Regional Economic Outlook: Asia and Pacific, April 2011: Managing the Next Phase of Growth

Asia and Pacific, April 28, 2011

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Focus: policy challenges of managing the next phase of growth after Asia's recovery from the global crisis.
Availability: Executive Summary also available in Korean and Vietnamese.
Video: "IMF on Asia: Robust Growth, But Inflation Causing Concern".
Key observation: Economic recovery in Asia as a whole has been rapid (8.3 percent in 2010) and fueled by both exports and domestic demand.
Near-term expectation: Growth is expected to continue at a more moderate but also more sustainable pace in 2011 and 2012, led by China and India.
Policy stance: The need to tighten macroeconomic policy stances has become more pressing than it was six months ago.

Maturing recovery with good near-term growth prospects across the region.
New risks to the outlook:
- The full human cost and impact on infrastructure of the mid-March earthquake and tsunami in Japan remain to be determined.
- Risk of prolonged disruptions in production that could spill over to other Asian economies in the regional supply chain.
- Tensions in the Middle East and North Africa and related risk of further oil price spikes could disrupt global growth and affect Asian exports.
Pockets of overheating have emerged: core inflation and credit growth have accelerated in several Asian economies.

Capital inflows to the region may affect the monetary policy transmission mechanism.
Capital inflows are expected to continue, but at a more moderate pace.
Analytical focus: comparison with previous episodes of capital inflows; effectiveness of monetary policy in the face of large capital flows; the role macroprudential measures can play.
Appendices detail econometric and DSGE model methods used in analysis.

Examination of the implications of the Asian supply chain for rebalancing growth across the region.
Topics covered include:
- Asian exporters: between partnership and competition.
- Evolving trade networks: old and new.
- How vertical integration affects external competitiveness and rebalancing.
Multiple figures and tables analyze exports of goods, intermediate goods trade, real effective exchange rates, and contributions to export growth.

Issues analyzed:
- Capital flows, aid, and remittances to Asian LICs.
- Impact of the global crisis on Asian LIC banks.
- Timor-Leste: the transition from conflict to development.
- Pacific Island Countries: vulnerabilities to commodity price shocks.
Data and charts cover gross total inflows, structure of capital and capital-like inflows, worker migration, bank deposit and loan growth, consumer price inflation, and pass-through of oil and food prices to inflation in PICs.

Extensive use of charts, tables, and boxes to document:
- Asia: Real GDP Growth; Asia: Exports of Goods; Asia: Consumer Prices; Asia: Headline Consumer Price Inflation.
- Financial indicators: credit to private sector, government bond and stock markets, 12-month forward P/E ratios.
- Capital flow metrics: Emerging Asia: Net Capital Inflows; Emerging Asia: Equity and Bond Funds––Weekly Net Flows during 2010–11.
- Country- and region-specific boxes, including "Is China Overheating?" and "How Effective Are the Bank of Japan’s Monetary Easing Measures?"
Appendices provide methods: Global Dynamic Factor Model, Structural VAR, Panel Regression, and DSGE Model.

Tighten macroeconomic policy stances where overheating risks (accelerating core inflation and credit growth) are present.
Monitor and prepare for spillovers from Japan’s mid-March earthquake and tsunami, particularly through regional supply chains.
Consider macroprudential measures alongside monetary policy to manage capital inflow episodes and mitigate financial stability risks.
Pursue policies to make growth more balanced and inclusive over the medium term, taking into account trade integration and structural considerations across Asia.

Regional Economic Outlook: Asia and Pacific, April 2011: Managing the Next Phase of Growth