China, India and Indonesia to drive growth next year

Written by The Edge Financial Daily
Wednesday, 02 December 2009 23:32

LONDON: 2010 is likely to be the year of global recovery thanks to a synchronised, sizeable, and successful global policy stimulus, according to the latest edition of Standard Chartered Bank's monthly Global Focus report published on Tuesday.

According to the report, domestic-demand driven economies such as China, India and Indonesia are likely to be at the forefront of this recovery, reinforcing the shift in the balance of economic and financial power from the West to the East.

"The outlook will depend on the interaction between economic fundamentals, policy and confidence," said Standard Chartered chief economist and group head of global research Dr Gerard Lyons.

"Economies with stronger fundamentals, like China and India, may see stronger rebounds as we move through the year."

Among the key predictions are: global growth is likely to be 2.7% in 2010, compared with an estimated 1.9% contraction in 2009; Asia is likely to grow by 7% in 2010, compared with an estimated 4.5% in 2009; while China and India are expected to grow by 10% and 7.5%, respectively, compared with 8.5% and 6.8% in 2009.

Although Standard Chartered is not predicting a "double-dip" recession in the West, it said a number of economies in this part of the world could witness a negative quarter of growth at some stage next year.

Standard Chartered expects the US Federal Reserve to raise its benchmark rate only in 2011.

The bank said the US and many European countries will next year see "stubbornly high unemployment, sluggish wage growth, stabilisation of house prices at levels far off their boom-time peak, and worries about pensions, despite this year's rally in equities".

It said for the emerging economies, however, exit strategies from the easy monetary and fiscal policies would be a dominating theme in 2010.

"Our forecasts suggest that the recovery will take the shape of an L or a U in the West and a V in the East," Lyons said.

He said while these trends could be viewed as part of the necessary rebalancing of the world economy, rebalancing in itself had not been the number one priority for the emerging economies in 2009.

Lyons said rebalancing implied that the West became relatively poorer, spending less and saving more, and high surplus regions such as the Middle East and East Asia did the opposite, spending more and saving less.

"The trouble is, in many cases, this is not the natural response to a crisis," he said. "Indeed, across Asia, saving more — not less — is the natural reaction to a crisis. Hence, there is a need for Asia to deepen its social safety nets, provide help to small and medium-sized firms, and deepen and broaden its bond markets. All of these are possible, but they will take time."

He said the last leg of the rebalancing would involve major currency adjustments and the key issue would be the need for the Chinese yuan (CNY) to strengthen, and this would take the centre stage throughout 2010.

"In the context of rebalancing the Chinese economy, a stronger CNY is in China's economic best interest," Lyons said.

"In 2010, possibly starting after the spring, we expect the CNY to be allowed to appreciate, albeit at a gradual pace. This is a key issue, as too many countries across Asia and elsewhere are intervening to keep their currencies stable, adding to domestic monetary challenges as their foreign-exchange reserves build."

Despite the challenges, the report identifies some key long-term trends which are creating opportunities for many emerging market economies.

Among these, the emergence of new trade corridors, reflected in the rising trade between Asia and regions such as Africa, the Middle East and Latin America.

Standard Chartered said this would involve rising flows of goods, commodities, people, remittances, and portfolio and direct investment flows.

It said the clearest example of this in 2010 would be continued investment by China in Africa, while investors were also watching India for further market opening as that could have a profound impact on trade flows between South Asia and the Middle East and East Africa.

According to the report, the infrastructure boom seen before the crisis is likely to return in 2010 with China leading the way, followed by economies across Asia, the Middle East and Africa.