Asia's Dynamic Economies Continue to Lead Global Growth

IMF News, May 9, 2017

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The Asia and Pacific region continues to deliver strong growth despite concerns about growing protectionism, a rapidly aging society, and slow productivity growth.
The Regional Economic Outlook for Asia and the Pacific projects regional growth to increase this year to 5.5 percent from 5.3 percent in 2016, and remain strong at 5.4 percent in 2018.
The report cites a more favorable global environment—with growth accelerating in many major advanced and emerging market economies—as supporting Asia’s positive outlook.

Regional growth:
- 2016: 5.3 percent
- 2017: 5.5 percent
- 2018: 5.4 percent
China:
- 2017 growth projected to decelerate to 6.6 percent
- 2018 growth projected at 6.2 percent
- Slowdown drivers: cooling housing market, weaker wage and consumption growth, and a stable fiscal deficit
Japan:
- 2017 growth forecast raised to 1.2 percent (supported by expansionary fiscal policy and postponement of the consumption tax hike from April 2017 to October 2019)
- 2018 growth projected at 0.6 percent (as fiscal stimulus effects fade)
India:
- Growth expected to rebound to 7.2 percent in FY 2017-18 as cash shortages from the currency exchange initiative ease
Korea:
- Growth projected at 2.7 percent in 2017 despite recent export pickup, owing mainly to weak consumption
Southeast Asian economies:
- Growth expected to accelerate somewhat, supported by robust domestic demand

Near-term risks:
- Tightening global financial conditions (e.g., accelerated Federal Reserve rate increases if U.S. fiscal stimulus leads to higher-than-expected inflation pressures)
- More inward-looking policies and rising protectionism that could suppress Asia’s exports and reduce foreign direct investment
- Spillovers from China’s transition or geopolitical tensions in the region
- Sudden tightening could trigger capital outflows and unwinding of productive investment projects, especially in economies with high external financing needs and weak private sector balance sheets
Medium-term risks:
- Population aging in some countries
- Limited productivity convergence (slow catch-up to global technology frontier)
Upside possibilities:
- Larger-than-expected U.S. fiscal stimulus or stronger business and consumer confidence in advanced economies could boost Asia’s exports and growth
- Productive public investment in infrastructure in ASEAN and South Asian economies could prolong positive momentum

Rapid aging:
- Asia is aging remarkably fast compared to Europe and the United States
- Aging can lead to fewer workers, higher healthcare costs, higher pension expenditure, pressure on government budgets, and lower growth
- The report estimates demographic trends could subtract 0.5 to 1 percentage point from average annual GDP growth over the next three decades in relatively old Asian economies such as China and Japan
Slow productivity growth:
- The region has not caught up to high productivity levels of countries at the global technology frontier
- Declines in trade and foreign direct investment could harm technology transmission and domestic competition

Macroeconomic stance:
- Monetary policy should stay accommodative in economies with economic slack and below-target inflation rates
- Central banks should be ready to raise policy rates if inflation pressures gather pace
Structural and demographic policies:
- Promote labor force participation of women and the elderly
- Strengthen pension systems and protect vulnerable elderly populations
- Encourage more migration and inclusion of women in the workforce
Productivity-enhancing reforms:
- Advanced Asian economies: make research and development spending more effective and raise productivity in the services sector
- Emerging and developing economies: attract foreign direct investment and expand capacity to absorb new technology and boost domestic investment
Trade and investment:
- More trade and foreign investment to support technology transfer and domestic competition
- Reforms including productive public investment in infrastructure in ASEAN and South Asia

Asian economies are expected to grow by 5.5% in 2017, slightly more than last year.
Growth outlook clouded by significant downside risks.
Near-term risks: tightening global financial conditions; more inward-looking policies; spillovers from China's transition
Medium-term risks: population aging in some countries; limited productivity convergence
To tackle these longer-term challenges, countries need: more women and migrants in the work force; stronger pension systems; more trade and foreign investment, along with more research and advanced education.

IMF Country Focus — May 9, 2017