Irish central banker points to Asia’s strong rebound and euro zone growth

ASIA’S strong economic recovery and better-than-expected euro zone growth should help the world dodge a double-dip recession, according to Irish central bank governor Patrick Honohan.

But governments will also need to focus on consolidating reserves after extensive spending on stimulus measures taken to tackle the financial crisis, he said.

Professor Honohan, who is also a member of the European Central Bank (ECB) governing council, was speaking yesterday at an event jointly hosted by the Irish Chamber of Commerce and the Association of Banks in Singapore at Marina Mandarin hotel.

He said while Europe has been slow to rebound, there has been ‘a lot of optimism’ about Germany, which he refers to as the ‘heart of Europe’.

Europe’s largest national economy grew by 2.2 per cent in the second quarter – the fastest pace in 23 years – driven by investment and exports, according to official data released yesterday.

‘The recovery has not been as strong as people had hoped, but I’m not too pessimistic about this recovery. I think it is slow and steady but it’s getting there,’ said Prof Honohan.

He added that the low interest rate environment – the ECB has kept its main interest rate at a record low of 1 per cent for the last one year – remains relevant to current economic conditions.

‘What we see is still quite a weak economic recovery, certainly in the euro zone area after the crisis, so I think the current interest rates, which are low by historical standards, are appropriate to maintaining the possibility of making sure the recovery happens,’ he said.

But the management of government debt will be key as most have come out of the crisis with much higher debt levels than before, which adds to their macroeconomic vulnerability, he explained.

‘They no longer have much headroom for additional fiscal interventions to deal with any issues that may arise,’ he said.

‘So persisting with the fiscal consolidation that most countries… are actually in the process of doing is absolutely key to ensure the policy tools will be available for any future problems.’

Looking back at the crisis, he said while there was a sharp downturn, the recovery was ‘surprisingly faster’ in many parts of the world, especially in Asia.

‘So to some extent we may not have learnt enough to avoid a downturn, but we definitely have learnt enough in terms of monetary and economic policy response to make sure the downturn was as short-lived as possible,’ said Prof Honohan, who departs for Malaysia today.

Source: Straits Times, 14 Aug 2010