Asia and Pacific Regional Economic Outlook: Caught in Prolonged Uncertainty
Asia and Pacific, October 23, 2019
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- Published: October 23, 2019
- Series: Asia and Pacific
Overview and near-term outlook
- The region is still the world’s fastest growing major region, contributing more than two-thirds to global growth.
- Near-term prospects have deteriorated noticeably since the April 2019 World Economic Outlook, with risks skewed to the downside.
- Growth in Asia is expected to moderate to 5.0 percent in 2019 and 5.1 percent in 2020 (0.4 and 0.3 percentage point lower than projected last April, respectively).
- A marked deceleration in merchandise trade and investment, driven by distortionary trade measures and an uncertain policy environment, is weighing on activity, particularly in the manufacturing sector.
- Loosening monetary policy in key advanced economies and, correspondingly, easing financial conditions, are mitigating the impact of slower growth on Asian economies, but could add to financial vulnerabilities in the region.
External and regional risks
- External downside risks:
- A possible further deepening of US-China trade tensions.
- Weaker-than-expected growth of key trading partners.
- Higher oil prices.
- A disorderly Brexit.
- Risks within the region:
- A faster-than-expected slowdown in China.
- A deepening of regional tensions such as Japan’s and Korea’s bilateral relationship.
- Rising geopolitical risks.
- Increased incidence of natural disasters.
Policy guidance: macroeconomic and financial policies
- Macroeconomic policy:
- Considering the expected deceleration in growth, macroeconomic policies should use existing fiscal and monetary policy space to smooth domestic demand where warranted.
- Financial sector policy:
- Financial sector policies should be adjusted proactively to ensure that loosening financial conditions do not fuel a further buildup of financial stability risks.
- Reducing firm and household leverage should be a priority in countries where exposures in these sectors are of concern.
- Structural policy priorities:
- Pursue structural reforms to lay the foundation for high, inclusive, and environmentally sustainable economic growth in the medium term.
- Imperatives include:
- Further trade liberalization, including reducing nontariff barriers to services trade, and relaxing investment restrictions.
- Sustained investment in people, by upgrading human capital while empowering women and youth.
- Policies to stimulate the labor supply, including higher female labor force participation.
- Reducing infrastructure gaps and enhancing regulatory frameworks.
- More ambitious measures to mitigate the drivers of climate change while building fiscal buffers to adapt to the increasing incidence of natural disasters.
Thematic study 1: Managing international capital flows in Asia (IMF 2019a)
- Finds that capital flows can be large, volatile, and disruptive for recipient economies.
- Policymaker responses documented:
- Extensive use of foreign exchange interventions to cushion the impact of volatile capital flows on the exchange rate, particularly where balance sheet mismatches are prevalent and where financial markets are shallow.
- Monetary policy deployed in response to inflation and growth shocks and in reaction to US interest rates, the exchange rate, and credit growth.
- Macroprudential and capital flow management measures responding to a variety of external, domestic macro, and domestic financial stability considerations.
- Conclusion: Evidence suggests that Asian countries deploy their toolkits to achieve a multiplicity of objectives when faced with external financial shocks. This data-driven analysis can contribute to ongoing reflections about how to manage volatile capital flows and exchange rates in Asia and elsewhere.
Thematic study 2: Strengthening growth in South Asia (IMF 2019b)
- South Asia context:
- Accounts for one-fifth of the world’s population and contributes more than 15 percent to global growth.
- With 150 million new labor market entrants expected through 2030, a successful, high-quality, and job-rich growth strategy is needed to harness the demographic dividend and increase potential growth.
- Policy directions to achieve goals:
- Strengthen agricultural productivity.
- Promote the sustainable expansion of manufacturing and higher-skilled services.
- Greater focus on domestic revenue mobilization to allow for increased priority spending and fiscal consolidation.
- Further trade and foreign direct investment (FDI) liberalization.
- Investment in people.
Asia and Pacific Regional Economic Outlook: Caught in Prolonged Uncertainty (IMF).
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