The Art of Shifting Gear
IMF Blog, April 27, 2012
Source details
- Canonical URL
- The Art of Shifting Gear
Other formats
Bibliographic details
- Authors: Anoop Singh
- Published: April 27, 2012
Capital inflows
- Author: Anoop Singh
- Date: April 27, 2012
- Key observations:
- Asia’s economy remains heavily dependent on events outside its borders; the notion of a full “decoupling” is a fallacy.
- Two illustrative scenarios highlight interconnectedness:
- Improved global prospects—following concerted policy actions in the euro area and indications of recovery in the United States—would benefit trade-dependent Asia via a boost in demand, fresh capital inflows, and potential revival of overheating pressures.
- Escalation and global spread of financial turmoil in the euro area would likely cause a sharp fall in demand for Asia’s exports by advanced economies and a possible retrenchment of credit by stressed foreign banks, severely affecting Asia.
- Geopolitical shocks that push energy prices sharply higher would force difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies.
- Recent developments (as of early 2012):
- “If the first months of 2012 are anything to go by, then the outlook is favorable.”
- Capital inflows into emerging Asia rebounded.
- Stock markets recovered.
- Most local currencies appreciated against the U.S. dollar.
- Inflation continued to fall, propelled mainly by the normalization of energy and food prices.
- Inflation expectations have increased in many countries, while macroeconomic policies remain generally accommodative in the region.
Global developments
- Policy implications:
- Asia’s policy choices will be largely determined by the direction of global developments.
- Under a positive global scenario with improving economic and financial conditions and rising inflation risks, policymakers should consider renewed tightening and continued normalization of monetary policy to pursue sustainable, noninflationary growth.
- It is “too early to declare victory over the forces of financial volatility and contagion.” The art for policymakers is to be prepared to shift gears if, and when, circumstances warrant.
Differing by country
- Medium-term priorities vary across countries:
- China:
- Needs to continue rebalancing away from investment-led toward consumption-led growth.
- Continued rebalancing would be beneficial for China and for the world.
- Contextual note: at the IMF-World Bank Spring Meetings, the Vice-Governor of the People’s Bank of China, Yi Gang, remarked that strolling through shopping malls shows consumption in action.
- India:
- Would benefit from improvements in the investment climate and raising its trade integration.
- ASEAN economies:
- Public investment in infrastructure—within the framework of medium-term goals—would help attract private investment and promote more broad-based growth.
- Low-income countries in Asia:
- Tasked with attracting foreign direct investment (including from other Asian economies) to become part of the Asian growth dynamic.
- Strategic rationale:
- Rebalancing would make the region less vulnerable to external shocks.
- Despite interdependence, Asia “continues to have plenty of space and the power to determine the shape of its economies.”
The Art of Shifting Gear — IMF blog post by Anoop Singh, April 27, 2012