According to the October 2016 Asia and Pacific Regional Economic Outlook Update (REO Update), the near-term outlook in Asia remains strong (see Chart), and is supported by domestic demand. But global and local risks somewhat cloud the growth horizon.
“Asia contributes about 60 percent to global growth currently, but its prospects could be weighed down by China’s transition to slower growth and an uneven global recovery,” said Changyong Rhee, Director of the IMF’s Asia and Pacific Department.
Strong but uneven growth in region
Overall, the region registered a slight uptick in growth in 2016. Stock markets are buoyant, and capital continues to flow into Asia, despite a short period of adjustment around the Brexit referendum. Domestic policies have mostly supported growth, with low interest rates and fiscal stimulus in many countries. Asia’s exports are set to benefit as global growth is expected to recover in 2017.
However, growth prospects in Asia are uneven. As China rebalances its economy from investment toward consumption, and from manufacturing to services, GDP growth is projected to be 6.6 percent in 2016, before moderating to 6.2 percent in 2017. While a stronger-than-expected fiscal stimulus and credit support help the near-term outlook, these steps could delay certain critical reforms, particularly the restructuring of state owned enterprises and reigning in credit growth.
In Japan, growth, which is mainly driven by public investment and consumption, has been slightly revised up to 0.5 percent in 2016 since April. The momentum is expected to continue in 2017, with the economy expanding by 0.6 percent, mostly due to the fiscal stimulus with an estimated impact on GDP of nearly 1 percentage point. As the stimulus gradually fades, the impact of the higher private investment linked to the 2020 Olympics would kick in. Nevertheless, Japan’s medium-term outlook remains weak, primarily due to its shrinking labor force.
India remains a regional and global dynamo, with its economy projected to grow at 7.6 percent in 2016-17. Growth in India relies on domestic demand, lower energy prices, and a progress on investment-friendly reforms.
For other emerging countries in Asia, economic prospects remain strong, but they depend in part on external developments, given their high exposure to global trade and finance.
Near-term risks, medium-term challenges
Despite strong overall growth in Asia, the woes of the global economy still dominate the medium-term outlook. The subdued and uneven global recovery and sluggish global trade could undermine Asia’s growth prospects.
Monetary policy divergence in advanced economies could translate into volatile financial conditions in Asia, especially for economies that rely more on external financing.
Asia also faces the specter of spillovers from secular stagnation trends in advanced economies, which would likely lead to weaker investment in the region.
Within the region itself, China’s rebalancing could be bumpier-than-expected, creating negative spillovers to regional trade and growth. Escalating geopolitical tensions and domestic policy uncertainty could disrupt trade and financial flows. Finally, Asia’s slowing productivity growth, population aging, and rising inequality casts a long shadow on growth prospects.
Policies should support growth
In view of the still weak and precarious nature of the global recovery, policymakers need to remain vigilant. Across most of the region, monetary policies need to stay supportive. Interest rates should be lowered if growth falls, provided that inflation is low and financial stability is not compromised. In Japan, the central bank’s reinvigorated efforts to re-inflate are welcome according to the report, while in China and several frontier economies, monetary policy should not encourage further credit expansion.
Policymakers can also consider growth-supporting fiscal policies to complement structural reforms. For instance, China could use on-budget and pro-consumption fiscal stimulus if growth were to slide. Korea and Thailand have room for more fiscal spending. For Japan, where public debt is high, however, the government needs to reign in expenses.
Restructure for better growth prospects
While policymakers of India, China and Korea have outperformed their G-20 peers on structural reform implementation, progress on reforms across the region has been uneven, the report observed. Yet such reforms would be crucial not only for bolstering growth but to make it more inclusive, and to make Asian economies less vulnerable.
China should therefore continue its efforts to rebalance. Japan should prioritize mitigating the effects of aging on potential growth, reducing labor market duality, and encouraging more dynamism in the corporate sector.
Emerging and frontier economies in Asia need reforms to speed up investment in infrastructure and increase productivity. Improving access to health, education, and (in some frontier economies) financial services will help lower income inequality and will bring some prosperity to a bigger chunk of the population. Smaller economies, including many Pacific Island countries, need to simplify regulation and lower the cost of doing business to be able to invest into connectivity and resilience to natural disasters.
