Asia Still Growth Champion, But Must Watch Its Step

IMF News, October 6, 2016

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Asia continues to lead global growth and its economy is projected to expand by about 5.4 percent this year and the next.
According to the October 2016 Asia and Pacific Regional Economic Outlook Update (REO Update), the near-term outlook in Asia remains strong and is supported by domestic demand.
“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.

Regional projection: expand by about 5.4 percent in 2016 and 2017.
China:
- GDP growth projected to be 6.6 percent in 2016, before moderating to 6.2 percent in 2017.
- Near-term outlook aided by stronger-than-expected fiscal stimulus and credit support, which could delay restructuring of state owned enterprises and reigning in credit growth.
Japan:
- Growth revised up to 0.5 percent in 2016 since April.
- Projected to expand by 0.6 percent in 2017, mostly due to fiscal stimulus with an estimated impact on GDP of nearly 1 percentage point.
- Medium-term outlook remains weak, primarily due to its shrinking labor force.
India:
- Projected to grow at 7.6 percent in 2016-17, driven by domestic demand, lower energy prices, and progress on investment-friendly reforms.
Other emerging Asian economies:
- Economic prospects remain strong but depend in part on external developments because of high exposure to global trade and finance.
Additional context:
- 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.

External/global risks:
- 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.
- Spillovers from secular stagnation trends in advanced economies could lead to weaker investment in the region.
Regional/ domestic risks:
- 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.
- Asia’s slowing productivity growth, population aging, and rising inequality cast a long shadow on growth prospects.

Monetary policy:
- 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 welcomed.
- In China and several frontier economies, monetary policy should not encourage further credit expansion.
Fiscal policy:
- Policymakers can consider growth-supporting fiscal policies to complement structural reforms.
- 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, the government needs to reign in expenses.
Financial resilience and external financing:
- Remain vigilant to avoid volatile financial conditions stemming from global monetary policy divergence.
- Strengthen resilience to external financing shocks, particularly for economies with higher reliance on external finance.

China: continue efforts to rebalance from investment toward consumption and from manufacturing to services; press ahead with restructuring state owned enterprises and reigning in credit growth.
Japan: prioritize mitigating the effects of aging on potential growth, reducing labor market duality, and encouraging more dynamism in the corporate sector.
India and Korea: build on recent progress in structural reform implementation to boost inclusive growth and productivity.
Emerging and frontier economies:
- Accelerate reforms to speed up investment in infrastructure and increase productivity.
- Improve access to health, education, and (in some frontier economies) financial services to lower income inequality and broaden prosperity.
Smaller economies, including many Pacific Island countries:
- Simplify regulation and lower the cost of doing business to enable investment in connectivity and resilience to natural disasters.

Source: IMF Country Focus — "Asia Still Growth Champion, But Must Watch Its Step", October 6, 2016.