Transcript of Asia - Pacific Regional Economic Outlook - Tokyo Launch October 2024
IMF News, November 1, 2024
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- Published: November 1, 2024
Growth and inflation: headline findings
- Asia remains the world's engine of growth, generating 60 percent of global economic growth, with a share in global GDP of about 40 percent.
- Most Asian economies exceeded the April 2024 REO growth forecast in the first half of 2024.
- Inflation developments:
- Emerging Asia: disinflation process was essentially complete already at the end of 2023; 2024 expected to show the lowest inflation rate in almost 25 years.
- Advanced Asia: services inflation remained elevated through mid-2024 due to wage pressures, but services inflation has started to retreat and most advanced economies are now back to policy targets.
- Selected country projections and data:
- China: forecast growth at 4.8 percent for 2024 (somewhat higher than the April forecast, but lower than the July interim update of 5 percent); domestic demand weakening; industrial production supported by exports.
- Japan: nominal wages boosted by 3.5 percent and total compensation by more than 5 percent; headline and core inflation remain above the Bank of Japan's target of 2 percent; growth downgraded for 2024 due to first-half supply disruptions in the auto industry, with recovery expected in 2025.
- India: remains the world's fastest growing major economy, benefiting from a good agriculture season that is boosting rural consumption.
- Korea: benefits from strong global demand for technology products; domestic demand soft in H1 2024.
- Australia: coping with residual services inflation and a tight monetary stance; 2024 growth projection marked down.
- ASEAN: overall robust and balanced growth with important cross-country differences.
- Pacific island countries: benefiting from a recovery in tourism, though the impact on growth will fade in 2025.
China: sectoral dynamics and policy space
- Housing/property sector:
- Housing activity measures (starts, sales, investment) have been continuously declining; the real estate drag is weighing on private demand and retail sales; loan growth is sluggish.
- IMF recommendation: central government to spend about 5.5 percent of GDP over four years to rehabilitate the property sector (finish pre-sold housing, support developers); use near-term fiscal space but begin consolidation two years out.
- Structural reforms highlighted:
- Reorient from export- and investment-led growth toward consumption-led growth.
- Strengthen social safety nets and pension reforms to reduce precautionary savings and support consumption.
- Improve competitive neutrality between SOEs and private firms and open markets to competition.
Trade, fragmentation, and external risks
- Trade-restrictive measures:
- 2019: around 1,000 measures globally.
- 2023: 3,000 measures.
- 2024: on track to be another record year for trade restrictions.
- Any trade restriction: 74 percent probability of retaliation.
- Effects of trade fragmentation:
- Short-run: some countries may gain via trade diversion (examples given: Vietnam, Mexico, and ASEAN countries in targeted sectors).
- Long-run: fragmentation is costly — “no one really wins”; slower global growth and greater negative impact on Asia because of deep integration in global supply chains.
- Observed trade pattern shifts: China exports relatively more to emerging markets and less to advanced economies than five years earlier; ASEAN countries export more to both China and the U.S. as trade targeted by tariffs is channeled through third countries.
- Geopolitical and commodity risk channels:
- Middle East tensions: as of the briefing oil prices hovering around $70; not as disruptive as 2022 so far.
- Shock scenario: a 10 percent increase in oil prices leads to a 0.15 percent decline in global output the next year and inflation rising by 0.4 percentage points (global level); oil-importing Asian countries would be more adversely affected.
Macroeconomic policy guidance for Asia
- Fiscal policy:
- Many countries: fiscal stance is too loose after sharp increases in public debt during the pandemic.
- Pacific island countries: debt ratios almost doubled during the pandemic and have hardly come down.
- Recommendation: in many economies, modest near-term fiscal support can be justified if private demand is weak, but for most countries it is time to consolidate budgets in earnest to build buffers and preserve spending power for long-term challenges (climate change, population aging).
- Monetary policy:
- With inflation falling, most Asian central banks have room to cut interest rates; earlier reluctance to ease (due to concerns over Fed policy and currency pressure) should dissipate as the Fed has started to cut rates.
- Exceptions exist (e.g., Japan), where the BOJ is increasing policy rates gradually and is on a different monetary cycle.
