## apd-reo-april-2018-chapter-1

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### Global outlook and projections
- Global growth projected at 3.9 percent in both 2018 and 2019 (April 2018 World Economic Outlook).
- Over the medium term, global growth expected to slow to 3.7 percent.
- World: Real GDP growth pickup noted; exports volumes and other indicators shown in Figures 1.1–1.3 in the source.
- Risks:
  - Sudden tightening of global financial conditions triggered by inflation surprises and revised market expectations of monetary policy tightening could weigh on global demand.
  - Continued easy financial conditions could lead to a buildup of financial vulnerabilities over time.
  - US fiscal stimulus contributes to higher US debt and a (temporary) buildup of global imbalances.
  - A shift toward inward-looking policies (tariff actions) and increases in geopolitical tensions, climate change, and cybersecurity breaches pose additional downside risks.

### Inflation, wages, and labor market
- Headline inflation increased since September with the recent rise in oil and food prices.
- Core inflation and wage growth remain muted.
- Inflation in advanced economies rose from 0.8 percent in 2016 to 1.7 percent in 2017.
- Inflation in emerging market and developing economies declined from 4.3 to 4.1 percent.
- Wage growth described as tepid, reflecting weak productivity growth and labor market slack (low participation rates and high levels of involuntary part-time work).

### Financial conditions, market behavior, and vulnerabilities
- Episodes of increased financial market volatility occurred: initially due to concerns about higher US inflation and faster monetary policy normalization, later by announcements of tariff increases.
- Overall global financial conditions remained accommodative and supportive of the recovery.
- Most central banks maintained accommodative policies amid weak inflation; investors searched for yield given low interest rates and improved economic outlook.
- Companies’ operating surplus exceeded investment requirements; firms used internal resources and available credit for share buybacks and other financial transactions, boosting asset prices (see Figure 1.4).
- Emerging markets generally continued to experience large capital inflows and very low borrowing spreads (see Figure 1.5).

### Regional developments: Asia (overview)
- Asia grew by 5.7 percent in 2017, up 0.3 of a percentage point from the year before.
- Asia contributed more than 60 percent of global growth in 2017 (three-quarters of which comes from China and India) (Figure 1.6).
- Consumption and investment were major contributors to growth; contribution of net exports remained small though gross exports and imports grew strongly (Figures 1.7 and 1.8).
- Current account surplus for the region narrowed to 2.1 percent of GDP, down by ½ percent from 2016 (Figure 1.9 and Table 1.3).
- Inflation in the region largely remained subdued despite growth pickup; headline inflation rose slightly in 2017 because of oil prices, while core inflation remained low and wage pressures were muted (Table 1.2).
- Explanations for low inflation discussed in Chapter 2 include: decline in commodity prices since 2013, more backward-looking expectations, possible flattening of the Phillips curve, increasing automation, integration with global value chains reducing labor bargaining power, technological progress, and decline in capital costs (Figure 1.10).
- Financial conditions in the region remained favorable despite equity market declines in early 2018; stock markets rose sharply through end-January 2018 and were still up over the past year; sovereign bond yields generally declined, supported by continued capital flows into the region (Figures 1.11–1.14).
- With the US dollar weakening, most Asian currencies continued to appreciate during 2017 and into 2018.

### Credit, housing, and macroprudential responses
- Credit growth in the region remained strong, resulting in further buildup of corporate leverage and household debt from already high levels (Figure 1.15).
- Strong credit growth contributed to a further rally in house prices in some economies (Figures 1.16 and 1.17).
- Several economies—including Australia, Hong Kong SAR, Korea, and Singapore—used macroprudential measures to limit risks in housing markets; house prices began to show signs of stabilization in recent months.

### Selected country developments and key figures
- China:
  - GDP growth accelerated to 6.9 percent in 2017.
  - Consumption accounted for less than 60 percent of total GDP growth.
  - Core inflation rose steadily to above 2¼ percent.
  - Producer Price Index (PPI) showed a strong pickup, while headline CPI inflation remained contained.
- Japan:
  - GDP growth picked up to 1.7 percent in 2017, from 0.9 percent in 2016.
  - Real effective exchange rate depreciated by 5 percent in 2017.
  - Current account surplus rose slightly to 4 percent of GDP.
  - Underlying inflation (excluding fresh food and energy) remains subdued.
- India:
  - Growth rebounded strongly to 7.2 percent in the third quarter of FY2017/18, up from 6.1 percent in the first half of the fiscal year.
  - CPI inflation in FY2017/18 estimated at 3.6 percent (target band 4 percent ±2 percent).
- Korea:
  - Growth picked up in 2017 supported by buoyant investment despite a negative output gap.
  - Core inflation remained below 2 percent.
  - Current account surplus narrowed to 5.1 percent of GDP in 2017, down from 7 percent in 2016.
- Australia:
  - Inflation increased to 2 percent in 2017 but remained slightly below the target range of 2–3 percent.
  - Employment grew strongly in 2017 while wage growth remained weak.
  - Housing market cooling in eastern capitals; price increases moderated in real terms.
- New Zealand:
  - Continued solid expansion extending back to 2011, driven by record net migration, accommodative monetary policy, improving services exports, and strong terms of trade.
- Hong Kong SAR:
  - Growth estimated about 3.8 percent in 2017, driven mostly by private consumption.
  - Current account surplus estimated at 3 percent of GDP.
  - House prices rose by over 25 percent between March 2016 and December 2017.
- ASEAN highlights:
  - Indonesia: Growth picked up to 5.1 percent in 2017; headline inflation remained below 4 percent; core inflation about 3 percent; gross international reserves reached eight months of imports in December 2017.
  - Thailand: Large current account surplus of 10.8 percent of GDP in 2017; international reserves as of December 2017 stood at $239 billion (up nearly $42 billion from end-2016).
  - Singapore: Growth estimated at 3.6 percent in 2017; headline inflation averaged 0.6 percent in 2017; core inflation rose to 1.5 percent in 2017.
  - Malaysia: Economy grew by 5.9 percent in 2017; headline inflation averaged 3.8 percent for the year after peaking at 4.9 percent in March 2017.
  - Philippines: Growth 6.7 percent in 2017; inflation picked up to 3.2 percent and edged up further in January 2018; current account deficit of 0.4 percent of GDP in 2017.
  - Vietnam: Growth reached 6.8 percent in 2017.
  - Cambodia: Growth estimated at 6.9 percent in 2017; inflation picked up to nearly 3 percent.
  - Lao P.D.R.: Growth strong at 6.8 percent in 2017 but facing significant macro-financial imbalances.
  - Myanmar: Growth dropped (specific figure not provided in the supplied excerpt).

### Recent performance and other economies
- Myanmar: growth was "5.9 percent in 2016/2017 given a temporary suspension of construction permits in Yangon as well as a weakening of agriculture," while inflation dropped to "6.8 percent."
- Brunei Darussalam: growth recovered to "0.5 percent in 2017," turning positive for the first time since 2012, driven mainly by the non-oil-and-gas sector.
- Frontier and developing economies:
  - Bangladesh: growth rose above "7 percent," with consumption the main driver.
  - Nepal: growth accelerated to "7.5 percent in 2017" as activity recovered from the 2015 earthquakes; inflation fell to "4.5 percent."
  - Mongolia: GDP growth reached "5.1 percent" amid higher commodity prices and coal export volumes despite substantial fiscal consolidation; the country is currently implementing an IMF-supported program.
  - Sri Lanka: growth is estimated to have fallen to "3.1 percent" due to droughts and floods affecting agriculture and slowing construction; also under an IMF-supported program.
- Pacific island economies: growth remained about "2.6 percent in 2017," broadly unchanged; Fiji growth jumped to "3.8 percent" given recovery from Cyclone Winston; growth in Papua New Guinea and Timor-Leste remained relatively subdued. Cyclone Gita caused widespread destruction in several economies, including Tonga and Samoa.

