Rising risk of deep eurozone-US recessions poses threat to Asia

MANILA, PHILIPPINES: Economic growth in emerging East Asia will continue to moderate into 2012 as growing sovereign debt problems in Europe and an anemic US economy raise the spectre of a deep global economic downturn, says the Asian Development Bank's latest Asia Economic Monitor.

In the event that the eurozone and the US economies contract sharply, the impact on emerging East Asia would be serious yet manageable, the report says.

"The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia; the region's policymakers must be prepared to act promptly, decisively, and collectively to counter what could be an extended global economic slowdown," said Iwan J. Azis, Head of ADB's Office of Regional Economic Integration, which produced the report.

The semi-annual report released today assesses the 10 ASEAN economies, Brunei Darussalam; Cambodia; Indonesia; Laos PDR; Malaysia; Myanmar; Philippines; Singapore; Thailand; and Vietnam as well as those of the People's Republic of China (PRC); Hong Kong, China; the Republic of Korea; and Taipei,China.

ADB cut its forecast for the region's growth in 2012 to 7.2 percent from the 7.5 percent forecast in the September Asian Development Outlook 2011 Update. Growth is still forecast at 7.5 percent for this year.

In a special section 'Can East Asia Weather Another Global Economic Crisis' the report describes the events that could lead to a recession in the eurozone and a new economic downturn in the US. It examines how a new global economic crisis would affect the region under differing scenarios. East Asia comprises emerging East Asia plus Japan.

In the worst case scenario, with the eurozone and US contracting as much as they did in 2009, emerging East Asia would grow by 5.4 percent next year. That would be 1.8 percentage points below the current forecast but not as severe as the impact of the 2008/09 global crisis. This is due in part to diversification of the region's export markets and increased domestic demand as a source of growth.

Nonetheless, the region's financial systems remain just as vulnerable as they were in 2008. The report notes that heightened risk aversion would see investors slash holdings of Asian financial assets while highly leveraged European banks would cut lending, leading to tighter credit conditions.