By Xinhua writer Liu Hua; Tan Weibing  

    MANILA, July 23 (Xinhua) -- Emerging East Asia has entered the transition from recession to recovery, possibly V-shaped, with gross domestic product (GDP) growth sourced more from domestic stimulus than a resurgence in external demand, the Asian Development Bank (ADB) said on Thursday.

    Economic growth in emerging East Asia dropped sharply in the first quarter of 2009, but the pace of decline has slowed during the second quarter, ADB said in its latest Asia Economic Monitor, a semiannual review of emerging East Asia's growth and policy issues. The report covers China, South Korea and the ten members of the Association of Southeast Asian Nations.

    In the first quarter of 2009, aggregate GDP growth of major emerging East Asian economies declined to 1.2 percent year-on-year, down from 2.6 percent in the last quarter of 2008 and in sharp contrast to the 8.5-percent growth in the first quarter of last year. Still, despite the global recession, most of the region's economies have performed better during the current economic crisis than during the 1997/98 Asian financial crisis, ADB economists said.

    Moreover, available data on second quarter performance and some leading indicators suggest that the slowdown may have bottomed out, according to the report.

    In the second quarter, China's growth increased to 7.9 percent from 6.1 percent of the first three months, while early estimates show that Singapore's economic contraction moderated to -3.7 percent from -10.1 percent posted in the previous quarter.

    Industrial production growth has moved away from recent lows in Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. In Indonesia, consumer confidence rose during the first six months of the year. And purchasing managers' indexes in China and Singapore have been on the rise as well in recent months.

    The slowdown in growth -- coupled with lower oil and food prices -- helped inflation to decline across the region, which made it possible for authorities to continuously ease monetary and fiscal policies.

    From February to June 2009, for instance, China's prices deflated by an average of about 1.5 percent, continuing their decline from the 8.7 percent inflation reached in early 2008, according to ADB. Meanwhile, inflation in Vietnam fell to 3.9 percent in June after reaching a peak of 28.3 percent in August 2008.

    Central banks have aggressively reduced policy rates in response as well as introduced a variety of other measures to increase liquidity in the banking system and to encourage banks to expand lending.

    Favorable monetary conditions in China have seen bank lending surge in the first half of 2009. Bank Indonesia reduced its policy rate seven times since the beginning of 2009 -- from 9.25 percent to a record low of 6.75 percent -- to stimulate economic growth. The Philippine central bank also took a gradual approach to cutting its policy rate -- reducing it six times since December 2008. Currently, the Philippines' overnight borrowing rate stands at 4 percent while overnight lending at 6 percent.

    China is implementing a sizable fiscal stimulus package announced in November 2008. With the two-year stimulus package worth 4 trillion yuan (586 billion U.S. dollars), China's economy maintain growth amid a collapse in exports. The 6.1 percent GDP growth in the first quarter of 2009 was the lowest since the introduction of quarterly GDP figures in the fourth quarter of 1999. But growth performance improved in the second quarter, increasing by 7.9 percent.

    In South Korea, the Ministry of Strategy and Finance announced a supplementary budget in April worth 13 billion U.S. dollars to support job and welfare programs, credits and grants for exporters and small-and medium-sized businesses, and subsidies to local governments.

    The regional outlook has improved from just a few months ago, and with expansionary policies, the largest emerging East Asia economies are expected to sustain positive -- if much slower -- growth, ADB said.

    Those economies with strong global trade and financial links, however, are expected to continue to contract, though less dramatically. As external demand will remain sluggish in the near future, emerging East Asia's recovery is expected to be gradual, with 2010 growth rising to about 6.0 percent.

    "It will undoubtedly take time before the region's economies return to their full potential," said Lei Lei Song, economist with ADB's Office of Regional Economic Integration.

    The overall external environment for emerging East Asia remains difficult and uncertain, with the recession in advanced economies continuing and global financial conditions improving yet tight. The global economy is expected to contract in 2009 for the first time since World War II. And World trade volume is forecast to decline for the first time in nearly three decades, as economic activity in advanced economies collapses.

    While exports from Indonesia, Malaysia, and the Philippines among others to the United States have continued falling, those to the Chinese mainland and Hong Kong have started increasing.

    However, there is a limit to what China can do by itself, said the ADB economist. During the first six months of 2009, China's total exports have dropped 21.8 percent. But imports fell faster, at 25.4 percent as a substantial portion of China's imports include intermediate goods for further processing into final exports to other countries.

    The United States, Japan, and Europe remain major markets for Asian exporters, accounting for 59.1 percent of the total final demand for the region's exports.

    Given the tentative nature of the expected recovery, it is critical that authorities stay the course in supporting domestic demand and growth, Song said in an interview with Xinhua.

    Although there are some tentative signs of global and regional economies bottoming out, it remains far too early to say if these signs signal a recovery will be underway any time soon, according to the report. Economists are predicting that any pending recovery will most likely be weak and fragile, with fallout from the global economic crisis long-lasting. Thus, authorities would be wise to maintain expansionary policies within the bounds of medium-and long-term fiscal sustainability, ADB said.

    Monetary policy in the region needs to remain expansionary until the recovery gains substantial traction or large inflationary pressures reemerge, it added.

    Meanwhile, ADB said ensuring that fiscal stimulus is implemented effectively and efficiently is a key to bolstering domestic demand in the face of continued weakness in the external environment.

    It also suggested that authorities should continue with deeper, more comprehensive structural reforms needed to rebalance growth toward greater domestic demand, even as the immediate impact of the global crisis works itself out.

Special Report:  Global Financial Crisis