### Regional outlook and headline projections
- Regional growth forecasts:
  - Asia overall: forecast at "5.6 percent in both 2018 and 2019"—up by about "0.1 of a percentage point" from October 2017 projections.
  - Emerging Asia: projected to grow by "about 6½ percent in both years."
- Current account and inflation:
  - Current account balances for the region are expected to decline to "about 1¾ percent of GDP in 2018–19."
  - Inflation projections: "about 1½ percent on average in advanced economies" and "about 3¼ percent on average in emerging markets."
- Drivers of the favorable near-term outlook: strong global growth supporting exports and investment; still accommodative policies and financial conditions; spillovers from US tax reform and budget boosting short-term US investment and growth.

### Country-level outlook highlights (projections)
- China: growth projected to moderate to "6.6 percent in 2018" as financial, housing, and fiscal tightening measures take effect and net exports contribute less.
- Japan:
  - Average headline inflation projected at "1.1 percent in 2018"; core inflation expected at "0.5 percent."
- India:
  - Growth projected at "6.7 percent in FY2017/18," recovering to "7.4 percent in FY2018/19."
  - Medium-term headline CPI inflation forecast to remain within the Reserve Bank of India’s inflation-targeting band "(4 percent ±2 percent)."
- Korea:
  - Growth expected about "3 percent in 2018 and 2019."
  - Consumer price inflation stable at "about 2 percent."
  - Current account surplus expected to remain elevated at "about 5 percent."
- Australia: recovery expected to accelerate; baseline assumes a soft landing in the housing market and inflation returning to the midpoint of the target range within the next three years.
- New Zealand: growth expected above trend in the near term and to moderate toward trend in the medium term due to lower net migration, less earthquake reconstruction spending, and weaker residential investment.
- Hong Kong SAR: growth expected at "about 3.6 percent in 2018"; current account surplus forecast at "about 3.1 percent of GDP"; CPI inflation projected to increase to "2.2 percent for 2018."
- ASEAN highlights:
  - Indonesia: growth projected to increase to "5.3 percent in 2018 and 5.5 percent in 2019"; inflation projected near "3.5 ±1 percent"; current account deficit projected at "1.9 percent of GDP in 2018"; medium-term real GDP growth projected at "5½ percent."
  - Thailand: growth forecast at "3.7 percent in 2017 and 3.5 percent in 2018"; inflation projected below the "2.5 percent midpoint."
  - Singapore: growth projected at "2.9 percent in 2018," easing to "2.7 percent in 2019"; headline inflation expected to rise to "1.2 percent in 2018"; core inflation to move closer to "2 percent" over the medium term.
  - Malaysia: GDP growth projected at "5.3 percent in 2018"; medium-term potential about "5 percent"; inflation about "2.5 percent."
  - Philippines: growth projected at "6¾ percent in 2018–19" and about "7 percent" over the medium term; current account deficit projected to widen to "0.5 percent of GDP in 2018"; inflation expected within "2–4 percent" target band.
  - Vietnam: growth expected to continue at "6½ percent" in the near and medium term; inflation in the range of "4 percent."
  - Myanmar: growth expected to pick up toward estimated potential of "7 to 7.5 percent" over the medium term.
  - Cambodia: medium-term growth projected to slow to "about 6 percent."
  - Lao P.D.R.: growth expected to continue at "about 7 percent" in the near and medium term.
  - Brunei Darussalam: growth expected to pick up to "1 percent in 2018" reflecting higher oil output.

### Outlook for other frontier and Pacific island economies
- Other frontier economies:
  - Bangladesh: growth should slow slightly to "7 percent in FY2018"; inflation should drop toward target as food price shocks wane.
  - Nepal: growth expected to slow to "5 percent in 2018"; inflation expected to rise to "6 percent."
  - Sri Lanka: growth projected to rise to "4.4 percent" and inflation to drop to "5 percent" by end-2018.
  - Mongolia: growth expected to remain strong in 2018 and pick up sharply over the medium term as a major new mine comes onstream.
- Pacific island economies: growth expected to pick up slightly in 2018–19 to "about 3 percent," helped by growing tourist arrivals, higher commodity prices, and stronger fishing revenues; inflation expected to remain low in most economies; outlook subject to downside risks from natural disasters.

### Risks to the outlook
- Overall risk balance: improved since October 2017 but still tilted to the downside over the medium term.
- Key uncertainties: possible sudden tightening of global financial conditions; retreat from global integration; continued buildup of private sector leverage and financial vulnerabilities; rising geopolitical tensions.
- Upside risks:
  - Durable growth momentum from strong consumer and business confidence and loose financial conditions.
  - US fiscal stimulus and euro area recovery could lift global growth with positive spillovers to Asia.
  - Medium-term potential from the CPTPP and China’s Belt and Road Initiative, provided debt sustainability and project quality are preserved.
  - Productivity gains from the digital revolution.
- Sharp tightening of global financial conditions (downside scenario):
  - Net financial flows to emerging market and developing economies have picked up, leading to rich asset valuations and increased volatility.
  - An abrupt change in global risk appetite could cause a sudden sharp increase in interest rates, strengthen the US dollar and euro, trigger corrections in asset valuations, and impose strains on economies with high leverage, balance sheet mismatches, or US dollar pegs.
  - Potential strains in dollar funding markets where financial institutions rely on short-term external funding; structural changes could raise global funding costs.
  - Example: some regionally active Japanese banks are exposed to foreign exchange funding liquidity risk due to greater reliance on short-term foreign exchange swaps.
- Retreat from global integration:
  - Inward-looking policies in advanced economies (tariffs and trade measures) could disrupt global supply chains, reduce migration and remittances, lower global productivity, and hurt longer-term growth.
  - Recent measures noted include safeguard tariffs on washing machines and solar cells and modules, tariffs on steel and aluminum, and a Section 301 action on China potentially affecting "some $50 billion in Chinese exports."
  - Potential escalation and retaliation could damp foreign direct investment and trade and weigh on financial markets and business confidence.
  - Policy response: Asian economies have scope to improve the openness of trade and foreign direct investment policies, particularly emerging market economies, as suggested by comparative metrics of trade, services, and FDI restrictiveness.

