Now that expectations of a US recession have more or less been fulfilled, these conflicting hypotheses will be put to the test over the next few quarters. As the title of this article suggests, we are currently of the view that strong regional drivers will help to insulate Asia from the adverse impact of a moderate US recession. Here, we provide some evidence to support this view. However, this is not to say that the regional economies do not face significant risks to sustained growth and macroeconomic stability in the months ahead.
Asia-Pacific growth and inflation outlooks
Table 1 shows our growth and inflation outlooks for major economies in the region for 2008 and 2009. First, we see lower growth during 2008 and 2009 compared to the preceding two years û for all the countries. With reference to the point made above, virtually all these countries tightened monetary policy during 2005 and 2006 amid overheating concerns. Just as for the US, the outlook for these economies would, under normal circumstances, have been for slower growth during this year and next. However, the worsening outlook for the US in the wake of developments during 2007 has also contributed to lower growth expectations for the Asia-Pacific region.
Second, while Asia-Pacific growth rates will slow somewhat, the region will still grow at a relatively fast pace. Two of the three largest economies û China and India û are also the fastest growing and will continue to grow at about 8% (or above) over the next two years. This provides the region with enormous momentum. As will be demonstrated below, this momentum will help sustain a positive growth environment for Asia-Pacific as a whole. The ability of the regionÆs economies to insulate themselves against a US recession is enhanced by their ability to exploit the opportunities in the region through greater economic integration.
Third, the inflation outlooks for most of the regionÆs sovereigns are relatively benign in the baseline scenario. Inflation rates are expected to remain close to 2006 and 2007 levels. This is the expected outcome of the tight monetary policy stance that central banks in the region have typically maintained over the past two years. One factor in favour of the insulation view is that most of these economies now have the room to lower interest rates, thereby allowing rising domestic demand to substitute for slowing export growth. However, in recent weeks, the emergence of inflation as a significant threat across the region casts some doubt on this course of action. We will address this issue below.
An important factor in the regionÆs resilience is JapanÆs return to positive growth. Although JapanÆs growth is predicted to slow down compared with its 2%-plus rate of the last couple of years, the expectation is that growth will continue, even in a changed global scenario, reflecting the buoyancy that the faster-growing economies in the region brings to the neighbourhood. JapanÆs growth, in turn, reinforces the growth impulses in other countries in the region. The Asean countries, which are relatively more dependent on exports, are also expected to grow at respectable rates.
