Recovery no grounds for complacency
This time last year the post-Sars, post-September 11 economic recovery was still finding its feet and no one was sure how long it would last, especially in export-dependent Asia.
The good news coming from Standard & Poor's yesterday is that the recovery has not only taken hold, most of the region is likely to see continued growth well into the second half of the year. Many countries have regained the kind of economic strength last seen before the 1997 crisis, and as a whole, the region is in a better position to deal with any unforeseen shocks, the report says.
Notable for its absence in the report is any kind of alarm about the pull of the mainland economy, which some feared would lead to a hollowing out in competing Asian countries as jobs and foreign direct investment moved to the world's fastest-growing market. Conversely, others worried that a big slowdown on the mainland would drag regional suppliers along. But S&P expects the mainland to achieve the hoped-for 'soft landing' and, with few exceptions, the region's key economies are expected to post respectable annual growth of at least 5 per cent.
The agency's upbeat view of regional prospects reinforces the revived confidence already glimpsed from the anecdotal evidence. Not only is the mainland factor less of a worry now than it was just three or four months ago, there is increasing evidence that any number of countries in Asia are able to compete with China on a cost basis and therefore draw manufacturing investment.
Domestic politics, as much as anything else, contributed to the positive outlook on Asia. Indonesia's recent election has been notable for its orderliness, and even contentious results as in Taiwan have not been allowed to disrupt ongoing economic recovery. In India, the new Congress government is beginning to outline a fiscal programme that is much more moderate than its alliance with the left-wing parties would have indicated.
There are caveats, however. The biggest one is that fiscal management remains weak. Deficit spending and the use of foreign exchange reserves to manage exchange rates leave countries vulnerable to inflation, asset bubbles and non-performing loans, according to the authors. Sovereign bond issuers in Japan, Taiwan, Hong Kong, Malaysia, the Philippines and Mongolia have been put on notice that management of public finances is the factor with the greatest potential to limit growth. Another concern is that Middle Eastern instability will have a negative effect by raising costs or curbing demand.
Overall, the picture is one of revived domestic demand, export growth and intra-regional trade anchored by growing Chinese demand. The challenge for most regional governments will be to use the current economic expansion to put their fiscal houses in order. If they do not, this recovery and subsequent ones are likely to be shorter than they have to be.
