Asia and the Pacific: Good Times, Uncertain Times—A Time to Prepare
IMF News, May 9, 2018
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- Published: May 9, 2018
Regional role and headline assessment
- Asia continues to be the main engine of the world’s economy, accounting for more than 60 percent of global growth—three-quarters of which comes from China and India alone.
- The IMF's latest regional assessment highlights ongoing strong near-term growth but identifies material risks from tightening global financial conditions, a shift toward inward-looking policies, and longer-run challenges from population aging, slowing productivity growth, and the rise of the digital economy.
Robust growth ahead (forecasts and country outlooks)
- Regional forecast: growth for Asia at 5.6 percent this year and next.
- Drivers: strong global demand, still accommodative policies and financial conditions.
- Country- and subregion-level projections and notes:
- China: growth is expected to moderate to 6.6 percent in 2018 as financial, housing, and fiscal tightening measures take effect.
- Japan: growth has been above potential for eight consecutive quarters and is expected to remain strong at 1.2 percent this year.
- India: growth is forecast to rebound to 7.4 percent in FY 2018/19 as the economy recovers from disruptions related to the currency exchange initiative and the rollout of the new Goods and Services Tax.
- ASEAN: growth is projected to stay at 5.3 percent both this year and next, reflecting strong investment and consumption across several countries.
- Most of the rest of the region, including small states and Pacific island countries, is also expected to see strong growth.
Inflation dynamics and outlook
- Present rates of inflation in Asia are some of the lowest in decades.
- Since September 2017, headline inflation in the region has ticked up on the back of rising oil prices; core inflation remains low and below target in many economies.
- 2017 averages:
- Headline inflation on average was 0.6 percent lower than target in Asian advanced economies.
- Headline inflation on average was 0.8 percent under target in Asian emerging market economies.
- Key findings on inflation behavior:
- Temporary global factors, including commodity prices and imported inflation, have been key drivers of low inflation, but these factors could reverse and inflation could rise.
- Inflation has become more backward-looking, meaning past inflation drives current inflation more than future expectations; this implies that if inflation rises, it may persist.
- There is some evidence that the sensitivity of inflation to economic slack has decreased (i.e., the Phillips curve has flattened), suggesting that if inflation rises, there may be a large hit to output when reducing it.
- Policy implication: central banks should watch closely for signs of inflation pressure and stand ready to respond.
Risks to the outlook
- Near-term upside and downside risks largely balance, but over the medium term downside risks dominate.
- Upside risks:
- Growth momentum could be more durable amid strong consumer and business confidence and loose financial conditions.
- Rollout of fiscal stimulus in the U.S. and a stronger recovery in the euro area could lift global growth and provide positive spillovers to Asia.
- Downside risks:
- Tightening of global financial conditions, spurred by higher U.S. interest rates, could trigger capital outflows.
- A global shift toward inward-looking policies would suppress Asia’s exports and reduce foreign direct investment.
- Escalating geopolitical risks, natural disasters, and cyberattacks could negatively impact medium-term growth.
- Longer-term structural risks:
- Population aging in some countries (example: Korea and Thailand) and young, growing populations in others (example: Indonesia).
- Slowing productivity growth.
- Disruptions and opportunities from the digital revolution.
Policy recommendations to increase resilience and reinforce growth
- Monetary policy and inflation management:
- Subdued inflation provides scope for a continued supportive monetary policy stance in much of Asia, but policymakers should remain vigilant to early signs of inflationary pressure.
- Strengthen monetary policy frameworks and central bank communications to bolster the role of expectations.
- Maintain exchange rate flexibility to help insulate economies from imported inflation.
- Financial stability:
- Focus on macroprudential policies to reduce financial booms and busts and lower risks in the financial system.
- Fiscal and structural policies:
- Keep debt under control.
- In some economies, prioritize mobilizing higher government revenues to create room for more spending on infrastructure, healthcare, and education and to support necessary structural reforms.
- Implement reforms now to support more durable and inclusive growth. Priority areas for Asia include:
- boosting productivity and investment;
- narrowing gender gaps in labor force participation;
- managing the demographic transition (address diverse country experiences such as aging in Korea and Thailand versus youth in Indonesia);
- addressing climate change;
- preparing job seekers with competitive skillsets to adapt to shifts in technology and trade.
- Digital economy strategy:
- To reap the full benefits of the digital revolution, Asia will need a comprehensive and integrated policy strategy covering information and communications technology, infrastructure, trade, labor markets, and education.
Source: Asia and the Pacific: Good Times, Uncertain Times—A Time to Prepare (May 9, 2018).