Economic News

Asian Development Bank issues strong warning about Asia economic downturn related to Eurozone crisis: more risk than 2008 GFC

The Asian Development Bank has issued its strongest warning yet that Asian economies including China may suffer severely from the crisis in the eurozone, with growth slumping as much as 1.8 percentage points.

And it says a eurozone break-up could be catastrophic for East Asia.

The bank says that growth in emerging East Asia would fall to 5.4 per cent next year from the expected 7.5 per cent this year in its worst-case scenario, in which the eurozone and the US contract to the extent they did in 2009.

“The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia,” the ADB’s head of regional economic integration, Iwan Azis, says in the bank’s new economic monitor publication.

The bank recently cut its forecast for East Asian growth next year from 7.5 per cent to 7.2 per cent as a result of the European downturn.

“The eurozone and US economies are now weaker than before the 2008-09 global financial crisis,” the report says.

“Their governments are also much more fiscally stretched than in 2008-09. Thus they cannot afford any major bank recapitalisation.”

So far, the bank says, Asia has demonstrated economic resilience by “rebalancing sources of growth from external to domestic demand”. But today, “with ailing eurozone banks needing to recapitalise, a recession would be likely to reduce bank lending.

“And politically, it is easier to cut lending abroad than within Europe, thus reducing available liquidity for the (East Asia) region.”

American banks, with their close eurozone links, would also be drawn into the crisis, the ADB warns. This would especially affect finance centres such as Hong Kong and Singapore — but banks in Indonesia, Malaysia, The Philippines and South Korea also have substantial European exposure. A new GFC, the ADB warns, “would likely cause a rise in global risk aversion, leading investors to flee the region. Highly leveraged banks would cut lending, resulting in tighter credit conditions and destabilising the region’s financial systems”.

But, it says, economies with balance of payments surpluses will be less susceptible to future crises, as they are less dependent on borrowings from abroad.

The bank calls on the region’s policymakers to ensure adequate and timely provisioning for foreign and domestic liquidity, to ensure that financial institutions do not come under severe pressure and that credit remains available for trade. It says governments should help banks raise the capital they need to strengthen capital ratios, and provide guarantees to new lending.

The ADB says central banks will need to keep inflation under control, even though this may limit its ability to respond to a slowing economy.

“With present elevated price levels, diminishing employment opportunities, budgetary pressures on social programs and the prospect of slowing growth in remittances, strains on the poor will likely intensify in Asia,” it says.

And in a message especially applicable to China, the ADB says: “In some economies with relatively rigid currency regimes, introducing greater flexibility should help enhance the effectiveness of monetary and fiscal stimulus while rebalancing demand.”

The bank urges East Asia to rebalance its economy by consolidating the region’s “many bilateral and plurilateral free-trade agreements into a single, region-wide agreement,” and to boost cross-border infrastructure.

Source:   The Australian

AREAP Comments:

• It is conceivable that when the Eurozone falls Asian countries will attempt to safeguard their economies.
• There may be a period of economic protectionism.

Related Stories:

• The End of the Commodities Boom: The Wall Street Journal Warning
• Chinese commercial environments rapidly deteriorating: Australian-Chinese business relationships at risk after Aussie jailed for 13 years in shock verdict
• The Australian housing and Chinese housing connection: Chinese downturn and heavy investment in Australian property
• Global consumer ground swell against Chinese goods and services – interesting times ahead
• Global slowdown triggers China factory strikes – hundreds of thousands of Chinese jobs at risk
• Chinese property bubble has burst, how far will prices drop? How much loan delinquency will occur?
• China’s ghost cities – it’s said there are 64 million empty apartments in China:  SBS Dateline special report.
• Australian stocks poised to drop further following Eurozone fears and poor Chinese data
• ‘Hard landing’ coming in China and Australia, warns Nouriel Roubini
• World demand cools and China’s trade surplus, exports & imports are weaker – ominous signs
• Search for China

Find Property

• Use the best real estate search engine available on the market today