Domestic demand can sustain Asian growth

Asia is rebounding fast from the depths of the global crisis. What explains this remarkable comeback? What challenges does the recovery pose to Asian policymakers?

Asia's impressive recovery from the global downturn, even as output elsewhere remains sluggish, has prompted some observers to revive the notion that the region has "decoupled" from the rest of the world. The IMF's latest Regional Economic Outlook for Asia and the Pacific, which was released in Seoul on Oct 29, examines this hypothesis --- and finds that the opposite is true. The primary driver of Asia's recovery has actually been a return towards normalcy following the abrupt collapse in global trade and finance at the end of 2008. Just as the near-collapse in international trade and finance triggered a super-sized fall in Asia's GDP, now the normalization of the global economy is generating an outsized Asian upturn.

The other key driver behind Asia's recovery has been the region's rapid, forceful, and comprehensive policy response. This was made possible by the fact that, in many countries, government fiscal positions were sounder, monetary policies more credible, and corporate and bank balance sheets sturdier than at any time in the past. These initial conditions gave Asia the scope to cut interest rates sharply, and adopt large fiscal stimulus packages. As a consequence, overall domestic demand has held up remarkably well.