Asia is still driving forward the global economic recovery, according to economists

News - Funds

Written by Ray Clancy

Wednesday, 28 July 2010 09:06

Asia continues to drive the global recovery with exceptionally strong growth in China, India, Taiwan, Korea, Japan and Hong Kong, according to a new economic forecast.

The report from the London based National Institute of Economic and Social Research (NIESR), shows that the world economy expanded by 1.2% in the first quarter of 2010, or at an annualised rate of 4.8%. Outside Canada and especially Brazil expanded rapidly, with more moderate growth in the US. Europe, however, continues to lag behind Asia and the Americas.

It predicts that the world economy will expand by 5% in 2010 and 4.4% in 2011 and world trade will increase by 14.2% this year and 8.8 per cent in 2011.

Despite some fears being expressed that the economy in China might fall back this year, NIESR predicts it will grow by 11.6% in 2010 and 8.3%. Japanese GDP will expand by 3.3% this year and 1.1% in 2011 while the US economy will grow by 3.1% in 2010 and 3% next year. But the Euro Area will expand by just 1.3% this year and 1.8% in 2011, according to the report.

The analysis indicates that world trade has recovered more rapidly than anticipated, rebounding by more than 10% since the trough reached in the second quarter of 2009. Open economies, such as Germany, Canada and the Netherlands have strong short term growth prospects, it says.

The recovery in world trade can be largely attributed to a rebound in import penetration in Germany, Australia, Brazil and several Asian economies, including Taiwan, Korea and Hong Kong. China has also helped sustain world trade throughout the turbulence, it adds.

It also indicates that the outlook for domestic demand in many of the advanced economies has deteriorated. Equity prices have declined in all the major economies in recent months and fiscal tightening measures, especially in Europe, have been brought forward.

Government fiscal positions suffered severe deteriorations during the financial crisis. NIESR estimates that policy responses added less than 1.5% of GDP to fiscal deterioration in most Euro Area economies, while policy changes contributed nearly 4% of GDP to the US budget deterioration. A 1% of GDP permanent consolidation in the Euro Area effected through cuts in government spending would reduce output by 0.7% in the first year, while in the US and Japan multipliers are estimated to be 0.9 and 1.2%, respectively.

Government bond yields in Greece have remained stubbornly high, despite an austere fiscal consolidation plan, which the report suggests will reduce the government debt stock by 15% of GDP relative to baseline by 2012. If spreads were to fall to the levels observed in January 2010, this would improve the outlook for public finances by 0.9% of GDP next year, it says.