### Risks and vulnerabilities: financial, external, and geopolitical (from "1. GOOD TIMEs, UNCERTAIN TIMEs")
- Property prices have risen substantially in a few economies in the region, raising the risk that tighter financial conditions could slow or reverse price increases, weigh on consumption via a negative wealth effect, and produce second-round effects on banks’ balance sheets.
- Some economies face external financing vulnerabilities, including from the high share of government bonds held by foreigners (including more procyclical retail investors).
- China faces downside financial risks related to banks’ still elevated off-balance-sheet exposures, thin capital and liquidity buffers at small and medium-size banks, and ongoing reliance by both banks and shadow banking entities on implicit guarantees.
- Geopolitical tensions:
  - Expectations of a peaceful resolution surrounding North Korea have increased, but risks could escalate if talks are viewed as unsuccessful; financial markets and investment could be adversely affected.
  - An actual conflict with US involvement remains a tail risk; heightened tensions could significantly affect perceptions of regional security and cause market turbulence in South Korea, Japan, and possibly China.
  - Territorial disputes in the South China Sea remain a possibility.
- Other downside risks:
  - In China, failure to pivot from high-speed to high-quality growth could increase financial imbalances and the probability of a sharp adjustment.
  - Higher food prices in several economies could spill over to headline inflation and require monetary policy tightening.
  - Cybersecurity breaches and cyberattacks are rising globally and could be highly disruptive.
  - Climate change and natural disasters: during 1980–2016, 204 natural disasters were recorded in the 12 economies in the Pacific, implying a nearly 50 percent chance of a country being hit in any given year, and disasters caused damage averaging 14 percent of GDP.
  - Small states and Pacific island economies face the risk of a withdrawal of correspondent banking relationships by global banks.

### Longer-term growth prospects and structural challenges
- Population aging:
  - Many Asian economies risk “growing old before they grow rich.” At the point the working-age share declines, incomes will be substantially below the United States level: 70 percent for Korea, 20 percent in China, and less than 40 percent for most others.
  - The adverse effect of aging on growth is estimated in the range of ½ to 1 percent for China, Japan, Korea, and Thailand.
  - Aging will imply substantial additional fiscal burdens for these economies.
- Slowing productivity growth:
  - No recent sign of productivity catch-up or convergence relative to the United States except for low-income emerging market and developing economies.
  - Decline in productivity growth observed across sectors, including manufacturing and especially services.
  - Lack of quality infrastructure is a critical structural weakness in most economies in the region.
- Digital revolution:
  - Recent technological advances could represent a “fourth industrial revolution” with transformative potential, but may create winners and losers and change long-standing growth models.
  - Widespread use of industrial robots could boost productivity but risks raising structural unemployment if alternative opportunities are not created.
  - Effectively harnessing digital benefits requires revamping education and investing in physical and regulatory infrastructure to spur competition and innovation.
  - An analytical chapter on the digital economy in Asia is planned for the October 2018 Regional Economic Outlook: Asia and Pacific.

### Policy recommendations
- Fiscal policy:
  - With output gaps closing across much of the region, fiscal support needs have diminished; fiscal policies should gear toward strengthening buffers, safeguarding sustainability, and increasing resilience.
  - China, India, Indonesia, and a number of other economies should aim for growth-friendly consolidation.
  - In Japan, avoid premature reduction in fiscal support; prioritize a credible framework for medium- and long-term consolidation.
  - A more supportive near-term fiscal stance is appropriate in Australia and Singapore.
  - In Korea, a substantial expansion would be appropriate as part of rebalancing.
  - Some economies should undertake tax reform over the medium term to create space for infrastructure and social spending and to support structural reforms.
- Monetary policy:
  - Continued accommodative monetary policy stance is appropriate for much of Asia given relatively subdued inflation, with notable exceptions.
  - In China, growth targets should be deemphasized and credit growth slowed; overall policy stance, including monetary policy, should become less accommodative.
  - In India, given increased inflation pressure, monetary policy should maintain a tightening bias.
  - Consider carefully the mix of monetary, macroprudential, exchange rate, and other policies given easy liquidity conditions and the risk of contributing to froth in financial markets.
  - Strengthen monetary policy frameworks and central bank communications to make inflation less sticky and keep expectations well anchored.
  - Exchange rate flexibility can help insulate economies from imported inflation.
- Macroprudential and financial policies:
  - Develop and broaden macroprudential toolkits; tighten macroprudential requirements in economies facing currency mismatches and rapid credit growth.
  - Be aware of limits of macroprudential policies amid excessive liquidity.
  - Use capital flow management measures carefully and generally allow flexible exchange rates to function as a buffer against external shocks.
- Structural reforms and resilience-building:
  - Use recovery momentum to pursue fiscal, financial, and structural reforms to lift long-term growth, enhance labor force participation, make growth more inclusive, and build resilience to shocks (“fix the roof while the sun is shining”).
  - Measures include boosting productivity and investment, narrowing gender labor force participation gaps, addressing the demographic transition, addressing climate change, and supporting those affected by shifts in technology and trade.
  - For developing economies, these steps are essential for progress toward the United Nations Sustainable Development Goals and for promoting economic diversification.
  - To adapt to the digital revolution, upgrade physical and regulatory infrastructure, reduce lower trade restrictions (particularly in services), enhance human capital, and address labor market and social challenges.

### Box 1.1 — Rapid credit growth in Frontier and Developing Asian Economies (FDEs)
- Scope: Asian frontier and developing economies comprise Bangladesh, Bhutan, Cambodia, Lao P.D.R., Mongolia, Myanmar, Nepal, Sri Lanka, and Vietnam.
- Recent experience:
  - Many FDEs are currently experiencing rapid credit growth.
  - Cambodia, Lao P.D.R., Myanmar, Nepal, Sri Lanka, and Vietnam have seen double-digit growth in credit to the private sector for several years; Mongolia experienced a credit boom a few years ago.
- Historical patterns (2011–16):
  - 9 out of 11 credit boom episodes in Asia were in FDEs, and five out of nine Asian FDEs experienced credit booms.
  - Among FDEs that had a credit boom during this period:
    - Annual real credit growth averaged nearly 23 percent.
    - Median credit-to-GDP ratio rose from about 35 to 56 percent.
    - Credit gaps averaged about 5 percent of GDP (and ranged up to 17 percent of GDP).
- Credit growth and investment disconnect:
  - A prolonged increase in credit growth has often failed to translate into sustained increases in domestically financed private investment.
  - Examples:
    - Sri Lanka: the 2012 credit boom helped boost domestically financed private investment, but the 2016 credit expansion did not have the same impact.
    - Nepal: nominal credit grew by 32 percent—nearly six times faster than nominal GDP growth—yet domestically financed private investment rose by just 2 percent in 2016.
- Causes vary across FDEs:
  - Nepal’s credit boom was driven by strong remittance inflows coupled with insufficient sterilization.
  - Cambodia’s credit booms have been financed by foreign borrowing by banks and large microfinance institutions.
  - Vietnam’s credit growth was driven by substantial unsterilized intervention to maintain the dollar peg amid large capital inflows, higher banking sector credit growth targets set by the central bank, and easing of macroprudential policy via lower risk weights on lending to real estate and securities sectors.
- Policy options and tools:
  - Strengthen bank and nonbank supervision and regulation, develop macroprudential indicators and tools, and ensure effective crisis management and resolution frameworks.
  - Tailored macroprudential policies can help prevent risk buildup, though limited capacity and experience should be considered.
  - Specific measures where credit is concentrated in real estate and related sectors:
    - Reduce loan-to-value ratios on real estate loans and hire purchases.
    - Introduce real estate exposure limits.
    - Raise risk weights on these loans.
    - Design tools to prevent migration of lending from banks to nonbanks.
  - Fiscal policies such as taxes on land or housing—particularly for properties not used as primary residences—can also be used.

