RGE Monitor, the firm founded by economist Nouriel Roubini, yesterday raised its growth forecasts for Asia, including China and India. The change is based on an improvement in global conditions in the second quarter of 2009, aggressive policy responses by governments and the fact that manufacturing activity in several countries has bottomed out. Inventory re-stocking, stimulus measures and global risk appetite will also temporarily boost Asia's growth, RGE said.
However, RGE continues to believe global growth will contract until late 2009 or early 2010. Its forecast is that global growth will contract by 1.9% in 2009 and that economic growth in the United States, the European Union and Japan (the G-3) will be sluggish. RGE believes a complete recovery in Asia is dependent on the timing and pace of the G-3 recovery, hence Asia's growth will remain under pressure for the rest of this year.
"Deleveraging in the US and [the] EU and a slow revival of the global electronics cycle will lead to a U-shaped recovery in Asia," said RGE. The New York-based economic news and analysis firm added that structural reforms to boost domestic demand in Asia will need several years to take effect so a sustained recovery in Asia in the short term is dependent on the US recovery. "However, better macro and financial fundamentals relative to other emerging markets will be a plus for Asian economies and asset markets during the recovery," added RGE.
Asia ex-Japan will grow by 4.3% in 2009, led by China and India, and will revive further and grow by 6.2% in 2010, the firm said.
RGE expects China to grow around 7.5% in 2009 with the fiscal stimulus being a key driver. However, RGE does not expect China's infrastructure spending to boost manufacturing in the rest of Asia. It cautioned that "China will need to start tightening carefully in 2009 given overheating in equity and property markets" and added that China also has limited ability to diversify from US assets.
In India, domestic consumption will ensure growth of around 5.7%. But RGE highlighted that Indian companies will have difficulty accessing external capital which has been the main driver of investment in recent years and also suggested that investors into India are overly optimistic about government reforms.
Further, slower exports and the dependence of both China and India on foreign capital will keep growth in these two economies below full potential, even in 2010.
RGE predicted the four "Asian Tigers" namely Hong Kong, Singapore, South Korea and Taiwan, as well as Malaysia and Thailand, will contract in 2009 with a sluggish recovery in 2010, on account of pressure on exports, and reduced domestic demand. Growth in the Philippines, Indonesia and Vietnam will also slow due to export contraction and commodity correction.
Roubini is a professor at New York University's Stern Business School and a former adviser to the US Treasury and the International Monetary Fund. He was one of the few economists to correctly predict the scale of the recent financial crisis.