Global Economic Slowdown: Macroeconomic Impact and Policy Options for SEACEN Countries

The synchronised economic downturn in the U.S., Euro area and Japan in 2001, mainly caused by a correction in the global IT sector and the events of September 2001, sharply reduced the export demand in most SEACEN countries causing deterioration in external trade activities. The resulting economic contraction in most SEACEN countries demonstrated the vulnerability of these countries to external trade shocks. However, in comparison with the 1997 financial crisis, the impact has been less severe. Availability of policy options to minimise the impact of global slowdown largely depends on the soundness of macroeconomic fundamentals in the individual economy. For example, countries with strong macroeconomic fundamentals were able to use stimulus monetary and fiscal policies successfully to minimise the impact of global slowdown. Even member countries with some fiscal constraints were able to use monetary policy effectively to mitigate the impact. However, countries with macroeconomic imbalances had fewer options. Policy priority for these countries should be given to address structural rigidities by expediting the implementation of necessary structural reforms that help address existing macroeconomic imbalances. This would also help improve the effectiveness of policy responses. In an environment of increasing global integration, countries with macroeconomic imbalances would continue to be vulnerable to fluctuations of the global economy.