### Tax Cuts and Jobs Act: key corporate provisions (from "5. Credit Intensity and Domestically Funded Private Investment Growth")
- Rate cut: The statutory rate in the United States is cut from 35 percent to 21 percent. The applicable rate for some activities is 13.125 percent.
- Capital expensing: For the next five years, corporate investments can be fully deducted in the first year; during the subsequent five years, the share of investment that can be expensed will be gradually reduced. Interest remains deductible (subject to tighter limits).
- Territorial taxation and repatriation: Previously unrepatriated profits estimated at some $2.6 trillion are deemed to be repatriated and are subject to tax at preferential rates (with payments spread over an eight-year period). The United States moves to taxing income on a territorial basis.
- Base-erosion provision (BEAT) and GILTI: BEAT ensures a firm’s tax liability can fall no lower than 10 percent of its income (excluding certain payments to foreign-affiliated corporations). A global intangible low-taxed income (GILTI) tax applies: a foreign affiliate’s returns above 10 percent on tangible assets are taxed at 10.5 percent, with a credit of 80 percent of foreign taxes paid. If a multinational’s average foreign tax rate is 13.125 percent (10.5 percent divided by 80 percent) or higher, no GILTI will be owed.
- Foreign-derived intangible income (FDII): A reduced tax rate of 13.125 percent is offered on export income from intangible assets (defined as export income exceeding a 10 percent return on domestic tangible assets, equivalent to the GILTI).

### Modeling growth spillovers: APDMOD results and quantitative impacts
- US growth impact in the simulation:
  - Real GDP growth: expansion from 2018 to 2021, with growth being, on average, 0.3 of a percentage point higher a year.
  - US output gap largely closed; additional fiscal stimulus is inflationary and prompts additional interest rate hikes by the US Federal Reserve, leading to real GDP growth being lower by about 0.1 of a percentage point for the remainder of the IMF’s forecast horizon.
  - Real imports peak 6 percent higher than in the baseline by 2020.
- Channels and regional impacts:
  - Main channel: increased exports to the United States from higher US aggregate demand, often paired with a short-term REER depreciation. Key beneficiaries: China, Japan, Korea, and some ASEAN economies.
  - Secondary channel: intra-Asia rebalancing via cross-exchange-rate effects; some economies (notably Japan and a few ASEAN members) experience stronger REER depreciation and larger gains, while others (such as Singapore and some ASEAN members) experience appreciation.
  - Third channel: movements in commodity prices. Commodity importers with strong US links (China, India, Japan, Korea, some ASEAN economies) face a minor drag; commodity exporters (Australia, Mongolia, New Zealand) benefit via higher Asian demand.
- Quantitative impacts (selected figures from simulation as presented):
  - Direct spillovers to Asia are relatively small; most Asia spillover effects are less than 0.2 of a percent of GDP at their peak in 2020.
  - United States: Real GDP growth: 0.30 1.20; Current-account-balance-to-GDP peak: 20.26 20.88; Import Volumes: 1.93 5.65.
  - Asia-Pacific (selected table entries): Asia-Pacific export/import/real GDP deviations: 0.04 0.09 0.04 0.23 0.28 1.00.
  - Australia: 0.03 0.04 20.012 20.53 0.14 0.34.
  - China: 0.03 0.07 0.05 0.35 0.31 1.18.
  - India: 0.03 0.06 0.02 20.08 0.28 0.94.
  - Japan: 0.01 0.16 0.05 0.33 0.35 1.26.
  - Korea: 0.05 0.09 0.03 0.14 0.20 0.77.
  - ASEAN-5: 0.06 0.13 0.05 0.10 0.19 0.59.
  - Rest of Asia and Pacific: 0.09 0.22 0.06 0.31 0.24 0.77.
- Global imbalances:
  - US current account deficit widens by –0.9 of a percentage point of GDP by 2021 compared with the baseline.
  - Asia current account surplus widens by over 0.2 of a percentage point of GDP compared with the baseline, led by China, Japan, and Korea.
- Policy-relevant implications:
  - The corporate rate cut and expensing are likely to provide a short-term boost to US growth and investment and may attract investment back to the United States; the BEAT and GILTI will constrain some profit-shifting incentives.
  - Effects on other jurisdictions depend on their foreign tax rates relative to the new US regime (rates above 21 percent risk losing US investment; rates below 13.125 percent may provide limited benefit to firms).
  - Deemed repatriation should raise revenue but its macroeconomic impact may be limited given existing US asset holdings of repatriated funds.
  - Much of the medium-term international impact depends on firms’ expectations about the persistence and evolution of the US tax system.

### Digital adoption, automation, and policy priorities
- Robotics and robot density:
  - In 2016, Korea is the second largest market (14 percent), and Japan is the third (13 percent), ahead of the United States (11 percent).
  - Robot density leader: Korea, followed by Japan and Germany.
  - Figure 1.3.3. Estimated Number of Industrial Robots Delivered, 2017 (Percent of total):
    - Asia 65.0%
    - Europe 17.3%
    - America 13.6%
    - Africa 2.8%
    - Unspecified 1.3%
  - Within Asia (percent of total delivered industrial robots, 2017):
    - China 50%
    - Korea 19%
    - Japan 18%
    - Taiwan Province of China 4%
    - India 1%
    - Thailand 1%
    - Other Asia 7%
- E-commerce and digital payments:
  - China accounted for less than 1 percent of worldwide transactions about a decade ago, but that share is now more than 40 percent (Wang and others 2017).
  - Mobile payments are expanding sharply in such economies as Bangladesh, India, and the Philippines, but on average Asia is lagging sub-Saharan Africa.
- Cryptocurrencies and regulatory divergence:
  - Some Asian economies have been at the frontier in terms of cryptocurrencies; some small states have been approached by private companies to issue these as legal tender, raising a variety of concerns.
  - Regulatory approaches to cryptocurrencies vary substantially across the region.
- Policy priorities to harness digital dividends:
  - revamp education;
  - invest in physical and regulatory infrastructure that spurs competition and innovation;
  - reform trade (especially in services) and investment policies;
  - address labor market and social challenges.
- Regional and international cooperation will be key to developing effective policy responses, and the IMF can play an important role.

*Source: International Monetary Fund | April 2018 — apd-reo-april-2018-chapter-1 (excerpt)*

### 2.3 percent the year before (Figure 1.2).

### apd-reo-april-2018-chapter-1 - 2.3 percent the year before (Figure 1.2)

### Global outlook and projections
- Global growth projected at 3.9 percent in both 2018 and 2019 (April 2018 World Economic Outlook).
- Over the medium term, global growth expected to slow to 3.7 percent.
- World: Real GDP growth pickup noted; exports volumes and other indicators shown in Figures 1.1–1.3 in the source.

### Inflation, wages, and labor market
- Headline inflation increased since September with the recent rise in oil and food prices.
- Core inflation and wage growth remain muted.
- Inflation in advanced economies rose from 0.8 percent in 2016 to 1.7 percent in 2017.
- Inflation in emerging market and developing economies declined from 4.3 to 4.1 percent.
- Wage growth described as tepid, reflecting weak productivity growth and labor market slack (low participation rates and high levels of involuntary part-time work).

