IMF Survey : Asia: Growth Remains Strong, Expected to Ease Only Modestly

IMF News, May 3, 2016

Source details

Canonical URL: IMF Survey : Asia: Growth Remains Strong, Expected to Ease Only Modestly

Growth in Asia and the Pacific is expected to remain strong at 5.3 percent this year and next, accounting for almost two-thirds of global growth.
Despite a slight moderation, Asia remains the engine of global growth, driven by resilient domestic demand amid weak external demand.
Domestic demand drivers cited: low unemployment, growth in disposable income, lower commodities prices, and macroeconomic stimulus.

China:
- Growth forecast to moderate from 6.9 percent in 2015 to 6.5 percent this year and 6.2 percent in 2017.
- Ongoing rebalancing from manufacturing and investment toward services and consumption.
- Medium-term consolidation in heavy industries (steel, shipbuilding) to reduce excess capacity; consumer expenditure becoming a more important growth engine.
Japan:
- Growth expected at 0.5 percent in 2016, then dropping to -0.1 percent in 2017 as the effect of the consumption tax increase takes hold (forecast does not account for likely growth-supporting policies to offset the increase).
- Aging population and high public debt are major long-term drags.
India:
- GDP expected to increase by 7.5 percent this year and next; remains the fastest-growing large economy in the world.
Other economies:
- Vietnam leading fast-growing economies in Southeast Asia, helped by rapidly growing exports of electronics and garment manufactures.
- Philippines and Malaysia expected to retain robust growth, underpinned by resilient domestic demand.

External challenges:
- Slow growth in advanced economies.
- Broad slowdown across emerging markets.
- Weak global trade.
- Persistently low commodity prices.
- Increasingly volatile global financial markets.
Domestic vulnerabilities:
- High debt incurred in recent years in some countries.
- China’s transition may disrupt regional partners, especially those heavily exposed to China.
- Geopolitical tensions and domestic policy uncertainty risk trade disruptions or lower domestic demand.
- Natural disasters can reverse gains, particularly in lower-income countries and small states (including many Pacific islands).
- Reduced financial services by global banks (“de-risking”) may hold back financial inclusion and growth in small states.
Upside possibilities:
- Low commodity prices could boost regional economies more than expected.
- Regional and multilateral trade agreements, such as the Trans-Pacific Partnership, could benefit Asia-Pacific even before ratification.

Commodity and China rebalancing impacts:
- China’s slowdown contributes to a large drop in prices of some metals.
- Rebalancing increases demand for some foodstuffs as Chinese consumers favor higher-quality and higher-protein items; Chinese tourism continues to grow.
- Countries with exposure to China’s consumers can benefit; those dependent on investment and manufacturing may face near-term losses. Over time, the region is likely to benefit as China’s growth model becomes more sustainable.
Inequality:
- Inequality has risen in many countries in Asia, with growth less beneficial to the poor compared with the past.
- Structural reforms plus fiscal policy can help reduce inequality and foster more inclusive growth.
- Key areas to address: broaden access to education, health, and financial services; tackle labor-market duality and informality.
- Reforms should avoid costly, across-the-board subsidy schemes and focus on expanding social spending through well-targeted interventions and more-progressive tax codes.
- Recent reforms cited positively include elimination of fuel-price controls in most major economies of the region.

Monetary policy:
- Since monetary settings are broadly appropriate and inflation remains low, there is room to cut policy rates if needed to boost demand.
Fiscal policy:
- Gradual consolidation is generally desirable to rebuild policy space.
- Adjust the composition of spending to allow for growth-friendly infrastructure and social spending in many economies.
Exchange rate and external-sector policies:
- Flexible exchange rates should remain the first line of defense against external shocks.
- Foreign-exchange intervention and capital-flow measures could be deployed in special circumstances, such as disorderly market conditions.
Financial stability:
- Continue use of macroprudential policies to deal with financial volatility and risks as a complement to monetary and fiscal policies.
Structural reforms:
- Needed to bolster potential growth and facilitate rebalancing.
- Past reforms have been effective in fostering diversification and facilitating Asia’s entry into global markets.

Source: IMF Survey : Asia: Growth Remains Strong, Expected to Ease Only Modestly (May 3, 2016)