Leading the Global Recovery Rebalancing for the Medium Term

World Economic and Financial Surveys

Regional Economic Outlook: Asia and Pacific

Leading the Global Recovery: Rebalancing for the Medium Term

April 2010

One year after the deepest recession in recent history, Asia is leading the global recovery. The Regional Economic Outlook: Asia and Pacific discusses the near-term outlook for the region, as well as the medium-term policy challenges that countries face. As in many emerging and developing markets, Asia rebounded swiftly during 2009 and in the first quarter of 2010, and in the near term the region is expected to continue leading the global recovery. In the medium term, the global crisis has highlighted the importance for Asia of ensuring that private domestic demand becomes a more prominent engine of growth.

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Contents

Definitions
Executive Summary
SECTION A––Asia and Pacific: Leading the Global Recovery
I. Recent Developments and Main Themes
A. Overview
B. Recent Developments
C. Asia, the Inventory Cycle, and the Role of China
D. Transitioning from Public to Private Domestic Demand?
E. Are Large Capital Flows Threatening Financial Stability?
II. Projections, Risks, and Policy Challenges
A. Projections for 2010–11
B. Risks to the Outlook
C. Policy Challenges
SECTION B––Asia and Pacific: Rebalancing for the Medium Term
III. Does Asia Need Rebalancing?
A. Introduction
B. Assessing Asia’s Export Dependence
C. What Does Rebalancing Mean for Asian Economies?
D. Are There Any Supply-Side Imbalances?
E. Impact of Rebalancing: Illustrative Model Simulations
F. Conclusions
Technical Appendix 3.1
ANNEX––Low-Income Countries and Pacific Islands Countries
Chart Data A1 Asian Low-Income Countries: Recovery Prospects and Policy Challenges
Chart Data A2 Impact of the Global Crisis on the Pacific Island Countries
Chart Data A3 Restoring Macroeconomic Sustainability in Maldives
References
Boxes
Chart Data 1.1 Recent Exchange-Rate Developments in Asia
Chart Data 1.2 What is the Outlook for Japan’s Domestic Demand?
Chart Data 1.3 China: An Extraordinary Investment Response in 2009
Chart Data 1.4 Lessons from Past Episodes of Large Capital Inflows in Asia
Chart Data 2.1 Assessing Monetary Policy Stances in Asia
Chart Data 3.1 Boosting Consumption in China: Is Public Spending on Health the Right Medicine?
Chart Data 3.2 Consumption and Financial Development in Asia
Chart Data 3.3 Rebalancing Growth in Asia: What Role for Investment?
3.4 The Asia GIMF Model and Policy Assumptions
Tables
Table 2.1 Asia: Real GDP Growth
Table 2.2 Selected Asia: Macroprudential Measures
Figures
Chart 1.1 Assessing Global Growth Momentum
Chart Data 1.2 Contributions to Global Growth
Chart Data 1.3 Asia: Domestic Demand Around Business Cycles
Chart Data 1.4 Selected Emerging Asia: Growth Differential vis--vis the United States versus Net Capital Inflows
Chart Data 1.5 Selected Asia: Exports
Chart Data 1.6 Net Flows to Equity Funds
Chart Data 1.7 Selected Asia: Corporate Bond (AAA) Spread over Government Securities
Chart Data 1.8 Selected Asia: Labor Market Conditions
Chart Data 1.9 Selected Asia: Manufacturing Capacity Utilization
Chart Data 1.10 Emerging Asia: Consumer Prices
Chart 1.11 Asia: Growth Momentum
Chart Data 1.12 Selected Asia: Industrial Production and Inventory Cycle
Chart Data 1.13 Selected Asia: Inventory and Shipments
Chart Data 1.14 Asia’s Exports to the United States and Inventory Cycle in the United States
Chart Data 1.15 Asia: Export Links
Chart Data 1.16 Selected Asia: GDP Growth and Value Added Linked to China Final Demand