### Financial conditions, market behavior, and vulnerabilities
- Episodes of increased financial market volatility occurred in the year—initially due to concerns about higher US inflation and faster monetary policy normalization, later by announcements of tariff increases.
- Overall global financial conditions remained accommodative and supportive of the recovery.
- Most central banks maintained accommodative policies amid weak inflation; investors searched for yield given low interest rates and improved economic outlook.
- Companies’ operating surplus exceeded investment requirements; firms used internal resources and available credit for share buybacks and other financial transactions, boosting asset prices (see Figure 1.4).
- Emerging markets generally continued to experience large capital inflows and very low borrowing spreads (see Figure 1.5).
- Risks highlighted:
  - Sudden tightening of global financial conditions triggered by inflation surprises and revised market expectations of monetary policy tightening could weigh on global demand.
  - Continued easy financial conditions could lead to a buildup of financial vulnerabilities over time.
  - US fiscal stimulus contributes to higher US debt and a (temporary) buildup of global imbalances.
  - A shift toward inward-looking policies (tariff actions) and increases in geopolitical tensions, climate change, and cybersecurity breaches pose additional downside risks.

### Regional developments: Asia (overview)
- Asia grew by 5.7 percent in 2017, up 0.3 of a percentage point from the year before.
- Asia contributed more than 60 percent of global growth in 2017 (three-quarters of which comes from China and India) (Figure 1.6).
- Consumption and investment were major contributors to growth; contribution of net exports remained small though gross exports and imports grew strongly (Figures 1.7 and 1.8).
- Current account surplus for the region narrowed to 2.1 percent of GDP, down by ½ percent from 2016 (Figure 1.9 and Table 1.3).
- Inflation in the region largely remained subdued despite growth pickup; headline inflation rose slightly in 2017 because of oil prices, while core inflation remained low and wage pressures were muted (Table 1.2).
- Explanations for low inflation discussed in Chapter 2 include: decline in commodity prices since 2013, more backward-looking expectations, possible flattening of the Phillips curve, increasing automation, integration with global value chains reducing labor bargaining power, technological progress, and decline in capital costs (Figure 1.10).
- Financial conditions in the region remained favorable despite equity market declines in early 2018; stock markets rose sharply through end-January 2018 and were still up over the past year; sovereign bond yields generally declined, supported by continued capital flows into the region (Figures 1.11–1.14).
- With the US dollar weakening, most Asian currencies continued to appreciate during 2017 and into 2018.

### Credit, housing, and macroprudential responses
- Credit growth in the region remained strong, resulting in further buildup of corporate leverage and household debt from already high levels (Figure 1.15).
- Strong credit growth contributed to a further rally in house prices in some economies (Figures 1.16 and 1.17).
- Several economies—including Australia, Hong Kong SAR, Korea, and Singapore—used macroprudential measures to limit risks in housing markets; house prices began to show signs of stabilization in recent months.

### Selected country developments and key figures
- China
  - GDP growth accelerated to 6.9 percent in 2017.
  - Consumption accounted for less than 60 percent of total GDP growth.
  - Core inflation rose steadily to above 2¼ percent.
  - Producer Price Index (PPI) showed a strong pickup, while headline CPI inflation remained contained.
- Japan
  - GDP growth picked up to 1.7 percent in 2017, from 0.9 percent in 2016.
  - Real effective exchange rate depreciated by 5 percent in 2017.
  - Current account surplus rose slightly to 4 percent of GDP.
  - Underlying inflation (excluding fresh food and energy) remains subdued.
- India
  - Growth rebounded strongly to 7.2 percent in the third quarter of FY2017/18, up from 6.1 percent in the first half of the fiscal year.
  - CPI inflation in FY2017/18 estimated at 3.6 percent (target band 4 percent ±2 percent).
- Korea
  - Growth picked up in 2017 supported by buoyant investment despite a negative output gap.
  - Core inflation remained below 2 percent.
  - Current account surplus narrowed to 5.1 percent of GDP in 2017, down from 7 percent in 2016.
- Australia
  - Inflation increased to 2 percent in 2017 but remained slightly below the target range of 2–3 percent.
  - Employment grew strongly in 2017 while wage growth remained weak.
  - Housing market cooling in eastern capitals; price increases moderated in real terms.
- New Zealand
  - Continued solid expansion extending back to 2011, driven by record net migration, accommodative monetary policy, improving services exports, and strong terms of trade.
- Hong Kong SAR
  - Growth estimated about 3.8 percent in 2017, driven mostly by private consumption.
  - Current account surplus estimated at 3 percent of GDP.
  - House prices rose by over 25 percent between March 2016 and December 2017.
- ASEAN highlights
  - Indonesia: Growth picked up to 5.1 percent in 2017; headline inflation remained below 4 percent; core inflation about 3 percent; gross international reserves reached eight months of imports in December 2017.
  - Thailand: Large current account surplus of 10.8 percent of GDP in 2017; international reserves as of December 2017 stood at $239 billion (up nearly $42 billion from end-2016).
  - Singapore: Growth estimated at 3.6 percent in 2017; headline inflation averaged 0.6 percent in 2017; core inflation rose to 1.5 percent in 2017.
  - Malaysia: Economy grew by 5.9 percent in 2017; headline inflation averaged 3.8 percent for the year after peaking at 4.9 percent in March 2017.
  - Philippines: Growth 6.7 percent in 2017; inflation picked up to 3.2 percent and edged up further in January 2018; current account deficit of 0.4 percent of GDP in 2017.
  - Vietnam: Growth reached 6.8 percent in 2017.
  - Cambodia: Growth estimated at 6.9 percent in 2017; inflation picked up to nearly 3 percent.
  - Lao P.D.R.: Growth strong at 6.8 percent in 2017 but facing significant macro-financial imbalances.
  - Myanmar: Growth dropped (specific figure not provided in the supplied excerpt).

*International Monetary Fund | April 2018*

### 5.9 percent in 2016/2017 given a temporary

### apd-reo-april-2018-chapter-1 - 5.9 percent in 2016/2017 given a temporary

### Recent performance and other economies
- Myanmar: growth was "5.9 percent in 2016/2017 given a temporary suspension of construction permits in Yangon as well as a weakening of agriculture," while inflation dropped to "6.8 percent."
- Brunei Darussalam: growth recovered to "0.5 percent in 2017," turning positive for the first time since 2012, driven mainly by the non-oil-and-gas sector.
- Frontier and developing economies:
  - Bangladesh: growth rose above "7 percent," with consumption the main driver.
  - Nepal: growth accelerated to "7.5 percent in 2017" as activity recovered from the 2015 earthquakes; inflation fell to "4.5 percent."
  - Mongolia: GDP growth reached "5.1 percent" amid higher commodity prices and coal export volumes despite substantial fiscal consolidation; the country is currently implementing an IMF-supported program.
  - Sri Lanka: growth is estimated to have fallen to "3.1 percent" due to droughts and floods affecting agriculture and slowing construction; also under an IMF-supported program.
- Pacific island economies: growth remained about "2.6 percent in 2017," broadly unchanged; Fiji growth jumped to "3.8 percent" given recovery from Cyclone Winston; growth in Papua New Guinea and Timor-Leste remained relatively subdued. Cyclone Gita caused widespread destruction in several economies, including Tonga and Samoa.

### Regional outlook and headline projections
- Regional growth forecasts:
  - Asia overall: forecast at "5.6 percent in both 2018 and 2019"—up by about "0.1 of a percentage point" from October 2017 projections.
  - Emerging Asia: projected to grow by "about 6½ percent in both years."
- Current account and inflation:
  - Current account balances for the region are expected to decline to "about 1¾ percent of GDP in 2018–19."
  - Inflation projections: "about 1½ percent on average in advanced economies" and "about 3¼ percent on average in emerging markets."
- Drivers of the favorable near-term outlook: strong global growth supporting exports and investment; still accommodative policies and financial conditions; spillovers from US tax reform and budget boosting short-term US investment and growth.

