For Asia, Growth Pickup Provides Opportunity for Reforms

IMF News, October 13, 2017

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Asia growth projected at 5.6 percent this year and 5.5 percent in 2018.
Inflation marked down to 2.3 percent in 2017—0.6 percentage points lower than previous projections in April.
Financial conditions supported by sizeable capital inflows in the first half of 2017.

Growth pickup driven by strong consumption and investment, and better than anticipated external demand.
Stronger-than-expected growth in China, Japan, Korea, and ASEAN countries helped offset weaker outlooks in Australia and India.
Country-specific notes:
- China: expected to post a growth of 6.8 percent this year, and 6.5 percent next. Upward revision reflects continued strong infrastructure spending and resilience in the real estate sector in the first half of the year. Potential to sustain strong growth over the next 3-5 years, contingent on speeding up reforms to make growth less reliant on debt and investment.
- India: growth slowed in recent quarters due to temporary disruptions from demonetization in November 2016 and the recent rollout of the goods and services tax. Growth in 2017 was revised downward to reflect the recent slowdown, but is expected to accelerate in the medium term as these temporary disruptions fade.
- Japan: enjoyed growth sustained above-potential for six consecutive quarters through the first half of 2017. Expected to grow to 1.5 percent in 2017, driven by a pickup in external demand and consumption supported by fiscal transfers.
- ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand): expected to expand by 4.9 percent this year and in 2018. Strong growth in these countries is primarily driven by higher investment and exports.

Near-term risks broadly balanced; upside: cyclical recovery in China and Japan could be stronger and last longer than expected.
Key downside risks:
- Rapid credit growth in China and a sharp adjustment in China due to unsustainable policies, further increases in debt, and mounting financial imbalances.
- A sudden tightening in global financial conditions could trigger disruptive capital outflows affecting emerging and developing Asian economies.
- Rising protectionism and a global shift toward inward-looking policies could suppress Asia’s exports and reduce foreign direct investment.
- Escalating geopolitical risks could negatively impact the region’s medium-term growth prospects.
Longer-term structural challenges:
- Population aging.
- Lagging productivity growth.

Use the current favorable momentum as an opportunity to pass structural reforms and address vulnerabilities.
Monetary and financial policy stance:
- Scope for monetary policies to remain accommodative given subdued inflation and robust capital inflows.
- Financial sector policies can be tightened to mitigate financial stability risks.
Policies to lift incomes, create jobs, and ensure inclusive growth:
- Protect the vulnerable and incentivize working-age population participation in the labor force.
- Examples of recommended country reforms:
- Japan: promote labor force participation of women and the elderly.
- Thailand: strengthen pension systems.
- Korea: reduce regulatory burdens and promote competition in the service sector to boost productivity growth.
- Philippines: minimize tax distortions to improve resource allocation to productive firms.
The robust recovery and fiscal space in some countries provide an opportunity to offset short-term costs and build public support for ambitious structural reforms to tackle medium-term challenges.

Source: IMF News, October 13, 2017.