A man walks past an advertising billboard for new housing developments in Beijing, China

East Asia’s rebound from the global economic crisis may be “V-shaped” and central bankers must retain expansionary monetary policies even as risks to the recovery dissipate, the Asian Development Bank said.

Asian policy makers, who have slashed borrowing costs and pledged more than US$950 billion of stimulus plans, have started saying their economies may be past the worst of the global recession. Economists are raising estimates for the region’s growth this year amid a recovery in China and as indicators show production declines may have bottomed.

“Emerging East Asia has entered the transition from recession to recovery, possibly V-shaped, with GDP growth sourced more from domestic stimulus than a resurgence in external demand,” the ADB said. “Monetary policy in the region needs to remain expansionary until the recovery gains substantial traction or large inflationary pressures reemerge.”

The region’s exporters are still dependent on orders from the US, Europe and Japan, and trade in goods will “remain sluggish” until industrialized economies recover enough to rekindle demand, the ADB said.

‘Grown rapidly’

“Trade within emerging East Asia has grown rapidly in recent years, but it remains largely based on parts and components rather than final goods,” it said. “The region has yet to provide final demand for its own exports.”

China’s exports will decline at a slower pace in the second half of this year if the world economy improves, Commerce Minister Chen Deming said Wednesday. Malaysia’s overseas shipments will recover later than expected and won’t be past the worst for another “couple” of months, according to Trade Minister Mustapa Mohamed.

“Until stimulus in advanced economies begins to gain traction and households realign their debt and savings profiles, it is unlikely that external demand will drive the region’s export production back to full throttle any time soon,” the ADB said.

Domestic consumption is buttressing growth in some economies as the effects of government stimulus plans boost lending and spending, the lender said.

Stimulus measures

“Domestic demand in emerging East Asia is expected to pick up gradually from the second half of 2009 as policy measures in the region gain traction and business and consumer confidence improves,” it said. “Ensuring the region’s stimulus packages are implemented effectively and efficiently is key to bolstering domestic demand in the face of the continued weakness in external demand.”

A slower recovery in the world’s biggest economies may hurt Asia’s growth prospects, the ADB said, highlighting the risks to the region. The International Monetary Fund and the World Bank lowered their forecasts for 2009 global growth in recent weeks, while leaders from advanced nations have said the recovery is too fragile to consider reversing more than $2 trillion in stimulus efforts.

“The recession in advanced economies could be much longer and recovery weaker than currently expected, exacerbating the external environment for emerging East Asia,” the ADB said. “Unintended policy errors, such as unplanned consequences of economic stimulus or premature policy tightening, could harm emerging East Asia’s growth prospects.”

Deflation risk

A sustained period of deflation may also be a risk to growth, the report said. Consumer prices have fallen in Asian economies including China, Singapore, Malaysia and Hong Kong amid a decline in cooking and commodity prices.

“It remains too early to say that a bout of deflation has begun,” the ADB said. “Yet, continued depressed economic conditions, worsening labor markets, and lower food and energy prices are expected to increase disinflationary, and possibly deflationary, pressures throughout the region in 2009.”

Growth in China and Indonesia this year may be higher than the ADB estimated in March, the lender said Thursday. It predicted a 7 percent rate for China then, while forecasting a 3.6 percent expansion in Indonesia.

“Amid the slowdown across most of emerging East Asia, China remains a major bright spot as it continued to grow at a healthy rate during the first half of the year,” the ADB said. “Continued strong growth in fixed-asset investment, which was given added impetus by the government’s massive stimulus package, managed to offset the effects of declining exports.”

The organization was more pessimistic on its forecasts for Malaysia, Thailand, the Philippines and Taiwan, saying “downside risks” to the outlook for the economies had increased since March.

Source: Bloomberg