### Country-level outlook highlights
- China: growth projected to moderate to "6.6 percent in 2018" as financial, housing, and fiscal tightening measures take effect and net exports contribute less.
- Japan:
  - Rising global demand and increased private investment expected to carry into 2018.
  - Average headline inflation projected at "1.1 percent in 2018"; core inflation expected at "0.5 percent."
  - Wage increases expected to remain modest despite tight labor markets.
- India:
  - Growth projected at "6.7 percent in FY2017/18," recovering to "7.4 percent in FY2018/19."
  - Medium-term headline CPI inflation forecast to remain within the Reserve Bank of India’s inflation-targeting band "(4 percent ±2 percent)."
  - Current account deficit in FY2017/18 expected to widen somewhat but remain modest; financed by robust FDI inflows.
- Korea:
  - Growth expected about "3 percent in 2018 and 2019."
  - Consumer price inflation stable at "about 2 percent."
  - Current account surplus expected to remain elevated at "about 5 percent."
- Australia: recovery expected to accelerate driven by infrastructure investment and private consumption; inflation forecast to return to the midpoint of the target range within the next three years. Baseline assumes a soft landing in the housing market.
- New Zealand: growth expected above trend in the near term and to moderate toward trend in the medium term due to lower net migration, less earthquake reconstruction spending, and weaker residential investment.
- Hong Kong SAR: growth expected at "about 3.6 percent in 2018"; current account surplus forecast at "about 3.1 percent of GDP"; CPI inflation projected to increase to "2.2 percent for 2018."
- ASEAN highlights:
  - Indonesia: growth projected to increase to "5.3 percent in 2018 and 5.5 percent in 2019"; inflation projected near "3.5 ±1 percent"; current account deficit projected at "1.9 percent of GDP in 2018"; medium-term real GDP growth projected at "5½ percent."
  - Thailand: growth forecast at "3.7 percent in 2017 and 3.5 percent in 2018"; inflation projected below the "2.5 percent midpoint."
  - Singapore: growth projected at "2.9 percent in 2018," easing to "2.7 percent in 2019"; headline inflation expected to rise to "1.2 percent in 2018"; core inflation to move closer to "2 percent" over the medium term.
  - Malaysia: GDP growth projected at "5.3 percent in 2018"; medium-term potential about "5 percent"; inflation about "2.5 percent."
  - Philippines: growth projected at "6¾ percent in 2018–19" and about "7 percent" over the medium term; current account deficit projected to widen to "0.5 percent of GDP in 2018"; inflation expected within "2–4 percent" target band.
  - Vietnam: growth expected to continue at "6½ percent" in the near and medium term; inflation in the range of "4 percent."
  - Myanmar: growth expected to pick up toward estimated potential of "7 to 7.5 percent" over the medium term.
  - Cambodia: medium-term growth projected to slow to "about 6 percent."
  - Lao P.D.R.: growth expected to continue at "about 7 percent" in the near and medium term.
  - Brunei Darussalam: growth expected to pick up to "1 percent in 2018" reflecting higher oil output.

### Outlook for other frontier and Pacific island economies
- Other frontier economies:
  - Bangladesh: growth should slow slightly to "7 percent in FY2018"; inflation should drop toward target as food price shocks wane.
  - Nepal: growth expected to slow to "5 percent in 2018"; inflation expected to rise to "6 percent."
  - Sri Lanka: growth projected to rise to "4.4 percent" and inflation to drop to "5 percent" by end-2018.
  - Mongolia: growth expected to remain strong in 2018 and pick up sharply over the medium term as a major new mine comes onstream.
- Pacific island economies: growth expected to pick up slightly in 2018–19 to "about 3 percent," helped by growing tourist arrivals, higher commodity prices, and stronger fishing revenues; inflation expected to remain low in most economies; outlook subject to downside risks from natural disasters.

### Risks to the outlook
- Overall risk balance: improved since October 2017 but still tilted to the downside over the medium term.
- Key uncertainties: possible sudden tightening of global financial conditions; retreat from global integration; continued buildup of private sector leverage and financial vulnerabilities; rising geopolitical tensions.

- Upside risks:
  - Durable growth momentum from strong consumer and business confidence and loose financial conditions.
  - US fiscal stimulus and euro area recovery could lift global growth with positive spillovers to Asia.
  - Medium-term potential from the CPTPP and China’s Belt and Road Initiative, provided debt sustainability and project quality are preserved.
  - Productivity gains from the digital revolution.

- Sharp tightening of global financial conditions:
  - Net financial flows to emerging market and developing economies have picked up, leading to rich asset valuations and increased volatility.
  - An abrupt change in global risk appetite could cause a sudden sharp increase in interest rates, strengthen the US dollar and euro, trigger corrections in asset valuations, and impose strains on economies with high leverage, balance sheet mismatches, or US dollar pegs.
  - Potential strains in dollar funding markets where financial institutions rely on short-term external funding; structural changes could raise global funding costs.
  - Example: some regionally active Japanese banks are exposed to foreign exchange funding liquidity risk due to greater reliance on short-term foreign exchange swaps.

- Retreat from global integration:
  - Inward-looking policies in advanced economies (tariffs and trade measures) could disrupt global supply chains, reduce migration and remittances, lower global productivity, and hurt longer-term growth.
  - Recent measures noted include safeguard tariffs on washing machines and solar cells and modules, tariffs on steel and aluminum, and a Section 301 action on China potentially affecting "some $50 billion in Chinese exports."
  - Potential escalation and retaliation could damp foreign direct investment and trade and weigh on financial markets and business confidence.
  - Policy response: Asian economies have scope to improve the openness of trade and foreign direct investment policies, particularly emerging market economies, as suggested by comparative metrics of trade, services, and FDI restrictiveness.

*Source: Regional Economic Outlook: Asia and Pacific Department, April 2018*

### 1. GOOD TIMEs, UNCERTAIN TIMEs: A TIME TO PREPARE

### 1. GOOD TIMEs, UNCERTAIN TIMEs: A TIME TO PREPARE

### Risks and vulnerabilities: financial, external, and geopolitical
- Property prices have risen substantially in a few economies in the region, raising the risk that tighter financial conditions could slow or reverse price increases, weigh on consumption via a negative wealth effect, and produce second-round effects on banks’ balance sheets.
- Some economies face external financing vulnerabilities, including from the high share of government bonds held by foreigners (including more procyclical retail investors).
- China faces downside financial risks related to banks’ still elevated off-balance-sheet exposures, thin capital and liquidity buffers at small and medium-size banks, and ongoing reliance by both banks and shadow banking entities on implicit guarantees.
- A sudden tightening of financial conditions poses near-term risks, while a prolonged period of easy conditions could foster a buildup of financial stability vulnerabilities through yield-seeking behavior and migration of risks toward nonbanks.
- Geopolitical tensions:
  - Expectations of a peaceful resolution surrounding North Korea have increased, but risks could escalate if talks are viewed as unsuccessful; financial markets and investment could be adversely affected.
  - An actual conflict with US involvement remains a tail risk; heightened tensions could significantly affect perceptions of regional security and cause market turbulence in South Korea, Japan, and possibly China.
  - Territorial disputes in the South China Sea remain a possibility.
- Other downside risks:
  - In China, failure to pivot from high-speed to high-quality growth could increase financial imbalances and the probability of a sharp adjustment.
  - Higher food prices in several economies could spill over to headline inflation and require monetary policy tightening.
  - Cybersecurity breaches and cyberattacks are rising globally and could be highly disruptive, particularly if they target critical infrastructure or highly interconnected entities.
  - Climate change and natural disasters could have significant economic impacts, especially on small and low-income economies with smaller buffers:
    - During 1980–2016, 204 natural disasters were recorded in the 12 economies in the Pacific, implying a nearly 50 percent chance of a country being hit in any given year, and disasters caused damage averaging 14 percent of GDP.
  - Small states and Pacific island economies face the risk of a withdrawal of correspondent banking relationships by global banks.

