As the economic recovery has matured across much of Asia, the region has continued to be a driving force in the strengthening global recovery. Yet, recent tragic events—around the globe, and the earthquake and tsunami in Japan—are an all too poignant reminder of the fragility of our economic circumstances and, indeed, life.
Much of this weighs on my mind as I am here in Hong Kong to launch our April 2011 Regional Economic Outlook: Asia and Pacific. While the outlook is by no means gloomy, it is an opportune time to consider how Asia should manage the next phase of growth.
Economic growth averaged 8.3 percent across the region in 2010, on the back of both strong exports and domestic demand. Asian exports, especially of high-tech products, have benefitted from higher global investment, and domestic consumption and investment from rising employment, abundant credit, and supportive macroeconomic policies.
Growth is likely to remain robust, averaging 7 percent in both 2011 and 2012 (compared to 4.5 percent global growth). China and India will remain in the lead, and their growth will increasingly benefit other economies in the region. The economic spillovers from Japan are still unclear, as events are unfolding, but the early and decisive policy actions helped to limit the initial damage. And we expect that the impact will remain limited, provided that disruptions to the production and distribution network—the “supply chain”—are not protracted.
Near-term risks & policy choices
The risks to Asia’s economic outlook are more balanced than in our last assessment six months ago, mainly reflecting receding financial risks in advanced economies.
But new downside risks have emerged:
- the potential for higher oil prices, particularly due to unrest in the Middle East, which could disrupt global growth and fuel inflation;
- overheating risks in many Asian economies in terms of both consumer price inflation and asset prices.
Against this background, the need to tighten macroeconomic policies in Asia has become more pressing now than it was a few months ago. Of course, the extent of tightening that is needed varies across countries. Several countries have already begun to raise interest rates and reduce fiscal stimulus. But more needs to be done. For example, real policy rates are still negative in several regional economies, including China, Korea and India. Also, exchange rate appreciation can be a key defense against overheating pressures, as it would help tighten overall financial conditions, reducing the burden of adjustment on higher interest rates. Policymakers sometimes fear that tightening could attract volatile capital inflows, but in fact such inflows have moderated in recent months, making the task of tightening easier.
The next phase
For the longer haul, there are two priority issues to strengthen the platform for sustained strong growth in Asia.
First, persistent global imbalances indicate that many of the distortions that characterized the pre-crisis period remain unchanged. Policies targeted at correcting these distortions will reinforce the sustainability of global growth prospects. In Asia, this will mean moving ahead with policies to boost domestic demand, such as extending social safety nets and boosting infrastructure investment.
Second, is the social dimension. Although labor market conditions in Asia are generally better than elsewhere in the world, persistent poverty in some countries, and high inequality and youth unemployment are pressing challenges. Promoting more inclusive growth will also help make growth more durable.