Too early for East Asia to reverse growth policies: ADB

July 23, 2009

BANGKOK (Reuters) - Policymakers in emerging East Asia should continue to support domestic demand and growth despite tentative signs that the worst is over for global and regional economies, the Asian Development Bank said on Thursday.

"It remains far too early to say if these signs signal a recovery will be under way any time soon," the Manila-based bank said in a semi-annual review of East Asian economies and policy.

It said monetary policy in the region needed to remain expansionary until the recovery gained substantial traction or big inflationary pressures emerged.

"Authorities should plan rather than implement credible and coherent exit strategies to unwind the policy stimulus to prevent inflationary expectations from rising, which could later impede recovery and sustainable growth," it said.

Asian authorities have adopted fiscal measures and cut interest rates to help the economy. But some have now paused to monitor the impact of monetary easing, and the debate is turning to when rates may have to rise, especially if heavy government spending fuels inflation.

The ADB said that, despite aggressive rate cuts, monetary conditions in the region had not been overly expansionary, considering the sharp contractions in the real economy, the benign inflation environment and moderating bank lending growth.

As economies gradually pick up in 2010 -- though with growth remaining below potential -- inflation should stay under control, it said, but further rapid increases in commodity prices may be inflationary and hurt the nascent recovery.

The agency projected average growth of 3 percent in 2009 and 6 percent for 2010 for emerging East Asia, compared with 6.1 percent growth in 2008.

ADB's emerging East Asia region groups Brunei, China, Cambodia, Hong Kong, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

It did not alter growth forecasts for main emerging East Asian countries in the report.

TRADE REMAINS A DRAG
The ADB said major risks to the outlook included a more prolonged recession and weaker recovery in developed countries than envisaged, unintended consequences of economic stimulus, premature policy tightening and falling inflation becoming deflation.

It expected a pick-up in demand from the second half of 2009 as policy measures gained traction and confidence improved, but the weak external sector remained a drag.

"As external demand will remain sluggish in the near future, emerging East Asia's recovery is expected to be gradual, with 2010 growth rising to about 6 percent," the ADB said.

China looked set for a quick recovery and would provide a much-needed boost to the region's economies, but Europe, the United States and Japan were important sources of demand, too.

Stimulus measures remained crucial to boost domestic demand in the wake of the continued weakness in external demand.

"For the moment, it would be good to retain the option for additional fiscal stimulus in 2010," it said.

"To ensure the most direct impact on growth, fiscal stimulus should be focused on areas where it will be most effective and efficient -- 'shovel-ready' infrastructure, small and medium enterprises, rural economies, and social safety nets."

(Reporting by Orathai Sriring; Editing by Alan Raybould)