Managing the Next Phase of Growth

April 2011

Executive Summary also available in Korean and Vietnamese

Managing the Next Phase of Growth

Asia and Pacific Regional Economic Outlook focuses on the policy challenges of managing the next phase of growth after Asia's recovery from the global crisis. The analytical chapters discuss how capital flows to the region may affect the monetary policy transmission mechanism and the role of macroprudential measures in this context, the implications of the Asian supply chain for rebalancing growth across the region, and the policy challenges for Asian low-income and Pacific Island countries. Economic recovery in Asia as a whole has been rapid (8.3 percent in 2010) and fueled by both exports and domestic demand. Looking ahead, growth is expected to continue at a more moderate but also more sustainable pace in 2011 and 2012, led by China and India. Meanwhile, new risks to the outlook have emerged. The full human cost and impact on infrastructure of the mid-March earthquake and tsunami in Japan remain to be determined. The steady response of the Japanese government and people has helped to contain the effects of the disaster on production, but a risk remains of prolonged disruptions in production that could spill over to other Asian economies in the regional supply chain. Moreover, tensions in the Middle East and North Africa and related risk of further oil price spikes could disrupt global growth and affect Asian exports. Finally, pockets of overheating have emerged in Asia, as core inflation and credit growth have accelerated in several Asian economies. The need to tighten macroeconomic policy stances has become more pressing than it was six months ago.

