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Chapter 1: Preparing for Choppy Seas
The Asia-Pacific region continues to be the world leader in growth, and recent data point to a pickup in momentum. Growth is projected to reach 5.5 percent in 2017 and 5.4 percent in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. Despite volatile capital flows, Asian financial markets have been resilient, reflecting strong fundamentals. However, the near-term outlook is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside. On the upside, growth momentum remains strong, particularly in advanced economies and in Asia. Additional policy stimulus, especially U.S. fiscal policy, could provide further support. On the downside, the continued tightening of global financial conditions and economic uncertainty could trigger volatility in capital flows. A possible shift toward protectionism in major trading partners also represents a substantial risk to the region. Asia is particularly vulnerable to a decline in global trade because the region has a high trade openness ratio, with significant participation in global supply chains. A bumpier-than-expected transition in China would also have large spillovers. Medium-term growth faces secular headwinds, including population aging and slow productivity catchup. Adapting to aging could be especially challenging for Asia, as populations living at relatively low per capita income levels in many parts of the region are rapidly becoming old. In other words, parts of Asia risk “growing old before becoming rich.” Another challenge for the region is how to raise productivity growth—productivity convergence with the United States and other advanced economies has stalled—when external factors, including further trade integration, might not be as supportive as they were in the past. On policies, monetary policy should generally remain accommodative, though policy rates should raised if inflationary pressures pick up, and macroprudential settings should be tightened in some countries to slow credit growth. Fiscal policy should support and complement structural reforms and external rebalancing, where needed and fiscal space is available; countries with closed output gaps should start rebuilding fiscal space. To sustain long-term growth, structural reforms are needed to deal with challenges from the demographic transition and to boost productivity.
Chapter 2: Asia: At Risk of Growing Old before Becoming Rich?
The main findings of this chapter are:
- Trends. Asia is aging fast. The speed of aging is especially remarkable compared to the historical experience in Europe and the United States. As such, parts of Asia risk becoming old before becoming rich. The region’s per capita income relative to the United States stands at much lower levels than those reached by mature advanced economies in the past. In a global context, Asia is shifting from being the biggest contributor to the global working-age population to subtracting hundreds of millions of people from it.
- Growth. Asia has enjoyed a substantial demographic dividend in past decades, but rapid aging is now set to create a demographic tax on growth. Demographic trends could subtract ½ to 1 percentage point from annual GDP growth over the next three decades in post-dividend countries such as China and Japan. In contrast, they could add 1 percentage point to annual GDP growth in early-dividend countries, such as India and Indonesia, if the transition is well managed. Overall, however, demographics are likely to be slightly negative for Asian growth and could subtract 0.1 of a percentage point from annual global growth over the next three decades (or 0.2 of a percentage point if early-dividend countries are unable to reap the demographic dividend). In several Asian economies, immigration—if past trends continue—could play an important role in softening the impact of aging or prolonging the demographic dividend (Australia, Hong Kong SAR, New Zealand, and Singapore).
- Inflation. In cases in which structural excess savings and low investment due to demographics lead to such a low real neutral interest rate that monetary policy may no longer stimulate the economy, the economy may operate below potential, keeping inflation under the central bank’s target (see Box 2.1 for the case of Japan). This raises the risk of Asia falling into a period of “secular stagnation” at a lower income level compared to advanced economies and smaller policy buffers.
- External flow balance. The diversity of demographic trends in the region creates opportunities for capital flows and crossborder risk sharing—that is, savings from surplus countries can be used to fulfill capital needs in younger economies. Projections based on the IMF’s External Balance Approach (EBA) model suggest that, over the next decade, surpluses of some Asian economies are projected to increase due to demographics. However, the impact is material only for a small set of countries, and the overall effect on global imbalances is likely to be limited (about 0.1 of a percentage point of global GDP over the next decade).
- Financial markets. Finally, demographic trends are likely to put downward pressure on real interest rates and asset returns for most major countries in Asia. These domestic effects are likely to be less important for countries that are financially open. For those, changes in the world interest rate—which may in turn be driven by global aging trends—will likely matter more.
Chapter 3: The “New Mediocre” and the Outlook for Productivity in Asia
The chapter will explore the following questions:
- Has there been a productivity slowdown in Asia similar to that in advanced economies? If so, how large and extensive has it been? What have been the implications for convergence? What is the outlook for productivity?
- How much of the slowdown can plausibly be attributed to external factors? How does it compare to the extent to which the slowdown can be attributed to domestic factors?
- Is there an investment malaise in Asia and can it be related to that in advanced economies elsewhere? How important is foreign direct investment (FDI) as a driver of business investment?