### Longer-term growth prospects and structural challenges
- Population aging:
  - Many Asian economies risk “growing old before they grow rich.” At the point the working-age share declines, incomes will be substantially below the United States level: 70 percent for Korea, 20 percent in China, and less than 40 percent for most others.
  - The adverse effect of aging on growth is estimated in the range of ½ to 1 percent for China, Japan, Korea, and Thailand.
  - Aging will imply substantial additional fiscal burdens for these economies.
- Slowing productivity growth:
  - No recent sign of productivity catch-up or convergence relative to the United States except for low-income emerging market and developing economies.
  - Decline in productivity growth observed across sectors, including manufacturing and especially services.
  - Lack of quality infrastructure is a critical structural weakness in most economies in the region.
- Digital revolution:
  - Recent technological advances could represent a “fourth industrial revolution” with transformative potential, but may create winners and losers and change long-standing growth models.
  - Widespread use of industrial robots could boost productivity but risks raising structural unemployment if alternative opportunities are not created.
  - Effectively harnessing digital benefits requires revamping education and investing in physical and regulatory infrastructure to spur competition and innovation.
  - An analytical chapter on the digital economy in Asia is planned for the October 2018 Regional Economic Outlook: Asia and Pacific.

### Policy recommendations
- Fiscal policy:
  - With output gaps closing across much of the region, fiscal support needs have diminished; fiscal policies should gear toward strengthening buffers, safeguarding sustainability, and increasing resilience.
  - China, India, Indonesia, and a number of other economies should aim for growth-friendly consolidation.
  - In Japan, avoid premature reduction in fiscal support; prioritize a credible framework for medium- and long-term consolidation.
  - A more supportive near-term fiscal stance is appropriate in Australia and Singapore.
  - In Korea, a substantial expansion would be appropriate as part of rebalancing.
  - Some economies should undertake tax reform over the medium term to create space for infrastructure and social spending and to support structural reforms.
- Monetary policy:
  - Continued accommodative monetary policy stance is appropriate for much of Asia given relatively subdued inflation, with notable exceptions.
  - In China, growth targets should be deemphasized and credit growth slowed; overall policy stance, including monetary policy, should become less accommodative.
  - In India, given increased inflation pressure, monetary policy should maintain a tightening bias.
  - Consider carefully the mix of monetary, macroprudential, exchange rate, and other policies given easy liquidity conditions and the risk of contributing to froth in financial markets.
  - Strengthen monetary policy frameworks and central bank communications to make inflation less sticky and keep expectations well anchored.
  - Exchange rate flexibility can help insulate economies from imported inflation.
- Macroprudential and financial policies:
  - Develop and broaden macroprudential toolkits; tighten macroprudential requirements in economies facing currency mismatches and rapid credit growth.
  - Be aware of limits of macroprudential policies amid excessive liquidity.
  - Use capital flow management measures carefully and generally allow flexible exchange rates to function as a buffer against external shocks.
- Structural reforms and resilience-building:
  - Use recovery momentum to pursue fiscal, financial, and structural reforms to lift long-term growth, enhance labor force participation, make growth more inclusive, and build resilience to shocks (“fix the roof while the sun is shining”).
  - Measures include boosting productivity and investment, narrowing gender labor force participation gaps, addressing the demographic transition, addressing climate change, and supporting those affected by shifts in technology and trade.
  - For developing economies, these steps are essential for progress toward the United Nations Sustainable Development Goals and for promoting economic diversification.
  - To adapt to the digital revolution, upgrade physical and regulatory infrastructure, reduce lower trade restrictions (particularly in services), enhance human capital, and address labor market and social challenges.

### Box 1.1 — Rapid credit growth in Frontier and Developing Asian Economies (FDEs)
- Scope: Asian frontier and developing economies comprise Bangladesh, Bhutan, Cambodia, Lao P.D.R., Mongolia, Myanmar, Nepal, Sri Lanka, and Vietnam.
- Recent experience:
  - Many FDEs are currently experiencing rapid credit growth.
  - Cambodia, Lao P.D.R., Myanmar, Nepal, Sri Lanka, and Vietnam have seen double-digit growth in credit to the private sector for several years; Mongolia experienced a credit boom a few years ago.
- Risks and context:
  - Rapid credit growth can reflect financial deepening and improved macroeconomic prospects (“good” expansion) or signal mounting macro-financial risks and unsustainable banking-sector dynamics (“bad” expansion).
  - FDEs face pressing macro-financial risks given typically weak supervisory capacity, poor risk management and underwriting standards, fewer macroprudential tools, and financial activity by nonbanks that may not be appropriately licensed and supervised.
- Historical patterns:
  - During 2011–16, 9 out of 11 credit boom episodes in Asia—as identified using the methodology in Bakker and others (2012)—were in FDEs, and five out of nine Asian FDEs experienced credit booms.
  - Among FDEs that had a credit boom during this period:
    - Annual real credit growth averaged nearly 23 percent.
    - Median credit-to-GDP ratio rose from about 35 to 56 percent.
    - Credit gaps averaged about 5 percent of GDP (and ranged up to 17 percent of GDP).
- Credit growth and investment disconnect:
  - A prolonged increase in credit growth has often failed to translate into sustained increases in domestically financed private investment.
  - Examples:
    - Sri Lanka: the 2012 credit boom helped boost domestically financed private investment, but the 2016 credit expansion did not have the same impact.
    - Nepal: nominal credit grew by 32 percent—nearly six times faster than nominal GDP growth—yet domestically financed private investment rose by just 2 percent in 2016 (though the 2015 earthquakes and subsequent trade disruption might also have played a role).
- Causes vary across FDEs:
  - Nepal’s credit boom was driven by strong remittance inflows coupled with insufficient sterilization.
  - Cambodia’s credit booms have been financed by foreign borrowing by banks and large microfinance institutions.
  - Vietnam’s credit growth was driven by substantial unsterilized intervention to maintain the dollar peg amid large capital inflows, higher banking sector credit growth targets set by the central bank, and easing of macroprudential policy via lower risk weights on lending to real estate and securities sectors.
- Policy options and tools:
  - Strengthen bank and nonbank supervision and regulation, develop macroprudential indicators and tools, and ensure effective crisis management and resolution frameworks.
  - Tailored macroprudential policies can help prevent risk buildup, though limited capacity and experience should be considered.
  - Specific measures that could be considered where credit is concentrated in real estate and related sectors:
    - Reduce loan-to-value ratios on real estate loans and hire purchases.
    - Introduce real estate exposure limits.
    - Raise risk weights on these loans.
    - Design tools to prevent migration of lending from banks to nonbanks.
  - Fiscal policies such as taxes on land or housing—particularly for properties not used as primary residences—can also be used.

