Crucial year looms for global economy

Tourists visit the Bund in Shanghai. Those who arrive by air have helped support Asia's international passenger market and China's domestic demand, which Credit Suisse expects to remain resilient this year. [China Daily]

A global recession is a strong possibility in 2012, a make-or-break year teetering on Europe's debt turmoil and the state of the US economy.

Experts see Asia as one of the few bright spots, although weaker eurozone demand will contribute to slower growth. Estimates for this year vary from 4 to 8 percent. Inflation will remain a major concern for many Asian economies along with bank liquidity problems, but most analysts agree the region is well placed to deal with both.

China, after a decade of double-digit growth, can expect its economy to grow 8 to 9 percent this year, and India 7 to 8 percent. Japan might be lucky to grow about 2 percent after retrenchment in 2011. Much of this, however, will be attributed to rebuilding after the devastating earthquake and tsunami in March.

Cautions have been issued against allowing inflationary pressures to build up in China, where the housing market overheated and public finances are less than healthy. High domestic savings rates are the counterpart to large current account surpluses, which overexpose China to turmoil on global markets.

But it is the policy decisions in Europe and the United States that "hold the key to the global growth outlook", Joachim Fels, the global head of Morgan Stanley's economic team, said in the investment bank's outlook for 2012.

"Our bear case is a full-blown recession, and it won't take much to tip the balance," Fels said. "Our base case assumes European governments make a big step toward fiscal integration soon that stabilizes confidence, and that the US Congress extends most of this year's stimulus.

"Against the backdrop of recent policy mistakes, these assumptions may seem heroic. Failure on these fronts would risk a full-blown recession in the US and Europe, with global GDP growth falling below the 2.5 percent recession threshold."

All eyes on Europe

The main focus will be on Europe, chiefly the eurozone. Its sovereign debt and bank liquidity problems have been at the center of much of the global financial turmoil for two years.

That turmoil poses a serious threat to the economies of emerging East Asia, said Iwan Azis of the Manila-based Asian Development Bank's office of regional economic integration.

"The region's policymakers must be prepared to act promptly, decisively and collectively to counter what could be an extended global economic slowdown," Azis wrote in the latest edition of the bank's Asia Economic Monitor.

The report assessed the economies of the Association of Southeast Asian Nations - Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam - plus those of the Chinese mainland, Hong Kong and South Korea.

The bank expects the eurozone economy to expand 0.5 percent this year and the US economy to grow 2.1 percent.

Economist and academic Jonathan Story agreed that any "serious and long-term stagnation in Europe" will affect Asia. "It is possible that Europe, the world's No 1 emporium, can recover from its self-inflicted predicament," Story told China Daily.

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.