- Central banks should focus on domestic inflation dynamics rather than attempting to manage capital flows through non-standard measures.
- Debt and fiscal frameworks:
- Asia's share of total global debt rose from something like 25 percent to 38 percent over the years.
- Public debt levels: China’s public debt has risen substantially since the GFC; Japan’s public debt about 250 percent.
- Recommendation: rebuild fiscal buffers, implement medium-term fiscal frameworks, and pursue consolidation through both expenditure and revenue measures.
Structural transformation and services opportunity
- Historical model: movement of labor from agriculture to manufacturing drove productivity and living standards increases across Asia.
- Recent trend: shift from manufacturing to services as income levels rise; modern services can be more productive and are becoming more tradable due to digital technology.
- Opportunities and reforms needed:
- Invest in education and training to equip workers with skills for modern services.
- Open services sectors to trade and investment (they remain relatively closed compared with manufacturing).
- Leverage the emerging global market for services, but undertake reforms to capture these opportunities.
Country-specific notes and program updates
- Korea:
- Q3 2024 GDP: 0.1 percent quarter-on-quarter (1.5 percent annualized) — fell short of expectations.
- Exports contracted in Q3; special factors included an automotive strike and weakness in segments of electronics.
- IMF: not yet clear that forecasts will be revised; Korea team to review in Article IV consultations in November and REO update in January.
- Sri Lanka:
- IMF noted good progress under the program and confirmed the new government’s commitment to program targets.
- Discussions on the next (third) review are ongoing; a mission will return to Sri Lanka soon.
- Bhutan:
- ESP loan program: expected to provide subsidized loans to specific sectors; financial institutions should ensure strong underwriting standards.
- Fiscal rebuilding: revenue mobilization and restraint in current spending recommended; implementation of a goods and service tax expected by July 2025 is a pillar of revenue mobilization.
- Nepal:
- ECF program since 2022 aims to manage pandemic impact, preserve macro stability, and advance reforms; exchange rate regime has helped macro stability.
- Negotiations on reviews and structural measures are ongoing; there have been delays on structural policies.
- Bangladesh:
- Recent unrest and major floods contributed to supply-side disruptions and higher inflation (~close to 10 percent); monetary policy tightening (repo rate increases) is a step in the right direction to prevent second-round effects.
- Budget support loans from development partners provide breathing space and time to design reforms; fiscal policy should tighten overall while protecting the poor and priority development spending.
- Pacific island countries:
- Recovery in tourism supports growth in 2024, but the positive impact will fade in 2025.
Scenarios and downside risks highlighted
- External demand shock: weaker-than-expected growth in the U.S. or China would significantly affect Asia given export dependence and intra-regional trade (about 55 percent of trade in Asia is intra-regional).
- Continued property-sector weakness in China could push growth below the baseline.
- Rising trade fragmentation and geoeconomic tensions would be disproportionately costly for Asia.
- Commodity-price shocks (e.g., higher oil prices) would reduce global output and raise inflation, with larger hits to oil-importing Asian economies.
Key policy recommendations (enumerated)
- Rebalance fiscal and monetary stance:
- Where private demand is weak, consider temporary near-term fiscal support, but for most countries prioritize fiscal consolidation and rebuilding buffers.
- Use monetary space to ease where inflation is subdued, focusing on domestic inflation objectives.
- Strengthen fiscal frameworks and medium-term anchors to rebuild confidence and fiscal space.
- Address China’s property-sector problems with targeted fiscal support in the near term (recommended central government support equal to about 5.5 percent of GDP over four years), followed by consolidation.
- Resist trade-restrictive and beggar-thy-neighbor policies; support open, rules-based multilateral trading system and modernize trading rules (agriculture, industrial subsidies, dispute settlement).
- Pursue structural reforms to support long-term growth:
- Invest in education and reskilling for services.
- Open services sectors to trade and investment.
- Improve competitive neutrality and market access for private firms vis-à-vis SOEs.
Transcript of Asia - Pacific Regional Economic Outlook - Tokyo Launch October 2024 — IMF Communications Department, November 1, 2024