Chart Data 1.17 Selected Asia: Change in REER and World Export Market Shares
Chart Data 1.18 Asia’s Exports: Forward-Looking Indicators
Chart Data 1.19 Impact of Fiscal Stimulus on 2009 Real GDP
Chart Data 1.20 Selected Export-Oriented Asia: Contribution of Private Domestic Demand (excl. Inventories) to Growth
Chart Data 1.21 Contribution to Recovery of Private Consumption in Asia
Chart Data 1.22 Selected Asia: Private Consumption, Consumer Confidence, and Stock Prices
Chart Data 1.23 Employment
Chart Data 1.24 Household Credit, 2009
Chart Data 1.25 Selected Asia: Private Domestic Demand
Chart Data 1.26 Selected Asia: Change in Real Cost of Capital
Chart Data 1.27 Selected Asia: Bank Credit to Corporate Sector
Chart Data 1.28 Selected Asia: Credit to Households and Corporations
Chart Data 1.29 Asia: Corporate Balance Sheet
Chart Data 1.30 Selected Asia: Bond Issuance in Local Currency
Chart Data 1.31 Bank Credit to SMEs and Large Corporations
Chart Data 1.32 Asia: Fiscal Impulse, 2010
Chart Data 1.33 Impact of Fiscal Stimulus on 2010 Real GDP
Chart Data 1.34 Selected Emerging Asia: Net Capital Inflows
Chart Data 1.35 Selected Asia: Net Capital Inflows
Chart Data 1.36 Emerging Asia: Equity Prices and Price-Earnings Ratio
Chart Data 1.37 Selected Asia: Property Prices
Chart Data 1.38 Emerging Asia (excl. China): Excess Liquidity and Net Capital Inflows
Chart Data 1.39 China and India: Composition of Reserve Money
Chart Data 2.1 China and India: Contributions to Growth
Chart Data 2.2 NIEs and ASEAN-5: Contributions to Growth
Chart Data 2.3 Industrial Asia: Contributions to Growth
Chart Data 2.4 Asia: Consumer Prices
Chart Data 2.5 Asia: Current Account Balance
Chart 2.6 Asia: GDP Growth
Chart Data 2.7 Outstanding Consolidated Claims of BIS Reporting Banks vis--vis Major Asian Economies
Chart Data 2.8 Emerging Economies: Projected Rollover of Foreign Currency Bonds and Loans by Corporations
Chart Data 2.9 Selected Asia: Policy Interest Rate and Implied 6-Month Forward Interest Rate
Chart Data 2.10 Output Gap: Projected Closure Dates
Chart Data 2.11 1-Year Ahead Inflation Expectation: Change between 2009:Q2 and 2010:Q1
Chart Data 2.12 Selected Asia: Mortgage Loans
Chart Data 2.13 Asia: Cyclically Adjusted General Government Balance
Chart Data 2.14 Public Debt
Chart Data 2.15 Japan: Consumer Price Inflation
Chart 3.1 Effect of Vertical Integration on Trade
Chart Data 3.2 Share of Export Value Added in GDP
Chart Data 3.3 Selected Asia: Export Dependence and Exposure
Chart Data 3.4 Selected Asia: Average Contribution to Real GDP Growth
Chart Data 3.5 Selected Asia: Share of Export Value Added in GDP
Chart Data 3.6 Selected Asia: Share of Medium and High-Tech Goods in Total Exports
Chart Data 3.7 Selected Asia: Impact on Value Added of Actual Decline in U.S. Private Final Demand
Chart Data 3.8 Private Consumption
Chart Data 3.9 Consumption Relative to Steady State
Chart Data 3.10 Cumulative Change in Ratio of Private Consumption to GDP (2000-07): Estimated Contribution of Disposable Income and Savings Rate
Chart Data 3.11 Investment
Chart Data 3.12 Capital-to-Output and Investment-to-Output Ratio
Chart Data 3.13 Model Based Determinants of Deviation of Investment-to-GDP Ratio from Sample Mean
Chart Data 3.14 Selected Asia: Excess Share of Industry in GDP
Chart Data 3.15 Selected Asia: Model Based Excess Share of Industry in GDP
Chart Data 3.16 Asia: Productivity Levels
Chart Data 3.17 Output
Chart Data 3.18 Investment-to-GDP Ratio
Chart Data 3.19 Consumption-to-GDP Ratio
Chart Data 3.20 Current Account Balance-to-GDP Ratio
Chart Data 3.21 Exports
Chart Data 3.22 Imports