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Here comes the recovery

Unlike in the developed world, where expansion of fiscal deficit has been used to bail out banking system, in Asia, government spending has had more bang for the buck.

Chetan Ahya | Print Edition: September 6, 2009

Unlike in the developed world, where expansion of fiscal deficit has been used to bail out banking system, in Asia, government spending has had more bang for the buck.

Chetan Ahya
Chetan Ahya

The aggressive global policy response to defend the slowdown has begun to gain traction, as real economic data have shown an improvement almost synchronously around the world. We expect a gradual recovery in the developed world and forecast a G7 GDP growth at 1.5 per cent in 2010 after a contraction of 3.6 per cent in 2009.

Meanwhile, there are already promising signs of recovery in Asia Ex-Japan (AXJ). In this environment of negative growth in the developed world and weak external demand, policy makers are focussing on boosting domestic demand. Short-term interest rates in the region have been reduced to unusually low levels of just 2 per cent from a peak of 5.5 per cent in July 2008.

With low risk of rise in core inflation across Asia, due to sharp drop in capacity utilisation as a result of low external demand, we believe policy makers wouldn’t hesitate to keep the policy accommodative over the next few quarters. In addition, fiscal deficit for the region is expected to climb to 4.1 per cent in 2009 compared with a surplus of 0.1 per cent in 2007. Unlike in the developed world, where expansion of fiscal deficit has been used to bail out banking system, in Asia, government spending has had more bang for the buck.

Indeed, AXJ region is already recovering earlier than the developed world. In China, passenger car sales have now surpassed those in the US on account of cuts in retail taxes and subsidies on car purchases in rural areas. Similarly, in other Asian economies, passenger car sales have been boosted by cuts in excise duties and lower rates.

Moreover, many countries in Asia have introduced measures such as lowering down payments for mortgages and relaxation of lending norms for property and mortgages. As a result, property markets have rebounded meaningfully across AXJ, particularly in the financial centres of Hong Kong, Singapore, Seoul, Shanghai, Bangkok, and Mumbai. Huge infrastructure investments in Asia, led by China, are also helping to revive domestic demand.

This revival in domestic demand has helped accelerate the industrial production growth in AXJ to 2.8 per cent in May ’09 from the trough of -7.5 per cent in January ’09. We expect AXJ GDP growth to rise 7.6 per cent in 2010 from 5.3 per cent in 2009.

The story in India is no different. Increased political stability, improvement in global capital markets and strong domestic policy response will ensure a steady recovery in growth. We expect GDP growth to be at 6.2 per cent in 2010. Improvement in global capital markets has been the single most important factor supporting recovery in India.

This is helping healing of the corporate balance sheet and reducing the concerns of non-performing loans in the banking sector. The traction in monetary policy, together with fiscal support from the government, is also helping the economy move on a recovery path. A steady progress in reforms in the area of public finances, state-owned enterprises (SOE) divestment and infrastructure should strengthen the pace of recovery over the next 12 months. Indeed, India is one of the betterpositioned economies in the Asia-Pacific region with its balanced growth model.

Chetan Ahya is Managing Director and India & Asean Economist, Morgan Stanley

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