Regional Economic Outlook: Asia Pacific, October 2017: Making the Most of the Upswing
Asia and Pacific, October 13, 2017
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- Published: October 13, 2017
- Series: Asia and Pacific
Recent Developments: Growth, Inflation, and Financial Conditions
- Regional output is projected to grow by 5.6 percent in 2017 and 5.5 percent in 2018, 0.1 percentage point higher than expected in April, driven by strong consumption and investment.
- Growth outturns in the first half of 2017 surprised on the upside in many Asian countries and European countries, supported by a cyclical upturn in manufacturing and investment, and stronger trade growth.
- With the notable exceptions of India and Australia, most countries in the Asia and Pacific region saw first-half 2017 growth better than anticipated in April 2017, on the back of strong domestic demand.
- Asia’s exports rebounded, partly as a result of restocking in high-tech sectors.
- Inflation has been weaker than projected, partly on account of lower commodity prices, and projections have been revised downward in most countries.
- Headline inflation in the Asia-Pacific region has softened; core inflation is now above headline in the region.
- Commodity prices have fallen by about 10 percent this year—about 14 percent for fuels and 5 percent for other commodities.
- Global growth is projected to accelerate to 3.6 percent in 2017 and further to 3.7 in 2018, up 0.1 percentage point in both years from the April WEO.
- The US Federal Reserve raised its monetary policy rate in June 2017 to 1.25 percent.
- Global financial conditions remain accommodative: equity markets in advanced economies are at record highs, bond spreads are tight, and market volatility is unusually low.
- Asian stock markets have strengthened during 2017; sovereign bond yields have generally declined, except in China; credit growth in the region has moderated but remains robust.
- The US dollar has depreciated by about 7 percent in real effective terms since end 2016; the euro has strengthened by a similar amount.
- Asian currencies have generally appreciated against the US dollar this year in nominal terms; in real effective terms the picture is mixed:
- Australian dollar and Malaysian ringgit appreciated by about 2 percent.
- Vietnamese dong and Philippine peso depreciated by more than 4 percent.
- The region experienced a brief period of net capital outflows following the US election in late 2016, but inflows resumed in early 2017.
- These capital inflows, together with strong current account balances and sizable valuation effects, contributed to an increase in foreign exchange reserves in most countries in the region, including China, during 2017.
Risks and Vulnerabilities
- Near-term risks to the regional outlook are broadly balanced, but medium-term risks are skewed to the downside.
- Key downside risks include:
- geopolitical tensions,
- sudden capital outflows,
- a shift toward inward-looking policies,
- policy uncertainty,
- a sharp adjustment in China.
- The region faces longer-term challenges including population aging and lagging productivity.
- Some countries may need stronger financial policies to reduce vulnerabilities, especially from capital flow reversal.
Policy Implications and Recommendations
- The favorable combination of circumstances provides a window of opportunity to pursue difficult structural reforms to boost growth and make it more inclusive, while addressing imbalances and risks.
- Fiscal policy recommendations vary across countries, depending on their cyclical positions and fiscal space.
- Subdued inflation pressures allow for continued accommodative monetary policies in much of the region.
- Stronger financial policies may be needed in some countries to reduce vulnerabilities, especially from capital flow reversal.
Regional Economic Outlook: Asia Pacific, October 2017: Making the Most of the Upswing
References
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