Asia and Pacific
Asia and Pacific: Navigating an Uncertain Global Environment While Building Inclusive Growth
October 2011
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In line with the weaker global outlook, growth in Asia is expected to be slightly lower in 2011-12 than forecast in April 2011, mainly as a result of weakening external demand, but the expansion should remain healthy, supported by domestic demand, which has been generally resilient. Overheating pressures remain elevated in a number of economies, with credit growth still robust and inflation momentum generally high, though inflation is expected to recede modestly after peaking in 2011. The sell-off in Asian financial markets in August and September 2011 underscores that an escalation of euro area financial turbulence and a renewed slowdown in the United States could have severe macroeconomic and financial spillovers to Asia. Against this backdrop, Asian low-income and Pacific Island economies face particular challenges in the near and medium term. In low-income countries, the fight against inflation is complicated by strong second-round effects, the need to phase out subsidies, and less well-anchored inflation expectations. Pacific Island economies need to undertake further structural reforms to lift potential growth.
| Contents |
| Executive Summary |
Chapter I: Navigating an Uncertain Global Environment
| Resilient Domestic Demand Amid Pockets of Inflation Pressure |
| An Uncertain Global Environment Poses Downside Risks |
| Stress in the Euro Area and United States: Spillovers to Asia |
| How Vulnerable Are Asian Banks and Firms? |
| Policy Challenges |
Chapter II: Drivers and Implications of Rapid Credit Growth in Emerging Asia
| Episodes of Rapid Credit Growth in Emerging Asia |
| Domestic versus External Factors and the Role of Monetary Policy |
| Conclusions |
Chapter III: Asia’s Quest for Inclusive Growth
| How Does Asia Compare With Other Regions? |
| Poverty, Growth, and Inequality |
| Policies |
Chapter IV: The Benefits of Further Financial Integration in Asia
| Assessing the Degree of Financial Integration in Asia |
| Risk Sharing versus Contagion |
| Policy Implications |
| Conclusions |
| Recent Inflation Trends in Asian LICs |
| Pacific Island Countries: Improving Resilience to External Shocks |
References |
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| Boxes | |||
| Chart | Data | 1.1 | Vietnam: Stabilization at the Crossroads |
| Chart | Data | 1.2 | How Large Are Chinese Inflation Spillovers to the Region? |
| Chart | Data | 1.3 | Recent Trends in ASEAN Exports to China |
| Chart | Data | 1.4 | Sterilization of Reserve Accumulation in Times of Large Capital Inflows |
| Chart | Data | 1.5 | A Strategy for Growth and Fiscal Sustainability in Japan |
| Chart | 4.1 | Assessing the Contagion of Systemic Risk form Financial Integration through Banks | |
| Tables | |||
| 1.1. | Asia: Real GDP | ||
| 3.1. | Number of People Living on Less than $1.25 per Day | ||
| 3.2. | Pro-poor and Inclusive Growth Measures | ||
| 5.1. | Selected Asia: Decomposition of Inflation and Exchange Rate Regimes | ||
| 5.2. | Selected Asia: Monetary Conditions | ||
| Figures | |||
| Chart | Data | 1.1 | Selected Asia: Real GDP at Market Prices |
| Chart | Data | 1.2 | Selected Asia: Exports of Goods |
| Chart | Data | 1.3 | Selected Asia: Financial Condition Index (FCI) |
| Chart | Data | 1.4 | Selected Asia: Contributions to Year-to-Date Changes in REER |
| Chart | Data | 1.5 | Selected Asia: Change in Inflation Rates since January 2011 |
| Chart | 1.6 | Selected Asia: Inflation Target Tracker | |
| Chart | Data | 1.7 | Emerging Asia: Equity and Bond Funds––Weekly Net Flows in 2011 |
| Chart | Data | 1.8 | Selected Asia: Trade Links to Japan and Export Growth in 2011:Q2 |
| Chart | Data | 1.9 | Selected Asia: Contributions to Projected Growth |
| Chart | Data | 1.10 | Selected Asia: Headline Consumer Price Inflation |
| Chart | Data | 1.11 | Selected Asia: Current Account Balances |
