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The IMF to Asia: Nice work, but spend more!

Asian economy | The IMF to Asia: Nice work, but spend more! Anthony Harrington

The old exhortation to ambitious youth, “Go East, young man!” has lost none of its potency over the century or so since it was first uttered. Asia now has global growth by the scruff and is running away with it while the West keeps on digging itself into a deeper hole.

Yes, our stock markets are rising again - at least they were in the third week of October - but one suspects that the rise owes more to savvy investors realising that more quantitative easing will pump up the markets just as it did in March 2010, than it does to better corporate fundamentals. Over the last few days we have been having what looks like a micro rerun of March 2010 with money once again cautiously trickling out of gold and into supposedly riskier asset classes.

I say “supposedly riskier” because the volatility in the price of gold lately will have undoubtedly burned a few investors, irrespective of whether they were playing it long or short. If you bought into gold at 1370 you’re probably not that thrilled with today’s UK mid-day price of 1319. If you are an inveterate shorter of gold, you probably took a largish position at a relatively early stage of gold’s foray into the 1300s and are now praying for it to keep on moving back down.

All of which goes to show that investing in real economies that are indubitably moving forward is a lot easier than trying to second guess gold or waiting for developed markets to pull out of near negative growth. The IMF has just issued a very bullish report on Asia’s growth prospects (PDF) that highlights three main areas of concern. First, there is the prospect of inflationary pressures not being dealt with robustly. Second, there is the possibility that Asian countries will continue to overemphasise exports at the expense of promoting domestic demand. Third, the IMF recognises that Asia has not entirely decoupled yet from developed economies:

“…while global financial conditions have improved since June 2010, underlying sovereign and banking vulnerabilities in advanced economies remain a significant challenge, and concerns linger over the strength of the global recovery. Despite Asia’s strong economic and policy fundamentals, important trade and financial linkages with advanced economies suggest that a further deterioration in global financial conditions and a slowing of the global recovery would have important repercussions for the region.”

In fact it is difficult to see how any country that is reliant on exports and on developed markets continuing to generate demand for its goods can be said to be independent of those markets. Ultimately, if we crash, they crash. However, the IMF points out that many Asian economies' output gaps that resulted from the global recession are now closing fast. In contrast, the West is concerned about deflationary pressures caused by a overly large output gaps (masses of idle plant, machinery, and people). In Asia, inflationary pressure is being generated at the same time as the central banks in those economies are still adopting a very accommodative monetary stance.

The IMF would like to see rates going up fairly smartly to put the brakes on and damp down inflation. However, Asian economies are both increasingly intertwined with each other, in terms of supply chain work, and increasingly competitive with one another for export markets, so talk of “Asia” doing this, or “Asia” doing that, rather overstates the potential for united action. The IMF can see the case for not allowing Asian central bank policy to drift into a procyclical stance that feeds the inflationary fires, but there is no one central Asian bank. It will be interesting to see whether Asian central banks do manage to take a coordinated approach, or whether the whole thing breaks down into a beggar-thy-neighbour race for markets.

Further reading on global growth and the Asian economy:

Tags: banking , central banks , China , global recession , inflation , interest rates , procyclical
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