Dealing with Uncertain Economic Times: The Outlook for Asia

IMF Blog, October 13, 2011

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Dealing with Uncertain Economic Times: The Outlook for Asia

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Bibliographic details

• Authors: Anoop Singh
• Published: October 13, 2011

Overview

• Author: Anoop Singh
• Date: October 13, 2011
• Key premise: Recent large equity sell-offs across Asia and safe haven flows into Japan illustrate the region’s vulnerabilities to further global shocks.
• Exact quoted assessment from the IMF’s Managing Director: “what makes the situation all the more urgent is that it has implications for every country.”

Regional outlook and immediate vulnerabilities

• The region’s fundamentals—built up over the past decade—remain relatively strong.
• Economic uncertainties in Europe and the United States pose large downside risks.
• Recent market behavior: large equity sell-offs across Asia and safe haven flows into Japan.
• View from Tokyo is described as “more serene than the view from other advanced country capitals, but there are storm clouds on the horizon.”

Policy balancing act

• Domestic demand in Asia has been rather resilient, in contrast to most advanced countries.
• Factories are working at near full capacity and unemployment is low.
• Overheating is the main concern in a number of economies, with credit growing strongly and inflation remaining stubbornly high.
• Growth in Asia is slowing, mainly due to weakening external demand.
• Policy challenge summarized: contend with softening exports, which act as a drag on growth, even as they seek to contain inflation and asset bubbles.

Guarding against spillovers

• Channels through which euro zone turmoil could affect Asia:
  • Foreign investors could withdraw abruptly (to some extent this is already happening, but things could get much worse).
  • Stressed European banks could withdraw funding from their local branches and cut back on cross-border lending.
  • Key derivatives markets—on which some local banks have become reliant—could be impaired.
• Potential consequence: impairment of dollar liquidity provision in Asian markets where European banks have been important providers.

Policy recommendations and flexible response

• Recommended stance: policymakers should react flexibly to domestic challenges amid an unsettled external environment.
• Specific guidance:
  • In overheating economies where monetary conditions are still loose, policies should be geared towards returning inflation to the target range.
  • Policymakers should be willing to change direction quickly should downside risks materialize.
  • In economies where inflation is under control and global financial linkages are greater, a pause in monetary tightening is warranted.
• Comparative advantage noted: Asia’s fundamentals are good, and the scope for policy adjustments is much greater than in other regions of the world.

Special considerations for low-income and Pacific Island economies

• Asian low-income and Pacific Island economies face similar challenges, but often in a more acute form.
• In low-income countries, the fight against inflation is complicated by strong second-round effects and less well anchored inflation expectations.
• Pacific Island economies need to undertake further structural reforms to lift their potential growth.

Longer-term rebalancing

• Weak global demand highlights the benefit for Asia to rebalance growth towards domestic sources of demand.
• Rebalancing is acknowledged as a long-term process, but efforts should start immediately.
• Fiscal policy advice: re-prioritizing fiscal spending and directing public spending toward critical infrastructure investments.
  • Expected outcomes of such spending: support rebalancing and help foster more inclusive growth.

Context about the publication

• Platform: IMFBlog, described as a forum for the views of IMF staff and officials on pressing economic and policy issues.
• Organizational note: The IMF, based in Washington D.C., is an organization of 191 countries, working to foster global monetary cooperation and financial stability around the world.
• Disclaimer: The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Source: Dealing with Uncertain Economic Times: The Outlook for Asia — IMFBlog (Anoop Singh, October 13, 2011).

Content in this bundle

• iMFdirect 博客: 应对不确定的经济时期, 亚洲的前景, 2011 年10 月13 日
  • iMFdirect 博客: 应对不确定的经济时期, 亚洲的前景, 2011 年10 月13 日 (Markdown version)
  • iMFdirect 博客: 应对不确定的经济时期, 亚洲的前景, 2011 年10 月13 日 (PDF)
• 経済が不確実な時代に対応する：アジアの見通し; アヌープ・シン; iMF direct ブログ 2011年10月13日掲載
  • 経済が不確実な時代に対応する：アジアの見通し; アヌープ・シン; iMF direct ブログ 2011年10月13日掲載 (Markdown version)
  • 経済が不確実な時代に対応する：アジアの見通し; アヌープ・シン; iMF direct ブログ 2011年10月13日掲載 (PDF)

References

• dangerous new phase
• IMF’s Managing Director stated recently
• Regional Economic Outlook for Asia and the Pacific
• rebalancing growth