India is not the only major Asian economy whose growth is expected to moderate in the current year. The entire Asean is expected to slow down during 2008. A similar fate probably awaits the ?big 4? from the region?Hong Kong, Korea, Taipei and Singapore. China, which for years defied expectations of a ?hard landing?, is likely to find 2008 memorable. Not only for the Olympics, but also because its GDP is likely to grow at a single-digit rate after many years.
Growth forecasts in the latest ?Asia Economic Monitor? of the Asian Development Bank (ADB) highlight a somber economic outlook for the region. While the regional prospects themselves are not too bright, there are some economies which appear to be facing serious difficulties. Within the Asean, Vietnam and Philippines are projected to have the sharpest drops in growth. GDP growth in these two economies is expected to come down to 6.5% and 5.5% in 2008 from 8.5% and 7.2% in 2007. Growth in Singapore is forecast to come down to 4.9% in 2008 from 7.7% in 2007. Hong Kong, Korea and Taiwan are also expected to grow at under-5% rates during 2008. While Singapore is expected to recover and touch almost 6% in 2009, the other three are projected to remain below 5% next year, too.
Is the Chinese economy entering a phase of low growth by its standards? It?s too early to say. But there?s no doubt that the Sichuan earthquake will have a partial impact on economic activity as will higher energy and food prices. The latter are identified by the ADB as one of the main factors behind the damp projections for the region. Furthermore, indications of the US slowdown turning out to be much deeper than expected are also going to rub off on activity in leading economies of the region, including China and India.
How strong are the possibilities of these forecasts coming through? First quarter (Q1) numbers for most of the economies in the region were pretty robust. The ?big 4? began the year with a bang as did China. However, second quarter (Q2) numbers have been disappointing. Singapore?s growth in Q2 of 2008 dropped to 1.9% from 6.9% in Q1 of 2008. Similarly, GDP growth in Korea dropped to 5% in Q2 of 2008 from 5.8% in Q1. Chinese growth also dropped by half a percentage point to 10.1% from 10.6% in Q1 of 2008. As of now, Q2 numbers are not available for the rest. But numbers from Singapore, Korea and China do not bode well for the region.
It appears that for at least a while the region will find it tough to fend off some key challenges. Foremost among these is inflation. Headline inflation in Asean and East Asia is already at a record high. An inflation driven by higher commodity prices, particularly of food and other essentials, reduces disposable income and purchasing power of consumers.
Some would argue that wage increases are the best antidote in such situations. But these can be seriously counterproductive. Increase in wages along with rising commodity prices will further push headline inflation as production costs for labour will go up along with those of material. Such ?wage-price? spirals will make exports from the region costlier and uncompetitive in the world market. This is the last thing the region requires. Exports from Asia are likely to suffer on account of recessionary conditions in the US that will dampen their demand. Becoming uncompetitive in prices on top of slackening demand will deal a double blow to exports.
What is the way out? Most will argue that higher costs can be overcome by increasing productivity. True. But such increases do not happen overnight. Pushing production frontiers through innovations and technological breakthroughs takes decades, if not years. The current situation is even more complex as it involves high prices in ?basics? like food and energy. So, while efforts to improve productivity should continue, it is equally important to correct distortions that are making the impact of rising prices even more painful.
Most economies in the region would have been able to cushion the current hardships in a less painful manner if they had exposed themselves to global prices much earlier. They avoided doing so by maintaining high food and fuel subsidies. Now they hardly have any choice other than correcting these subsidies. That means generating more inflationary pressures. Such pressures can hardly brighten the economic outlook.
?The author is a visiting research fellow at the Institute of South Asian Studies (ISAS) under National University of Singapore (NUS). These are his personal views