ECONOMIC HEALTH CHECK
Asia Faces Shifting Risks, New Foundations for Growth
IMF Survey online
April 29, 2013
- Asia to lead three-speed global recovery on robust internal demand
- Rising financial imbalances, but corporate and banking sector balance sheets sound
- Policymakers need to stand ready to respond decisively to shifting risks
After a year of subdued economic performance, growth in Asia is set to pick up this year driven largely by continued robust domestic demand, says the IMF in its latest Regional Economic Outlook, which predicts growth will reach about 5¾ percent in 2013.
As a result, the region is expected to lead the global three-speed recovery.
Consumption and private investment will be supported by favorable labor market conditions—unemployment is at multiyear lows in several economies—and relatively easy financial conditions, notes the report.
Asia should also benefit from intraregional demand spillovers mainly reflecting growing Chinese demand and policy stimulus in Japan but also, in the case of the Association of Southeast Asian Nations, growing integration in final consumer goods trade.
Favorable outlook, with risks
The report says the favorable outlook is accompanied by some risks. While the external risk of severe economic fallout from an acute euro area crisis has diminished, regional risks are coming into clearer focus.
Financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several Asian economies.
A number of other regional risks are more difficult to anticipate but could prove disruptive given Asia’s highly integrated supply-chain network and growing dependence on regional demand and finance.
These include trade disruptions from a natural disaster or geopolitical tensions, a loss of confidence in Japan’s efforts to restore economic health, or an unexpected slowdown in China.
Policymakers should stand ready to respond
The report’s authors say policymakers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.
With inflation remaining low and stable, the current accommodative stance has generally served the region well. But financial imbalances are often persistent and cannot be easily unwound, says the report. It adds that output levels are close to or slightly above trend in most economies.
Monetary policymakers should stand ready to respond early and decisively to shifting risks, although the need and direction for future monetary policy action differs substantially across economies, adds the report.
Macroprudential measures against rapid credit growth
Where conventional tools are not sufficient, macroprudential measures will also have to play an important role, especially where rapid credit growth and persistently strong capital inflows pose problems for financial stability.
In general, Asia has buffers to cope with such risks, as banking and corporate sector balance sheets remain generally sound. But these imbalances require careful monitoring, adequate supervision, and a timely response.
Rebuilding fiscal space
Country circumstances—including the extent of demand pressures and the available policy space—will also determine the appropriate pace of fiscal consolidation.
In many Asian economies, structural deficits that are higher than precrisis levels imply the need for greater efforts to rebuild fiscal space. The report notes that projected improvements in structural fiscal balances remain small on current policy.
Some fiscal consolidation could also help preempt the potential overheating pressures from continued strong capital inflows. With risks more balanced than they were six months ago, automatic stabilizers should provide a sufficient first line of defense if, and as long as, growth proves only marginally disappointing.
Laying the foundations for shared longer-term prosperity
The report focuses on two important policy challenges for the medium-term: making growth more inclusive and, in particular for emerging Asia, avoiding the middle-income trap.
Strengthening fiscal frameworks and implementing a comprehensive agenda of structural reforms can go a long way toward achieving these goals, suggests the report.
Bold discretionary fiscal action in Asia during the global recession was emblematic of the region’s increasingly effective fiscal management over the past decade.
But there remains much room to make revenue and expenditure policies more growth-friendly while making growth more resilient through automatic stabilizers, and ensuring that Asia’s growing prosperity is shared across all income groups.
Emerging Asia is potentially susceptible to the middle-income trap—a phenomenon whereby economies risk stagnation at middle-income levels and fail to graduate into the ranks of advanced economies.
To sustain high rates of per capita income growth across the region, the policy agenda will have to vary by country across a range of priorities, including economic rebalancing, strengthening infrastructure investment, reforms in goods and labor markets, and meeting the challenges from rapid demographic change, says the report.