Regional Economic Outlook: Asia Pacific, May 2017: Preparing for Choppy Seas
Asia and Pacific, May 9, 2017
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- Published: May 9, 2017
- Series: Asia and Pacific
Overview
- The outlook for the Asia-Pacific region remains robust—the strongest in the world—and recent data point to a pickup in momentum.
- Growth is projected to reach 5.5 percent in 2017 and 5.4 percent in 2018.
- Near-term outlook is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside.
- Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions.
- Despite volatile capital flows, Asian financial markets have been resilient, reflecting strong fundamentals.
- Upside risk: additional policy stimulus, especially U.S. fiscal policy, could provide further support.
- Downside risks:
- Continued tightening of global financial conditions and economic uncertainty could trigger volatility in capital flows.
- A possible shift toward protectionism in major trading partners represents a substantial risk to the region.
- A bumpier-than-expected transition in China would have large spillovers.
- Medium-term growth faces secular headwinds, including population aging and slow productivity catchup.
- Policy guidance:
- Monetary policy should generally remain accommodative, though policy rates should raised if inflationary pressures pick up.
- Macroprudential settings should be tightened in some countries to slow credit growth.
- Fiscal policy should support and complement structural reforms and external rebalancing, where needed and fiscal space is available.
- Countries with closed output gaps should start rebuilding fiscal space.
- Structural reforms are needed to deal with demographic transition challenges and to boost productivity.
Main findings of Chapter 1
- Trends:
- Asia is aging fast.
- The speed of aging is especially remarkable compared to the historical experience in Europe and the United States.
- Parts of Asia risk becoming old before becoming rich.
- The region’s per capita income relative to the United States stands at much lower levels than those reached by mature advanced economies in the past.
- In a global context, Asia is shifting from being the biggest contributor to the global working-age population to subtracting hundreds of millions of people from it.
- Growth:
- Asia has enjoyed a substantial demographic dividend in past decades, but rapid aging is now set to create a demographic tax on growth.
- Demographic trends could subtract ½ to 1 percentage point from annual GDP growth over the next three decades in post-dividend countries such as China and Japan.
- In contrast, they could add 1 percentage point to annual GDP growth in early-dividend countries, such as India and Indonesia, if the transition is well managed.
- Overall, demographics are likely to be slightly negative for Asian growth and could subtract 0.1 of a percentage point from annual global growth over the next three decades (or 0.2 of a percentage point if early-dividend countries are unable to reap the demographic dividend).
- In several Asian economies, immigration—if past trends continue—could play an important role in softening the impact of aging or prolonging the demographic dividend (Australia, Hong Kong SAR, New Zealand, and Singapore).
- Inflation:
- Structural excess savings and low investment due to demographics can lead to such a low real neutral interest rate that monetary policy may no longer stimulate the economy.
- The economy may operate below potential, keeping inflation under the central bank’s target (see Box 2.1 for the case of Japan).
- This raises the risk of Asia falling into a period of “secular stagnation” at a lower income level compared to advanced economies and smaller policy buffers.
- External flow balance:
- The diversity of demographic trends in the region creates opportunities for capital flows and cross-border risk sharing—savings from surplus countries can be used to fulfill capital needs in younger economies.
- Projections based on the IMF’s External Balance Approach (EBA) model suggest that, over the next decade, surpluses of some Asian economies are projected to increase due to demographics.
- However, the impact is material only for a small set of countries, and the overall effect on global imbalances is likely to be limited (about 0.1 of a percentage point of global GDP over the next decade).
- Financial markets:
- Demographic trends are likely to put downward pressure on real interest rates and asset returns for most major countries in Asia.
- These domestic effects are likely to be less important for countries that are financially open; for those, changes in the world interest rate—which may in turn be driven by global aging trends—will likely matter more.
Policy implications and recommendations
- Monetary policy:
- Should generally remain accommodative.
- Policy rates should be raised if inflationary pressures pick up.
- Macroprudential settings should be tightened in some countries to slow credit growth.
- Fiscal policy:
- Should support and complement structural reforms and external rebalancing, where needed and fiscal space is available.
- Countries with closed output gaps should start rebuilding fiscal space.
- Structural reforms:
- Needed to deal with challenges from the demographic transition.
- Needed to boost productivity, given stalled productivity convergence with the United States and other advanced economies.
- External and financial policies:
- Use opportunities from demographic diversity for capital flows and cross-border risk sharing.
- Monitor and manage vulnerabilities from volatile capital flows and potential shifts in global trade policies.
Research questions explored in the chapter
- Has there been a productivity slowdown in Asia similar to that in advanced economies? If so, how large and extensive has it been? What have been the implications for convergence? What is the outlook for productivity?
- How much of the slowdown can plausibly be attributed to external factors? How does it compare to the extent to which the slowdown can be attributed to domestic factors?
- Is there an investment malaise in Asia and can it be related to that in advanced economies elsewhere? How important is foreign direct investment (FDI) as a driver of business investment?
Regional Economic Outlook: Asia and Pacific, May 2017: Preparing for Choppy Seas
Content in this bundle
- Asia Pacific Regional Economic Outlook, May 9, 2017
- Areo0517c1
- IMF APD REO Chapter 2 Aging
- IMF REO chapter 3 The “New Mediocre” and the Outlook for Productivity in Asia
- 亚太地区经济展望概要;2017年4月
- Asia Pacific Regional Economic Outlook Executive_Summary, May 9, 2017
- Ringkasan Eksekutif,Prospek Ekonomi Regional Asia Pasifik, 9 Mei 2017
- アジア太平洋地域経済見通し要旨、2017年5月9日
- Resumen ejecutivo: Perspectivas Económicas Regionales de Asia y el Pacífico; 9 de mayo de 2017
References
- Asia's Dynamic Economies Continue to Lead Global Growth
- People's Republic of China and the IMF
- United States and the IMF
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