*International Monetary Fund | April 2018 — 1. GOOD TIMEs, UNCERTAIN TIMEs: A TIME TO PREPARE*

### 5. Credit Intensity and Domestically Funded Private

### 5. Credit Intensity and Domestically Funded Private Investment Growth

### Tax Cuts and Jobs Act: key corporate provisions
- Rate cut: The statutory rate in the United States is cut from 35 percent to 21 percent. The applicable rate for some activities is 13.125 percent.
- Capital expensing: For the next five years, corporate investments can be fully deducted in the first year; during the subsequent five years, the share of investment that can be expensed will be gradually reduced. Interest remains deductible (subject to tighter limits).
- Territorial taxation and repatriation: Previously unrepatriated profits estimated at some $2.6 trillion are deemed to be repatriated and are subject to tax at preferential rates (with payments spread over an eight-year period). The United States moves to taxing income on a territorial basis.
- Base-erosion provision (BEAT) and GILTI: BEAT ensures a firm’s tax liability can fall no lower than 10 percent of its income (excluding certain payments to foreign-affiliated corporations). A global intangible low-taxed income (GILTI) tax applies: a foreign affiliate’s returns above 10 percent on tangible assets are taxed at 10.5 percent, with a credit of 80 percent of foreign taxes paid. If a multinational’s average foreign tax rate is 13.125 percent (10.5 percent divided by 80 percent) or higher, no GILTI will be owed.
- Foreign-derived intangible income (FDII): A reduced tax rate of 13.125 percent is offered on export income from intangible assets (defined as export income exceeding a 10 percent return on domestic tangible assets, equivalent to the GILTI).

### Modeling growth spillovers: APDMOD results
- US growth impact in the simulation:
  - Real GDP growth: expansion from 2018 to 2021, with growth being, on average, 0.3 of a percentage point higher a year.
  - US output gap largely closed; additional fiscal stimulus is inflationary and prompts additional interest rate hikes by the US Federal Reserve, leading to real GDP growth being lower by about 0.1 of a percentage point for the remainder of the IMF’s forecast horizon.
  - Real imports peak 6 percent higher than in the baseline by 2020.
- Mechanisms:
  - Initial driver: investment from the tax cut increases potential output and labor demand, raising incomes and consumption but generating inflation pressure and a short-term appreciation of the real effective exchange rate (REER).
  - Long-term effects are muted because TCJA provisions expire over time and corporate tax cuts reduce firms’ costs, producing a long-term REER depreciation that undoes short-term trade spillovers.

### Channels and regional impacts
- Main channel: increased exports to the United States from higher US aggregate demand, often paired with a short-term REER depreciation. Key beneficiaries: China, Japan, Korea, and some ASEAN economies.
- Secondary channel: intra-Asia rebalancing via cross-exchange-rate effects; some economies (notably Japan and a few ASEAN members) experience stronger REER depreciation and larger gains, while others (such as Singapore and some ASEAN members) experience appreciation.
- Third channel: movements in commodity prices. Commodity importers with strong US links (China, India, Japan, Korea, some ASEAN economies) face a minor drag; commodity exporters (Australia, Mongolia, New Zealand) benefit via higher Asian demand.

### Quantitative impacts (selected figures from simulation)
- Direct spillovers to Asia are relatively small; most Asia spillover effects are less than 0.2 of a percent of GDP at their peak in 2020.
- United States:
  - Real GDP growth: 0.30 1.20 (as presented in table cells).
  - Current-account-balance-to-GDP peak: 20.26 20.88 (peak in 2020).
  - Import Volumes: 1.93 5.65.
- Asia-Pacific (selected entries as presented):
  - Asia-Pacific export/import/real GDP deviations: 0.04 0.09 0.04 0.23 0.28 1.00 (table entries).
  - Australia: 0.03 0.04 20.012 20.53 0.14 0.34 (table entries).
  - China: 0.03 0.07 0.05 0.35 0.31 1.18 (table entries).
  - India: 0.03 0.06 0.02 20.08 0.28 0.94 (table entries).
  - Japan: 0.01 0.16 0.05 0.33 0.35 1.26 (table entries).
  - Korea: 0.05 0.09 0.03 0.14 0.20 0.77 (table entries).
  - ASEAN-5: 0.06 0.13 0.05 0.10 0.19 0.59 (table entries).
  - Rest of Asia and Pacific: 0.09 0.22 0.06 0.31 0.24 0.77 (table entries).
- Global imbalances:
  - US current account deficit widens by –0.9 of a percentage point of GDP by 2021 compared with the baseline.
  - Asia current account surplus widens by over 0.2 of a percentage point of GDP compared with the baseline, led by China, Japan, and Korea.

### Policy-relevant implications highlighted
- The corporate rate cut and expensing are likely to provide a short-term boost to US growth and investment and may attract investment back to the United States; the BEAT and GILTI will constrain some profit-shifting incentives.
- Effects on other jurisdictions depend on their foreign tax rates relative to the new US regime (rates above 21 percent risk losing US investment; rates below 13.125 percent may provide limited benefit to firms).
- Deemed repatriation should raise revenue but its macroeconomic impact may be limited given existing US asset holdings of repatriated funds.
- Much of the medium-term international impact depends on firms’ expectations about the persistence and evolution of the US tax system.

*International Monetary Fund | April 2018*

### 2016. Korea is the second largest market (14 percent),

### apd-reo-april-2018-chapter-1 - 2016. Korea is the second largest market (14 percent),

### Digital adoption and automation: robots and robot density
- In 2016, Korea is the second largest market (14 percent), and Japan is the third (13 percent), ahead of the United States (11 percent).
- In terms of robot density (the number of industrial robots per 10,000 workers), Korea is the global leader, followed by Japan and Germany.
- Figure 1.3.3. Estimated Number of Industrial Robots Delivered, 2017 (Percent of total):
  - Asia 65.0%
  - Europe 17.3%
  - America 13.6%
  - Africa 2.8%
  - Unspecified 1.3%
- Within Asia (percent of total delivered industrial robots, 2017):
  - China 50%
  - Korea 19%
  - Japan 18%
  - Taiwan Province of China 4%
  - India 1%
  - Thailand 1%
  - Other Asia 7%

### E-commerce and digital payments
- China accounted for less than 1 percent of worldwide transactions about a decade ago, but that share is now more than 40 percent (Wang and others 2017).
- Mobile payments are expanding sharply in such economies as Bangladesh, India, and the Philippines, but on average Asia is lagging sub-Saharan Africa.

### Cryptocurrencies and regulatory divergence
- Some Asian economies have been at the frontier in terms of cryptocurrencies; some small states have been approached by private companies to issue these as legal tender, raising a variety of concerns.
- Regulatory approaches to cryptocurrencies vary substantially across the region.

### Policy priorities and recommendations
- Comprehensive policies and fresh thinking are needed to reap digital dividends.
- Policy responses will need to address digitalization-linked risks without stifling innovation.
- Policies to harness digital dividends include:
  - revamping education;
  - investing in physical and regulatory infrastructure that spurs competition and innovation;
  - reforming trade (especially in services) and investment policies;
  - addressing labor market and social challenges.
- Policy priorities differ across the region as economies’ initial conditions are different.
- Regional and international cooperation will be key to developing effective policy responses, and the IMF can play an important role in this regard.

*International Monetary Fund | April 2018 — apd-reo-april-2018-chapter-1 (excerpt)*

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_Source: https://www.imf.org/-/media/files/publications/reo/apd/2018/apd-reo-april-2018-chapter-1.pdf_