It has been five years since the outbreak of the global crisis. Hopes for a strong and lasting recovery have been hit by new setbacks this year. The euro area, where output is contracting, has suffered the most. However, growth has also decelerated elsewhere.
As a result, the International Monetary Fund has marked down its projections for world growth in both 2012 and 2013 to 3.3 per cent and 3.6 per cent respectively.
Given its openness, Asia has not been immune to the changing global tides. According to the fund's recent economic-outlook update for Asia, regional growth is likely to moderate to 5.5 per cent this year, and pick up modestly to 6 per cent next year. However, external shocks could depress Asia's growth to below 4 per cent in 2013.
In light of this uncertain outlook, policies in Asia should remain responsive to signals of deteriorating growth, while minimising legacy risks from previous stimulus measures such as asset bubbles and deterioration in lending quality due to rapid credit growth. At the same time, the unbalanced and unequal nature of the region's recent development calls for refocusing structural and fiscal reform efforts towards sustained and more inclusive growth.
These policy imperatives apply to China as much as anywhere. Its economy has been slowing since the end of 2010. In response, Beijing has been fine-tuning its policies. Aware of the lingering side effects of its large credit-infused and investment-focused stimulus in 2009 and 2010, it has been more cautious this time around. Contrary to misleading headlines about new stimulus packages, there has not been anything like the infrastructure roll-out or local government borrowing surge previously witnessed.
Thus, it is not surprising that China's economy has yet to show signs of a pronounced recovery. Industrial production and exports have disappointed. But domestic demand is holding up. Retail sales have been resilient on the back of a healthy labour market. Investment remains strong. We expect growth to bottom out in the third quarter, before mounting a gradual recovery that sees the economy expanding by 7.75 per cent this year and 8.25 per cent next year.
So China's outlook is a little less rosy than a few months ago, but still far from disastrous. Of course, much could still go wrong. There are clear risks from the euro area and the US, which together account for close to half of China's exports. Some also feel the government may be underestimating the weakness of the economy or that its policy tools may no longer be as effective.
These fears are exaggerated; China is able to respond quickly to growth deteriorations outside its comfort zone. Moreover, years of prudent management of public finances have left China with considerable room for manoeuvre on fiscal policy.
With investment already very high at nearly half of gross domestic product, and straining the economy's absorptive capacity, if a stimulus becomes necessary, it should this time be less oriented to building infrastructure than to boosting household incomes and consumption. This could be achieved through increased subsidies to consumption, reduced social security contributions, higher social safety net spending, fiscal support to small and medium-sized enterprises, and incentives to cut pollution and energy use.
In fact, the government's measured response to China's slowdown is reassuring. It reflects a deliberate and welcome desire to move away from a focus on the rate of growth and, instead, put more weight on its quality and sustainability.
For too long, investment and exports have been at the core of China's development strategy, resulting in environmental degradation, high energy use and a transfer of resources from households and workers towards banks and corporates. Ultimately, making private consumption a more important driver of growth will result in more sustainable growth that, importantly, boosts the welfare of the Chinese people.
The 12th five-year plan recognises the need to transform to a more consumer-based economy. By succeeding in this transformation, China would boost the livelihood of its citizens and help support strong and sustainable global growth.
Anoop Singh is director of the IMF's Asia and Pacific Department