Robust growth, strong domestic demand, fiscal health brighten prospects

In its outlook for the Asian economy last month, the International Monetary Fund forecast growth would come close to 6 percent in 2012 and further recover to 6.5 percent next year.

Though revised slightly down, the projections nonetheless confirmed that Asia would “hold firm” as the world’s fastest growing region in the face of global financial turmoil and the eurozone’s debt problem.

The IMF cut its growth outlook for the world economy to 3.3 percent in 2012, down from an earlier estimate of 4 percent. Next year’s growth was forecast to edge up to 3.9 percent.

Many analysts agree that strong domestic demand and room for additional fiscal stimulus would enable Asian economies to maintain growth in the event of a further slowdown in the global economy.

Chinese Premier Wen Jiabao said last week China was looking into ways to use some of its $3.2 trillion in foreign exchange reserves ― by far the world’s largest ― to help resolve Europe’s debt crisis.

His remarks, which came in a joint press conference with visiting German Chancellor Angela Merkel, led the euro to rise about 0.5 percent against the U.S. dollar.

The U.S., which is still struggling to reverse its slowdown despite recent improvement in unemployment and some other indicators, will witness yet another scene testifying to its waning economic clout when Chinese and European leaders hold a summit later this month, in which more concrete terms of Beijing’s contribution are likely to be discussed.

In efforts to boost its sluggish economy and check China’s growing influence, the U.S. has been increasing its engagement in the Asian region in recent years. In 2008, President Barack Obama’s administration announced its participation in the Trans-Pacific Partnership, giving weight to the free trade agreement initiated by New Zealand, Chile, Singapore and Brunei in 2005.

Asia’s growing status is in sharp contrast to its predicament in the 1997 foreign exchange crisis when Korea and many other regional economies had to appeal to the IMF for bail-out funds to cope with massive capital outflows.

Many experts note that if the current pace of growth continues to be kept as expected, Asia will outgrow Europe and North America into the largest economic area in the world by 2050, with some predicting the region will reach the status far earlier by 2025.

The Asian Development Bank forecast the combined gross domestic product of Asian economies will increase from $17 trillion in 2010 to $174 trillion, or 52 percent of the global GDP, in 2050.

According to IMF figures, China’s GDP is projected to jump from $5.87 trillion to $44.74 trillion over the cited period, while the U.S. will see its GDP increase from $14.65 trillion to $37.16 trillion.

India is forecast to rank third in the GDP list in 2050 with $28.93 trillion, overtaking Japan, Germany and France. Korea’s GDP is estimated to quadruple from about $1 trillion to $4.17 trillion in the four decades, with its ranking climbing from 15th to seventh.

Favorable factors

“Asia has a full range of favorable conditions for stable growth,” said Shin Suk-ha, an analyst at the Korea Development Institute, a state-run think tank in Seoul.

While export growth is expected to slow down for some period of time amid global financial turmoil, he noted, Asian economies could fill the gap with increasing domestic demand.

Shin said fiscal health, coupled with stabilizing prices, would also provide emerging economies in Asia with room to take measures to shore up growth.

Jun Min-kyoo, a researcher at the Korea Investment Co., echoed the view.

“What should attract more of our attention is not simple figures on growth but the way of growth (in Asian economies),” he said.

Jun said China and other Asian developing countries are turning to boosting domestic demand to fuel economic growth and such approach can be sustained for years, backed by fiscal health and growing middle class.

Compared to the robust performance by emerging Asian nations, U.S. and eurozone economies are forecast to grow by 1.8 percent and minus-0.5 percent, respectively, this year before making a slight recovery to 2.2 percent and 0.8 percent in 2013, according to IMF figures.

What brightens prospects for Asian markets most is the rapid emergence of a middle class with discretionary spending power.

McKinsey, a global consultancy, expects the middle class to expand from 29 percent of China’s 190 million urban households in 2011 to 75 percent of 372 million urban households in 2025.

Chinese economic policymakers have stepped up efforts to increase the number of middle-class people with discretionary spending, whose number was estimated at 300 million last year, or about 23 percent of the population.

India is expected to have a middle class of 200 million with an annual income of about $10,000 by 2017, up from the current 70 million.

Japan’s Mizuho Research Institute predicted that the middle-income class in the 10 member states of the Association of Southeast Asian Nations would account for more than 60 percent of the roughly 600 million population in the area by 2020.

According to a report released by Japan’s Ministry of Economy, Trade and Industry last year, the number of people in wealthy and upper-middle classes, who earn $35,000 and between $15,000 and $35,000 each, was projected to increase from 100 million and 240 million in 2010 to 350 million and 800 million in 2020 in developing Asian countries.

The lower middle class, with an annual per capita income of between $5,000 and $15,000, was estimated to grow from 1.21 billion to 1.51 billion over the cited period, while the number of poor people who earn less than $5,000 was forecast to decrease from 1.55 billion to 700 million.

Most Asian governments have kept their debt to GDP ratios below 50 percent, compared to 101.1 percent for the U.S. and 95.6 percent for the eurozone, placing themselves in a position to take defensive fiscal measures if the global slowdown deepens further.

The diversity of Asia comprising economies at different levels of development and with different strengths could also give momentum to growth in the region.

While three northeastern Asian countries ― China, Japan and Korea ― are major players on the global economic stage, accounting for more than 20 percent of global GDP ― other regional nations have been taking various routes of development, based on their comparative advantages.

Malaysia and Thailand have been growing on the strength of exports and service industries while Singapore and Hong Kong prosper, banking on competitive financial services and trade. Indonesia abounds in natural resources and has a large domestic consumption market. Central Asian countries, including Kazakhstan and Uzbekistan, have fueled economic growth by developing oil and gas. Vietnam, Laos, Cambodia and Myanmar, which are shifting to a new economic system, have also potential for greater growth.

Some experts describe Asia as a factory with division of labor, referring to its mix of advanced, developing and less developed economies.

Limits to overcome

The Asian economy, however, has its own limits to overcome.

Trade volume within the region, which remains at about 40 percent of its total commerce, has yet to be increased. The volume of commerce among China, Japan and Korea accounts for only 22 percent of their total trade, compared with 66 percent for the European Union and 39 percent for North American Free Trade Agreement countries.

Lee Jong-eun, professor of economics at Sejong University in Seoul, said the most urgent task for Asian economies is to expand trade among themselves, which she said would lessen the impact of slowdown in the U.S. and Europe.

China, which depends on U.S. and European markets for nearly 40 percent of its exports, has tried to forge a free trade agreement with Korea and Japan and eventually a pact encompassing East Asian economies.

A group of government officials, scholars and businessmen from China, Japan and Korea completed a feasibility study on a three-way accord last year. Its results are set to be submitted to a summit of their leaders in May, who are expected to decide on when and whether to launch talks on the FTA among the three countries.

Japan, which announced a plan to participate in the TPP, has been less enthusiastic toward the northeast Asian FTA, wary of China’s growing influence over the region.

Korea, which has signed free trade agreements with the EU and the U.S., has found itself with leverage in the free trade talks, courted by both China and Japan.

Experts here argue Korea should assume a mediating role between China and Japan to achieve a free trade agreement encompassing the three countries, which hold more than half of foreign exchange reserves in the world.

The three-way trade accord might eventually lead to the establishment of a larger trade zone bringing together all East Asian economies, they say.

By Kim Kyung-ho (khkim@heraldcorp.com)