| Chart | 1.12 | Asia: GDP Growth | |
| Chart | Data | 1.13 | Selected Asia: Foreign Holdings in Local Currency Government Bonds |
| Chart | Data | 1.14 | Consolidated Claims of European and U.S. Banks on Selected Asia |
| Chart | Data | 1.15 | Selected Asia: U.S. Dollar––Local Currency Basis Swap Spreads |
| Chart | Data | 1.16 | Selected Asia: Impact of Severe Global Slowdown on Real GDP Growth |
| Chart | Data | 1.17 | Selected Asia: Impact of Severe Global Slowdown on Selected Indicators |
| Chart | Data | 1.18 | Selected Asia: Impact on Real GDP Growth of Discretionary Fiscal Spending in China |
| Chart | Data | 1.19 | Emerging Asia: External Bond Issuance by Corporations |
| Chart | Data | 1.20 | Emerging Asia: Leverage in Corporate Sector |
| Chart | Data | 1.21 | Selected Asia: Debt-to-Equity Ratio |
| Chart | Data | 1.22 | Asia: Debt-to-Equity Ratio during Recoveries from 2001 and 2008 Recessions |
| Chart | Data | 1.23 | Emerging Asia: Leverage in Different Sectors |
| Chart | Data | 1.24 | Selected Asia: Tier 1 Ratio of Top 25 Banks |
| Chart | 1.25 | Emerging Asia: Overheating Map | |
| Chart | Data | 1.26 | Selected Asia: Change in Inflation Expectations for 2011 since March 2011 |
| Chart | Data | 1.27 | Selected Asia: Overheating Index and Vulnerabilities to a Slowdown in Growth in G-2 |
| Chart | Data | 1.28 | Selected Asia: Change in General Government Cyclically Adjusted Fiscal Balance |
| Chart | Data | 1.29 | Selected Asia: Fiscal Space |
| Chart | Data | 1.30 | Selected Asia: Cyclically Adjusted Changes in General Government Spending |
| Chart | Data | 1.31 | Selected Asia: Deviation from Model-Based Norms of Public Spending on Health and Education |
| Chart | Data | 1.32 | Selected Asia: Deviation of Retail Gasoline and Diesel Prices from International Prices |
| Chart | Data | 1.33 | Selected Asia: Increase in Net Oil Subsidy |
| Chart | Data | 2.1 | Nominal Credit to Private Sector |
| Chart | Data | 2.2 | Crises Associated with Emerging Market Credit Booms |
| Chart | Data | 2.3 | Real Credit |
| Chart | Data | 2.4 | Credit Booms Across Emerging Economies |
| Chart | Data | 2.5 | Emerging Asia: Real Credit Growth and the Role of Domestic versus External Factors |
| Chart | Data | 2.6 | Real Credit Growth in Emerging Asia: Forward-Looking Scenarios |
| Chart | Data | 3.1 | Stylized Facts: Asia’s Growth Experience over the Last Two Decades |
| Chart | Data | 3.2 | Selected Asia: Change in Poverty and Inequality during the Global Crisis |
| Chart | Data | 3.3 | Income Elasticity of Poverty Reduction |
| Chart | Data | 3.4 | Degree of Inclusiveness of Growth |
| Chart | Data | 3.5 | Fiscal Policy and Inclusiveness |
| Chart | Data | 3.6 | Labor Market Institutions and Inclusiveness |
| Chart | Data | 4.1 | Regional and Nonregional Sources of Portfolio Investment Liabilities, 2001—09 |
| Chart | Data | 4.2 | Trade and Financial Integration, 2001—09 |
| Chart | Data | 4.3 | Deviations from Model-Based Norms of Financial Integration |
| Chart | Data | 4.4 | Risk Sharing within and between Regions |
| Chart | Data | 4.5 | Trade-Offs between Risk Sharing and Contagion |
| Chart | Data | 4.6 | Decomposing the Gap between International Risk Sharing in Asia and the G-2 |
| Chart | Data | 4.7 | Effect of Financial Integration on Current Account Surplus |
| Chart | Data | 5.1 | Selected Asia: Inflation and World Prices |
| Chart | Data | 5.2 | Selected Asia: Headline Inflation, January 2005–Latest |
| Chart | Data | 5.3 | Selected Asia: Inflation Persistence, 2005—11 |
| Chart | Data | 5.4 | Pass-Through from International Prices to Domestic Prices |
| Chart | Data | 5.5 | PICs: Real GDP Growth |
| Chart | Data | 5.6 | PICs Real GDP Growth: Correlation with Australia and New Zealand, 2002—10 |
| Chart | Data | 5.7 | PICs (Commodity Importers): Real GDP Growth around Downturns |
| Chart | Data | 5.8 | PICs: Impulse Response of Output Loss to Terms-of-Trade Shock |
| Chart | Data | 5.9 | PICs: Impulse Response of Output Loss to External Demand Shock |