Video: IMF on Asia: Robust Growth, But Inflation Causing Concern


Executive Summary
I. Asia After the Recovery: Managing the Next Phase
A. Maturing Recovery and Good Near-Term Growth Prospects
B. Pockets of Overheating Across the Region Pose New Risks to the Outlook
C. Capital Inflows Are Expected to Continue, but at a More Moderate Pace
D. Policy Challenges: Tightening Macroeconomic Policy Stances to Contain Overheating Risks
E. The Economic Impact of Japan’s Earthquake-Related Tragedy
F. Making Growth Balanced and Inclusive Over the Medium Term
II. Capital Flows to Asia: Comparison with Previous Experience and Monetary Policy Options
A. Introduction
B. How Does the Current Episode of Capital Inflows Compare with Previous Episodes?
C. How Effective Is Monetary Policy in the Face of Large Capital Flows?
D. What Role Can Macroprudential Measures Play?
E. Conclusions
Appendix 2.1. Econometric Methods: Global Dynamic Factor Model, Structural VAR, and Panel Regression
Appendix 2.2. DSGE Model
III. Implications of Asia’s Regional Supply Chain for Rebalancing Growth
A. Introduction
B. Asian Exporters: Between Partnership and Competition
C. Evolving Trade Networks: Old and New
D. How Does Vertical Integration Affect External Competitiveness and Rebalancing?
E. Conclusion
Appendix 3.1
IV. Asian Low-Income and Pacific Island Countries: Policy Challenges After the Global Crisis
A. Capital Flows, Aid, and Remittances to Asian LICs
B. Impact of the Global Crisis on Asian LIC Banks
C. Timor-Leste: The Transition from Conflict to Development
D. Pacific Island Countries: Vulnerabilities to Commodity Price Shocks
Chart Data 1.1 Spillovers from Emerging Asia to Australia and New Zealand
Chart Data 1.2 Vietnam: Restoring Macroeconomic Stability
Chart Data 1.3 Is China Overheating?
Chart Data 1.4 Channeling Capital Inflows to Its Most Productive Uses: Developing Corporate Bond Markets In Asia
Chart Data 1.5 How Effective Are the Bank of Japan’s Monetary Easing Measures?
Chart Data 2.1 Do Nonresident Bond Holdings Affect Long-Term Interest Rates in Emerging Markets?
Chart Data 2.2 Macroprudential Policy––An International Perspective
Chart Data 3.1 Horizontal Competition and the Real Effective Exchange Rate
1.1 Asia: Real GDP Growth
1.2 Capital Flow Management Measures in Asian Economies
2.1 Episodes of Large Net Private Capital Flows to Emerging Asia: Summary Statistics
2.2 Financial Indicators Across Episodes of Large Net Capital Flows to Emerging Asia
2.3 Parameters of the Policy Rules
2.4 Performance of Policies in Reaction to a Financial Shock
2.5 Selected Asia: Impact of Macroprudential Measures
3A.1 Share in Intermediate Goods Exports
3A.2 Share in Capital Goods Exports
3A.3 Share in Consumer Goods Exports
Chart Data 1.1 Asia: Changes in Real GDP at Market Prices
Chart Data 1.2 Asia: Exports of Goods
Chart Data 1.3 United States: Real Private Fixed Investment in Equipment and Software during Business Cycle Recoveries
Chart Data 1.4 Asia’s Exports to China and Retail Sales in China
Chart Data 1.5 Asia: Industrial Activity
Chart Data 1.6 Selected Asia: Credit to Private Sector
Chart Data 1.7 Emerging Asia: New Capital Raised by Corporations
Chart Data 1.8 Selected Asia: Effective Exchange Rates
Chart Data 1.9 Asia: Fiscal Impulse
Chart Data 1.10 Global Investment
Chart Data 1.11 Export-Oriented Asia: Private Domestic Demand and Exports
Chart Data 1.12 Selected Emerging Asia: Private Investment
1.13 Asia: GDP Growth
Chart Data 1.14 Selected Asia: Exports of Goods to the United States and Europe
Chart Data 1.15 Asia: Changes in Headline Inflation since 2009
Chart Data 1.16 Emerging Asia: Changes in Expectations of Annual 2011 Inflation since October 2010
Chart Data 1.17 Selected Asia: Purchasing Managers’ Index (PMI)—Input Costs for Manufacturing Industries
Chart Data 1.18 Asia: Consumer Prices
Chart Data 1.19 Asia: Headline Consumer Price Inflation
Chart Data 1.20 Asia: Pass-Through from Global Food and Energy Prices to Domestic Food and Energy Prices
Chart Data 1.21 Asia: Pass-Through from Domestic Food and Energy Prices to Core Inflation
Chart Data 1.22 Asia: Impact of 10 Percent Increase in Commodity Prices on Headline Inflation
Chart Data 1.23 Asia: Deviation of the Cyclical Component of Credit-to-GDP Ratios from Long-Term Averages
Chart Data 1.24 Selected Asia: Contribution to Growth in Credit to Private Sector
Chart Data 1.25 Selected Asia: Comparing Changes in Current Real Property Prices with Previous Boom-Bust Cycles
Chart Data 1.26 Asia: Government Bond and Stock Markets
Chart Data 1.27 Selected Asia: 12-Month Forward P/E Ratios
Chart Data 1.28 Emerging Asia: Net Capital Inflows
Chart Data 1.29 Emerging Asia: Equity and Bond Funds––Weekly Net Flows during 2010–11
Chart Data 1.30 Emerging Asia (excl. Hong Kong SAR and Singapore): Net Portfolio Capital Inflows
Chart Data 1.31 Selected Asia: Policy Interest Rates
Chart Data 1.32 Asia: Real Policy Rates
Chart Data 1.33 Asia: Real Effective Exchange Rates
Chart Data 1.34 Emerging Asia: Sources of Change in Stock of Foreign Exchange Reserves
Chart Data 1.35 Asia: General Government Cyclically Adjusted Fiscal Balances
Chart Data 1.36 Japan: Official Estimate of Damage to Capital Stock Following 1995 and 2011 Earthquakes
Chart Data 1.37 Selected Asia: Demand and Supply Exposures to Japan
Chart Data 1.38 Asia: Contributions to GDP Growth
Chart Data 1.39 Asia: Current Account Balances
Chart Data 1.40 Global Current Account Balances
Chart Data 1.41 Vulnerable Employment
Chart Data 2.1 Selected Emerging Asia: Real Policy Rates and Headline Inflation during Capital Inflow Surges
Chart Data 2.2 Emerging Asia: Net Private Capital Flows
Chart Data 2.3 Selected Asia: 10-Year Bond Spreads
Chart Data 2.4 Secondary Market Yield of 10-Year Government Bond
Chart Data 2.5 Contributions of U.S. 10-Year Yield and VIX to the Common Factor of Asian Bond Yields
Chart Data 2.6 Selected Asia: Variance Decomposition of Domestic 10-Year Yield by Sources during 2005–10
Chart Data 2.7 Selected Asia: Contribution of U.S. Long-Term Interest Rates to Variance of Domestic Yields by Maturity
Chart Data 2.8 Selected Asia: Importance of U.S. Interest Rates and Capital Account Openness
Chart Data 2.9 Selected Asia: Variance Decomposition of Industrial Production in Response to Shocks to Domestic Interest Rates
Chart Data 2.10 Selected Asia: Short-Term Corporate Debt
Chart Data 2.11 Selected Asia: Effect of Capital Flows on Monetary Transmission Mechanism
Chart Data 2.12 Selected Asia: Responses to a Financial Shock
Chart Data 3.1 Asia: Export Trends
Chart Data 3.2 Selected Asia: Contributions to Export Growth
Chart Data 3.3 Asia: Exports of Intermediate Goods
Chart Data 3.4 Asia (excl. China): Exports to G-2 and China
Chart Data 3.5 Share in U.S. Imports: Consumer Goods
Chart Data 3.6 Selected Asia: Export Similarity Index
Chart Data 3.7 Selected Asia: Direct and Indirect Intermediate Goods Trade
Chart Data 3.8 Japan and Korea: Export of Capital Goods
Chart Data 3.9 Selected Asia: Change in Intermediate Goods Trade
Chart Data 3.10 Japan: Trade Balance in Intermediate Goods
Chart Data 3.11 Selected Asia: Standard and Integrated Real Effective Exchange Rates (REER)
Chart Data 3.12 Asia: Real Effective Exchange Rates (REER) and Real Export Growth
Chart Data 3.13 Net Exports to World Markets: Consumer Goods
Chart Data 3.14 Selected Asia: Share in Trade Surplus vis-à-vis U.S.––Value Added and Gross Trade
Chart Data 4.1 Asian LICs: Gross Total Inflows
Chart Data 4.2 Selected Asia: Structure of Capital and Capital-Like Inflows, 2009
Chart Data 4.3 Selected Asia: Workers Moving Abroad, January 2006–January 2011
Chart Data 4.4 Selected Asia: Customer Deposit Growth
Chart Data 4.5 Selected Asia: Gross Loan Growth
Chart Data 4.6 Selected Asia: Customer Loan-to-Deposit Ratio
Chart Data 4.7 Timor-Leste: Real Non-Oil GDP Growth
Chart Data 4.8 Selected Asia: Consumer Price Inflation
Chart Data 4.9 PICs: Pass-Through of Oil Prices to Inflation
Chart Data 4.10 PICs: Pass-Through of Food Prices to Inflation
IMF on Asia: Robust Growth, But Inflation Causing Concern
IMF on Asia: Robust Growth, But Inflation Causing Concern