Asia faces weak recovery from slowdown, IMF says

SINGAPORE — Most Asian economies face weak recoveries next year after contracting sharply this year, the International Monetary Fund said Wednesday, urging governments to boost spending to offset faltering global demand.

Despite some signs that a plunge in exports and manufacturing may have bottomed in recent months, the IMF warned sustained growth won’t return to the region before late 2010.

“Even if these nascent trends continue, stabilization is far from recovery,” according to the IMF’s seminannual Regional Economic Outlook for Asia and the Pacific. “Prospects for an imminent rebound of economic activity in the region are weak.”

Asia’s collective economic growth will likely slow to 1.3 percent this year from 5.1 percent last year, before expanding 4.3 percent in 2010, the IMF said in a report. Excluding China and India, Asian economies will contract 2.9 percent this year and grow 1.6 percent next year, the fund predicted.

The financial crisis that began in the U.S. sub-prime mortgage sector in 2007 mushroomed into the worst global slump since World War II, dragging Asia down with it. Despite relatively solid banks and low debt levels, many Asian economies have suffered deeply as export demand from the West shriveled.

China, the world’s third-largest economy, will grow the most of the major Asian countries over the next two years, expanding 6.5 percent in 2009 and 7.5 percent in 2010, the fund said. Singapore’s economy, which relies heavily on trade, finance and tourism, will likely shrink the most, contracting 10 percent this year and 0.1 percent next year.

The IMF expects the Japanese economy, the region’s biggest, to shrink 6.2 percent this year and grow just 0.5 percent next year as a steep drop in exports undermines consumer confidence.

Meanwhile, the economies of New Zealand, Hong Kong, South Korea, Taiwan, Malaysia, and Thailand will contract at least 2 percent this year and grow no more than 1.5 percent next year, it projects.

India will likely grow 4.5 percent in 2009 and 5.6 percent in 2010.

“The intensity of the downturn has far outstripped what was predicted by our own empirical models,” Joshua Felman, assistant director for the IMF’s Asia and Pacific department, said at a seminar in Singapore. “Asia has never seen such export declines.”

The Washington-based IMF urged Asian governments to extend fiscal stimulus packages into next year to help spur domestic demand. Governments in the region have pledged more than $900 billion, led by China’s $585 billion, in infrastructure projects, tax cuts and cash handouts.

The fund also suggested governments and central banks cut interest rates, purchase corporate bonds and provide guarantees to bank loans in a bid to spur lending and investment.

“The monetary easing and large fiscal transfers already approved will help limit the damage to the economies,” the fund said. “Forceful countercyclical policies need to be sustained to help Asia come out of recession more quickly.”

Some analysts questioned whether Asian governments have the means to sustain consumer demand through pump priming measures.

“If we’re going to go for another year with some of these policies in the region, some countries simply don’t have the fiscal space,” said Charles Adams, a professor at the Lee Kuan Yew School of Public Policy in Singapore. “At some point, all this stimulus has to be unwound.”

The IMF warned that unless corporate credit and consumer demand pick up, Asian companies could see falling profits, a jump in worker layoffs and a rash of mergers and acquisitions.

“There’s a risk that continued weak demand and tighter financial conditions will lead to a surge in corporate bankruptcies in the region,” it said.

Many Asian economies, which have prospered for decades by selling goods to developed countries, may not return to pre-crisis growth rates unless they switch focus from exports to developing domestic demand, the fund said.

“The growth rate of Asian manufacturing and exports could be structurally lower for many years, and Asia’s export-led growth strategy may no longer pay the same dividends as in the past,” the IMF said.