Asia: Exiting from Stimulus in an Uncertain World
IMF Blog, May 12, 2010
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Bibliographic details
- Authors: Anoop Singh
- Published: May 12, 2010
Overview
- Author: Anoop Singh
- Date: May 12, 2010
- Context: Presentation of the Asia-Pacific Regional Economic Outlook in New Delhi; Asia leading the global recovery but vulnerable to global downside risks, particularly recent developments in Europe and pervasive financial market volatility.
Key findings on the recovery and risks
- Asia is recovering ahead of and faster than advanced economies and is an important driver of the global recovery.
- Asia’s growth is highly dependent on export demand and growing integration with international financial markets, exposing the region to global downside risks.
- Recent financial market volatility and developments in Europe bring downside risks back to the forefront.
- Despite relatively strong recent performance, “we are not yet out of the woods.”
Guidance on the pace of exit (monetary and fiscal normalization)
- Main near-term challenge: judge the appropriate pace for normalizing monetary and fiscal policy conditions against an uncertain global backdrop.
- Because Asia is recovering earlier and faster, policy conditions in the region will need to start normalizing sooner than in several other parts of the world.
- Withdrawal of stimulus should be cautious and gradual given the fragility of the global recovery.
- The right pace of “exit” differs across economies and depends on the stage of the cycle and exposure to risks.
Monetary policy considerations
- Pace of monetary normalization should be guided by:
- the degree of monetary accommodation that is still in place,
- the pace at which output gaps are closing,
- the emergence of inflationary pressures.
- Economies with less economic slack and smaller exposure to external demand can normalize faster than those far from capacity constraints or highly exposed to uncertain external demand.
- A pick-up in consumer price inflation in a few economies, including India, in recent quarters requires monitoring.
- Part of the pick-up is due to food and energy prices.
- Part is due to rising “core” prices, indicating inflationary pressure spreading beyond volatile components.
Complications from monetary tightening and large capital inflows
- Monetary tightening risks attracting further capital inflows that could complicate macroeconomic management.
- Possible measures to manage large inflows (already used by many in the region) include:
- prudential regulations to address unduly rapid rises in asset prices (equity and property),
- greater exchange rate flexibility.
Fiscal policy stance and medium-term considerations
- Many Asian economies plan to withdraw part of the crisis-era stimulus this year, but fiscal conditions are expected to remain accommodative in most of Asia.
- Gradual removal of fiscal stimulus is appropriate given low levels of public debt in most of the region (Japan is an exception).
- Given large downside risks, retaining some targeted fiscal measures to support growth is prudent risk management.
- Policymakers should plan to move to a more neutral fiscal stance over the medium term to:
- safeguard fiscal space for future shocks,
- maintain policy credibility and effectiveness.
Anoop Singh, May 12, 2010.