The apparent recovery of crisis-hit Asian economies lacks depth and it is too early to forecast a sustained rebound amid falling investment and lending, Barclays Capital said in a regional overview. A monthy report on Asian economies by the investment banking division of Britain's Barclays Bank plc, received on March 18, 1999, said "it is premature to forecast a sustained recovery in Asia."
"In many cases, pro-growth policies have far further to run before we see a return of macro-economic stability. Critically, Asia's recovery lacks depth," it said.
Although manufacturing output is improving, investment remains weak, with Thailand, for instance, experiencing a sharp decline in private investment of 23 percent in December 1998 from a year previously. Bank lending is also declining in Hong Kong, South Korea, Singapore, Thailand and Malaysia, it said.
"Without the private sector being provided the fuel for growth from the local banking sector, a sustained recovery is improbable," the report said. Barclays Capital said normal counter-cyclical economic policies -- starting with austerity to promote stability, followed by an easing of fiscal and monetary policies, and then normal demand management --- are "failing to create a broad-based recovery."
"The multiplier effect of fiscal spending is weak while the demand and supply of credit in individual economies is proving unresponsive to lower interest rates," the report said.
"In short, higher public spending, with little follow through to the private sector, is driving much of Asia's growth," it added. Consequently there is little added-value to the economies of the region. Lack of added-value translates to little or no real economic growth.
Bad loans, which were expected to peak at 59 percent of total credit from 43 percent at the time the report was released, made Asian banks averse to lending fresh funds domestically on the one hand, although on the other hand demand for credit was weak as falling prices reduced the incentive for fresh investment, it said.
Credit demand is also dampened by weak consumer confidence amid asset deflation and fears for job security among east Asians, the report said.
"Far more aggressive policy reflation is required for demand to recover and local prices to stabilise," Barclays Capital said. "Most appropriately, monetary policy must be eased further not simply by lower interest rates, but via increased monetary growth."
If accompanied by an accelerated banking reform, the credit crunch could ease. Weak currencies would result from such policies but further depreciation would help support growth by boosting local currency revenue from exports and easing deflationary pressures by tolerating imported inflation, it said.