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East Asia facing downside risks; External demand expected to remain sluggish for many years

East Asia is facing “much greater downside risks” because of the possibility of recessions in the US and Europe and the threat of destabilizing capital flows. However, the impact of sharp contractions in the Eurozone and US would be serious but manageable. A new global economic crisis could be worse and more prolonged than the 2008/09 crisis. Financial systems would enter a new crisis already damaged. Governments and central banks have far diminished policy space given forced fiscal consolidation in the Eurozone and US. The difficult external environment in the coming years suggests that structural reform should be combined with macroeconomic policies that provide needed and affordable support to domestic demand - - and thus growth. As external demand is expected to remain sluggish for many years to come, East Asia must rebalance its sources of growth more toward domestic and regional demand.
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