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Asia’s growth path will continue to run parallel to the global economy. For the rest of 2009, the external shock is expected to continue to spill over into private investment and consumption, causing many countries to register negative growth rates. Then, as the global economy revives in 2010, so too will Asia. But the recovery is likely to be tepid—and not only because the global economy will remain weak. Hhistorical experience shows that investment tends to recover slowly from downturns, especially those that involve financial stress.

The risks to this baseline scenario are skewed to the downside. In particular, a delayed global recovery may trigger more insidious feedback loops between the real and financial sectors in Asia. Continued weak demand and tighter financial conditions could lead to a surge in corporate distress that could feed back into Asian banks, making them even less able or willing to extend credit to the private sector. At the same time, a surge in corporate bankruptcies could spill over to domestic demand, with a sharper-than-anticipated increase in unemployment rates putting a dent in consumption.

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