Crucial year looms for global economy

An emeritus professor of international political economy at Insead, the international graduate business school, Story said observers should watch carefully whether the US can extract itself from its policy deadlock in Congress and whether euroland countries can work their way through to a compromise that "has to be a mixture of Keynesian macro-economic policy through EU institutions, fiscal consolidation, and deep labor market and welfare reforms. Of course, you are not wrong to be pessimistic, given the failures in leadership that we have witnessed over the past year."

Story said that if relief from developed markets and governments is unlikely, then Asian countries must think more about generating the conditions for sustainable development in the region.

"This, too, is easier said than done," he said. "One component, and a crucial one, clearly has to be free trade. Another is to conduct responsible fiscal and financial market policies. And a third is to implement structural reforms, particularly on the supply side."

A bright spot

Rajiv Biswas, Asia-Pacific chief economist with IHS Global Insight, said 2012 will be a "year of transition, uncertainty and change".

In a commentary published on the BBC's website, Biswas said, "Despite the political and economic uncertainties facing the global economy, Asia-Pacific is forecast to be the fastest growing region of the world economy in 2012, with growth rising to 5.3 percent from 4.5 percent in 2011.

"Continued growth in Chinese demand for exports from the rest of Asia will help mitigate the impact of weaker export demand from the recession-hit eurozone," he said.

Sanjay Mathur, head of non-Japan Asia research for the Royal Bank of Scotland, said the debate over whether China has a soft or hard landing will be settled this year, although "multiple scenarios and outcomes are possible".

"At one extreme is a repeat of 2008-09 where the region experiences a severe reduction in cross-border lending and an attendant freeze-up in trade financing," he said. "At the other, the speedy creation of a fiscal compact with greater funding support from the European Central Bank.

". . . On China, we remain in the 'soft landing' camp," Mathur said. "Nonetheless, at least in the first quarter, the lagged effect of past tightening will continue to show in the real economy data."

Looking in and out

Credit Suisse, in its latest Emerging Markets Quarterly, said European debt contagion remains the "shock of the hour, which carries the threat of becoming the recessionary tipping point for the global economy". The bank warned that debt contagion, if disorderly, could lead to sharply tighter credit conditions globally, which in turn could cause a severe contraction in global economic activity.

Amid the gloom, Insead's Story believes that many Asian countries have become "interdependent with the world economy. That means governments have to face both ways, inwards to the domestic markets and outwards to global markets and politics."

Asia's "inheritance for 2012" is the continued debt and banking crisis of the major western markets, he said. Story believes that the policy of exporting out and protecting in, which served Asian countries well while Western markets were buoyant, is no longer viable.

 

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