Asia and Pacific: Navigating an Uncertain Global Environment While Building Inclusive Growth

October 2011

©2011 International Monetary Fund
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In line with the weaker global outlook, growth in Asia is expected to be slightly lower in 2011-12 than forecast in April 2011, mainly as a result of weakening external demand, but the expansion should remain healthy, supported by domestic demand, which has been generally resilient. Overheating pressures remain elevated in a number of economies, with credit growth still robust and inflation momentum generally high, though inflation is expected to recede modestly after peaking in 2011. The sell-off in Asian financial markets in August and September 2011 underscores that an escalation of euro area financial turbulence and a renewed slowdown in the United States could have severe macroeconomic and financial spillovers to Asia. Against this backdrop, Asian low-income and Pacific Island economies face particular challenges in the near and medium term. In low-income countries, the fight against inflation is complicated by strong second-round effects, the need to phase out subsidies, and less well-anchored inflation expectations. Pacific Island economies need to undertake further structural reforms to lift potential growth.

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Executive Summary

Chapter I: Navigating an Uncertain Global Environment

Resilient Domestic Demand Amid Pockets of Inflation Pressure
An Uncertain Global Environment Poses Downside Risks
Stress in the Euro Area and United States: Spillovers to Asia
How Vulnerable Are Asian Banks and Firms?
Policy Challenges

Chapter II: Drivers and Implications of Rapid Credit Growth in Emerging Asia

Episodes of Rapid Credit Growth in Emerging Asia
Domestic versus External Factors and the Role of Monetary Policy

Chapter III: Asia’s Quest for Inclusive Growth

How Does Asia Compare With Other Regions?
Poverty, Growth, and Inequality

Chapter IV: The Benefits of Further Financial Integration in Asia

Assessing the Degree of Financial Integration in Asia
Risk Sharing versus Contagion
Policy Implications

Chapter V: Asian Low-Income and Pacific Island Countries: Managing Inflation Risks and Strengthening Growth Prospects

Recent Inflation Trends in Asian LICs
Pacific Island Countries: Improving Resilience to External Shocks