Tokyo: Economies in the Asia-Pacific region will continue to recover in the next two years thanks to solid domestic demand and exports, but many countries need higher interest rates to counter inflation, the OECD said on Thursday.
Capital is flowing to emerging economies in the region because their growth prospects are better than those of major economies, leading some countries to intervene in the currency market or introduce capital controls, the Organisation for Economic Cooperation and Development said in its twice-yearly outlook report.
A certain amount of appreciation in Asia-Pacific currencies would help correct economic imbalances, and countries should refrain from currency intervention as it could encourage protectionism, the OECD said.
“The challenge for most monetary authorities will be to exit from exceptional stimulus in a way consistent with macroeconomic developments,” the report said.
“Some countries have been reacting to capital inflows through unilateral measures. Protracted unilateral action of this sort is likely to have little or even counterproductive effects.”
South Korea’s economy is predicted to grow 4.3% in 2011 and 4.8% in 2012 as increased competitiveness sustains export growth and falling unemployment underpins domestic demand, the OECD said.
A strong labour market and high capacity utilisation will put upward pressure on inflation, so the Bank of Korea should normalise interest rates, the report said.
The South Korean government said on Thursday it supports re-imposing a 14% withholding tax on foreign holdings of local bonds, and authorities regularly intervene to stem gains in the won, but currency appreciation could help contain inflationary pressure, the OECD said.
Japan interevened in the currency market in September for the first time in 6-year to limit the threat a rising yen poses to exports, but the move largely failed.
Companies will lose some market share overseas due to the strong yen, but Japan will avoid a double-dip as the labour market and corporate profits support domestic demand, the OECD said.
Capital spending by companies will pick up due to higher profits, the report said. Japan’s economy will grow 1.7% in 2011 but slow to 1.3% in 2012 as exports moderate, it predicted.
This would not be quick enough to bring an end to persistent deflation, so the Bank of Japan should implement more quantitative easing measures until prices rise significantly, the OECD said.
China’s economic outlook is crucial to the region, because so many countries rely on its demand for parts, finished goods and commodities.
China’s economy will continue to expand as domestic consumption offsets more moderate export growth, but inflation and the potential for non-performing loans in the property sector are risks to the outlook, the OECD said.
India, another important source of export demand, will return to a more sustainable pace of growth as a sharp rebound in agricultural output slows, it said.
India has avoided an inflationary spiral due to slowing gains in food prices. Still, India’s central bank needs to tighten monetary policy further because fuel prices remain high, credit demand is strong and capacity is scarce.
Strong business investment and personal consumption will support the Indian economy, which is projected to expand 8.0% next year and 8.5% in 2012, according to the OECD.
Australia’s economy should grow briskly in the next couple of years as Asian demand for its resources drives a mining boom, though higher interest rates will be need to contain inflation, the OECD said.
It forecast Australian economic growth of 3.6% next year and 4.0% for 2012. Strong growth, driven by terms of trade gains and dynamic investment, should push unemployment under 5% after mid-2011.