth from external to domestic demand.”

Regional financial systems had been “little affected” by volatility in the credit markets and were keeping the investment pipeline liquid.

“Growth in bank lending, while slowing, remains robust,” the report said.

Even so, a sharp downturn in Europe and the flow-on effects on the United States would have inevitable ramifications for East Asian banks, especially in financial centers such as Hong Kong, China and Singapore.

Capital outflows could hit regional share markets and consumer confidence, eroding domestic spending.

Tighter global credit would also hurt Asian bank liquidity and possibly increase the cost of borrowing for investors, the ADB said.