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World Economic Forum seeks to sustain Asian growth

By Puneet Pal Singh Business reporter, BBC News, Singapore

Export-dependent economies in Asia-Pacific are facing a challenge to maintain the pace of growth As some of the biggest and sharpest minds on the global economic stage gather in Jakarta for the World Economic Forum on East Asia, sustainability of growth is likely to be the focus.More than 500 delegates from business, government and other fields will be coming together in the Indonesian capital from 12 June under the theme of Responding to the New Globalism.

The tremendous growth of Asia-Pacific economies, coupled with a slowdown in the US and Europe, has seen a drastic shift in the global economic power in the past two to three years.Led by China and India, emerging economies have pulled the world out of the financial crisis and put it back on the growth track.Such has been their dominance that the sustainability of their growth is now key to global economic expansion."There is a good reason why policymakers are so concerned about the imbalance in the global economy," says Kalpana Seethepalli, infrastructure economist at the World Bank.Analysts say that if emerging economies slow down, especially in the Asia-Pacific region, it will have a huge knock-on effect."The growing size and importance of the Chinese economy has increased the vulnerability of other Asia-Pacific countries to a sharp Chinese economic slowdown," says Rajiv Biswas of IHS Global Insight."There is no doubt that such a slowdown would hit other Asian economies very hard," he adds."Both manufacturing export economies such as South Korea and Taiwan would be hard hit, as well as resource exporters such as Indonesia, Australia and Malaysia," Mr Biswas says.

Interlinked challenges

While the growth of the emerging economies has been fascinating, sustaining the current rate of increase is a tall order for policy-makers."Strong growth in most developing economies has contributed to a new set of global challenges," says the World Bank in its June 2011 edition of Global Economic Prospects.The bank says "higher commodity prices, rising inflation, and the possible return of destabilising capital inflows as monetary policies tighten and interest rates rise" are some of the biggest threats.For their part, analysts say the biggest headache for policy-makers is that all these problems are interrelated. "The growth of Asian economies has meant a complete shift in the economic landscape," says Arjuna Mahendran of HSBC Private Bank."First, you have people from rural areas migrating to urban centres, that has seen urbanisation reach exponential proportions," he says. This has resulted in a boom in demand for construction material, driving up commodity prices.He adds that as ordinary people start benefiting from their countries' new-found success, the problems become still more complex."Rising wage pressure in emerging markets is the biggest concern right now," he says.As people have more disposable income, they tend to spend more, hence driving up demand and pushing up consumer prices, he adds.Mr Mahendran says governments have to work towards tightening their monetary policy to rein in higher prices.

Capital inflows

Rising prices of food and essential commodities have threatened to derail growth in Asian economies However, rising interest rates are an even tougher test for policymakers in the region.As interest rates in developing economies rise, while those in the developed world remain lower, investors are pumping huge amounts of money into the region.That is driving up property prices and creating potential problems in the medium to long-term future."Clearly risks remain of volatile capital flows creating Asian asset bubbles," says Mr Biswas of IHS.However, the International Monetary Fund (IMF) says that if managed properly, the capital inflows can be turned into an advantage."Capital flows to Asia are not only a challenge, but also an opportunity to facilitate medium-term rebalancing," the IMF says in its Regional Economic Outlook for Asia and Pacific."The question is how best to channel capital inflows toward financing broader-based growth, and in particular toward boosting investment," the fund adds.Ms Seethepalli, of the World Bank, explains how this can work."The challenge is how to make sure that these inflows are not short-term, but go in to long-term investment," she says.Ms Seethepalli says that as the public sector funds in most developing economies are already overstretched, governments can use private capital flows to fund and finance infrastructure projects in their countries.She says that not only will this speed up infrastructure development, a key to maintaining growth in emerging economies, but it will also lower the risk of formation of asset bubbles, as capital is channelled towards the creation of infrastructure assets.

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Recession risk: Small, but growing

NEW YORK (CNNMoney) -- Experts worry that the risk of falling into another recession has increased, according to a CNNMoney economic survey.To be sure, economists still place long odds on that worst case scenario. But the odds are a lot less long than they were just a little while ago.

And the trend of a weakening economy is clear: most of the economists surveyed, even those who are not worried about a recession, have cut their forecasts for growth in the second quarter sometime during the last month. Many are trimming estimates for the full year as well.A CNNMoney economic survey of 18 leading experts found they think there is about a 15% chance of a new recession. That's about double the chance they believed existed at the start of the year."The fragile U.S. recovery means the economy is much more vulnerable to geopolitical shocks and a rise in fuel prices," said Bernard Baumohl of the Economic Outlook Group, a Princeton, N.J., research firm. "Since the instability in Middle East is far from over, there are real risks for the U.S. and international economy."The gloomier outlook of recession in the economic survey comes as most readings create a drumbeat of bad news, showing hiring grinding to a near halt, home prices continuing to slide to a new post-boom low, and a slowing of consumer and business spending.

High prices for gas and food have taken a bite out of consumer confidence and there are worries among economists about the threat of other external shocks, such as a possible debt default by the Greek government, that would ripple through the world's financial system.Still, Baumohl said he thinks there is a "less than 20%" chance of a new recession. But he said at the start of the year there was no chance.Many other economists said the weakening of the economy in recent months in the first half of the year has changed their outlook."We came off a great Christmas and some nice jobs reports," said Gary Rosenberger of EconoPlay. "Then came storms and tsunamis and tornadoes. Who would have guessed that the economic recovery would hinge on the shifting of tectonic plates and global climate change?"But three of the economists surveyed say they still aren't worried about another recession, putting the chances between 0% and 5%.

Special report: Recovery At Risk

The consensus view is that gross domestic product, the broadest measure of the nation's economic health, will grow at only a 2.3% annual rate in the second quarter, a little better than the 1.8% growth in the first three months of the year. A month ago they were still looking for 3% growth in the quarter.

While virtually all the economists are projecting stronger growth in the second half of the year, they've trimmed their forecast for full-year GDP growth to 2.7% from 3% a month ago. The economy posted 2.9% growth for all of 2010.Nevertheless, only a couple economists said they would support Congress passing a new round of stimulus in order to jumpstart disappointing growth. Bill Cheney, chief economist at Manulife Asset Management, said he would like to see Congress accelerate military procurement or other government spending on goods and services. Baumohl would like Congress to act sooner rather than later to raise the debt ceiling in order to assure bond investors who might be worried about the threat of default later this summer.0:00 / 2:01 Jobless discouraged by weak economy He also would like to see an extension of the payroll tax holiday. But most of the economists, even those most worried about a recession, aren't ready to see Congress spend money or cut taxes to respond to that threat. "At this point, reduction in (the) budget deficit is more important," said Sung Won Sohn, economics professor at Cal State University-Channel Islands.There also was scant support for Federal Reserve pumping more cash into the struggling economy when it's done with its purchases of $600 billion in Treasuries later this month."Interest rates and liquidity are not critical constraints on the economy at present, so Fed action is unlikely to have much positive impact," said Cheney.