Weak economic growth in developed countries threatens Asian recovery

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Led by China and India, the Asia-Pacific region made a significant economic recovery this year, following recession in previous years, but weakening economies in developed countries could pose new challenges for the region in 2011, according to a report from the UN’s commission for the region.

The report, entitled “The Year-end Update – Economic and Social Survey of Asia and the Pacific” and issued by the UN Economic and Social Commission for Asia and the Pacific (UNESCAP), recommends increased spending on poverty alleviation to boost domestic demand within the region and sustain the economic dynamism seen in 2010.

Developed countries are increasingly turning to monetary policy to stimulate growth and a result, many developing economies in Asia and the Pacific are facing a heavy influx of short-term speculative capital flows causing exchange rate appreciation and inflationary pressures, especially in food prices, the report notes. It projects that regional economic growth is likely to slip to seven per cent next year from 8.3 per cent in 2010.

“The Asia-Pacific region has recovered strongly from the severe 2008-2009 recession,” one of the report’s authors, UNESCAP Chief Economist Nagesh Kumar, said. “However, it is not yet out of the woods and new challenges have emerged that could adversely affect its performance in 2011.”

These challenges include slowing economic growth in developed countries and their efforts to revive growth with large-scale liquidity injections. These efforts have triggered huge capital inflows into the region causing “significant exchange rate appreciation in a number of countries” and added to inflationary pressures, particularly in basic food commodities.”

The report goes on to note that while weakening growth in most developed countries has impacted the more export-driven economies of the region, low interest rates and the “enormous liquidity injections known as quantitative easing in many developed countries” have given rise to huge inflows of capital into Asia and the Pacific.