Keeping Asia at the Forefront Amid Growing Risks

IMF News, October 11, 2018

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Asia continues to drive the global economy, with growth forecast at 5.6 percent this year and 5.4 percent in 2019.
The Regional Economic Outlook: Asia and Pacific was launched at a press conference in Bali, Indonesia as part of the IMF-World Bank Annual Meetings.
Longer-term challenges identified: slowing productivity, population aging, and the impact of the digital revolution on the future of work.

China: projected growth remains at 6.6 percent for 2018 and is expected to moderate to 6.2 percent in 2019; medium-term risks rise with a possibly slower pace of deleveraging if stimulus offsets trade measures.
Japan: 2018 growth marked down from 1.2 to 1.1 percent, reflecting mixed quarterly outturns.
India: projected to grow at 7.3 percent in FY2018/19 and 7.4 percent in FY2019/20; revisions down by 0.1 and 0.4 of a percentage point, respectively, on account of higher oil prices and further monetary policy tightening.
ASEAN-4 (Indonesia, Malaysia, the Philippines, Thailand): growth lost momentum in the first half of 2018—except in Thailand—and has been revised down for 2019.
Rest of the region (including small states and Pacific island economies): growth is expected to pick up, reaching 4.1 percent for 2019.

Trade tensions:
- Continued trade tensions could undermine business confidence, hurt financial markets, disrupt supply chains, and discourage investment and trade.
- If all proposed tariffs are implemented, Asian GDP could fall by 0.9 percent over the next couple of years (IMF research).
- Greater protectionism could make tradable consumer goods—such as electronics—less affordable.
Tighter global financial conditions:
- Driven by higher U.S. interest rates, sudden deterioration of risk appetite, rising trade tensions, and political and policy uncertainty.
- Analysis suggests such tighter financial conditions could lower Asia’s output by as much as three-quarters of a percentage point.
- Financial market volatility in some emerging market economies could worsen, with negative spillovers through reduced capital flows and higher funding costs.
Domestic vulnerabilities:
- High household and corporate debt in Korea, Singapore, and many other economies.
- Inflated real estate markets in Australia and Hong Kong SAR.
- Risk of slowing reform implementation in India.
China-specific risk:
- Focus on addressing significant and longstanding financial vulnerabilities, but a shift toward stabilizing growth may mean slower progress on deleveraging and heightened medium-term risks for China and the entire region.

Exchange rate and monetary policy:
- Allow exchange rates to move flexibly and act as a shock absorber.
- Use foreign exchange intervention only to deal with disorderly market conditions.
- Support independent monetary policy decision-making to address inflation and domestic objectives.
Macroprudential measures:
- Use targeted macroprudential policies to protect financial stability.
Monetary stance guidance:
- With low inflation and negative output gaps in most advanced economies in the region, monetary policy should generally remain accommodative.
- Where inflation is on the rise, or where capital flows remain volatile and balance sheets show significant currency mismatches, raising interest rates would be appropriate.
Trade and investment liberalization:
- Regional trade and investment liberalization (removing regulatory restrictions), particularly in services, can bolster prospects and offset global trade tensions.
- Analysis shows that liberalization could boost Asian GDP by up to 15 percent over the long run.
Firm dynamism and productivity:
- Declining firm dynamism—the decline in young firms and the rise of zombie firms—has contributed to declining productivity growth.
- Measures to boost firm entry and exit can help support economic growth.

Digital innovations accounted for nearly one-third of Asia’s per capita growth over the past two decades.
To harness the digital dividend, policymakers need to:
- Upgrade education.
- Improve infrastructure.
- Update the regulatory environment.
Address digital disruptions:
- Manage displaced workers from automation.
- Manage financial stability risks from fintech.

These challenges are surmountable with continued sound policymaking.
With appropriate policies, Asia should have good prospects for staying at the forefront of global growth over the coming decade and beyond.

Source: Keeping Asia at the Forefront Amid Growing Risks (IMF, October 11, 2018).