Regional Economic Outlook: Asia Pacific
Asia and Pacific, May 10, 2018
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- Published: May 10, 2018
- Series: Asia and Pacific
Overview
- The world economy continues to perform well, with strong growth and trade, rising but still muted inflation, and accommodative financial conditions, notwithstanding some increased financial market volatility in early 2018.
- Near-term economic prospects for both the world and Asia have improved from the October 2017 Regional Economic Outlook Update: Asia and Pacific, driven partly by the procyclical tax stimulus in the United States.
- Asia is expected to grow by around 5½ percent this year, accounting for nearly two-thirds of global growth, and the region remains the world’s most dynamic by a considerable margin.
- While risks around the forecast are broadly balanced for now, they are skewed firmly to the downside over the medium term. Key risks include further market corrections, a shift toward protectionist policies, and an increase in geopolitical tensions.
- With output gaps closing in much of the region, fiscal policies should focus on ensuring sustainability. Monetary policies can remain accommodative in most Asian economies for now, but central banks should stand ready to adjust their stances as inflation picks up. Macroprudential policies should be used appropriately to contain credit growth.
- Many Asian economies face important medium-term challenges, including population aging and declining productivity growth, and will need structural reforms, complemented in some cases by fiscal support.
- The global economy is becoming increasingly digitalized; Asia is already a leader in many aspects of the digital revolution, but policy responses will be needed in areas including information and communication technology, trade, labor markets, and education.
Growth and inflation projections
- Growth in Asia is forecast at 5.6 percent in 2018 and 2019, while inflation is projected to be subdued.
- China’s growth is projected to ease to 6.6 percent, partly reflecting the authorities’ financial, housing, and fiscal tightening measures.
- Growth in Japan has been above potential for eight consecutive quarters and is expected to remain strong this year at 1.2 percent.
- In India, growth is expected to rebound to 7.4 percent, following temporary disruptions related to the currency exchange initiative and the rollout of the Goods and Services Tax.
- Global growth in 2017 was the highest since 2011 and is expected to strengthen further in 2018–19, supported by broad-based momentum across countries and fiscal expansion in the United States.
- Headline inflation has been picking up with the upturn in oil prices since September, but core inflation remains surprisingly subdued, especially in advanced economies. Core inflation remains below inflation targets in many Asian economies.
Risks around the outlook
- Upside risks:
- The global recovery could again prove stronger than expected.
- Over time the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and successful implementation of the Belt and Road Initiative—assuming debt sustainability and project quality are maintained—could support trade, investment, and growth.
- Downside risks:
- Sudden and sharp tightening of global financial conditions.
- Prolonged easy financial conditions risking further buildup of leverage and financial vulnerabilities, excessive risk taking, and migration of financial risks toward nonbanks.
- A shift toward inward-looking or protectionist policies could disrupt international trade and financial markets.
- Geopolitical tensions, cybersecurity breaches and cyberattacks, climate change, and natural disasters.
Medium-term challenges and structural reform priorities
- Demographics: Many economies risk “growing old before they grow rich”; population aging can have substantial adverse effects on growth and fiscal positions.
- Productivity: Slowing productivity growth requires policy attention.
- Digitalization: The rise of the digital economy offers transformative opportunities and challenges (including the future of work). Policy responses are needed in ICT, infrastructure, trade, labor markets, and education.
- Fiscal policy: With output gaps closing, continued fiscal support is less needed; most economies should strengthen buffers, increase resilience, and ensure sustainability. Some should improve revenue mobilization to create space for infrastructure and social spending and support structural reforms.
- Inclusive policies: Tailored measures are needed to boost productivity and investment, narrow gender gaps in labor force participation, deal with demographic transition, address climate change, and support those affected by shifts in technology and trade.
Chapter 2 — Low inflation in Asia: findings
- Recent low inflation has been driven mainly by temporary forces, including imported inflation. Phillips curve estimation indicates weaker import prices, including low commodity prices, contributed to half of the undershooting of inflation targets in advanced Asia and most of the undershooting in emerging Asia in recent years.
- China has played an important role in driving both global and regional inflation.
- Temporary shocks have accounted for the bulk of the recent reduction in inflation.
- The inflation process has become more backward-looking: the importance of expectations in driving inflation has declined in recent years, with past inflation playing a larger role.
- The sensitivity of inflation to the unemployment gap has declined: evidence of a flattening of the Phillips curve compared to the 1990s in advanced Asia and a similar but more continuous flattening in emerging Asia. Outside of Asia, the slope of the Phillips curve seems to have been more stable.
- Looking forward, inflation may rise in Asia as commodity prices and other temporary factors reverse themselves (the current WEO projects a near-term increase in commodity prices). Higher inflation in the rest of the world and weaker currencies in the region could pose upside risks. Given the stickiness of the inflation process and a flatter Phillips curve, the output costs of disinflating could be high.
Policy recommendations (summarized)
- Monetary policy:
- Central banks should be vigilant in responding to early signs of inflationary pressure, including from global factors.
- Strengthen monetary policy frameworks and improve central bank communications to increase the role of expectations in driving inflation and to keep expectations anchored to targets.
- In principle, the monetary policy response to commodity price shocks should be to accommodate first-round effects but not second-round effects.
- Exchange rate policy:
- Allow exchange rates to adjust more flexibly to mitigate the role of imported inflation.
- Macroprudential and fiscal policy:
- Use macroprudential policies appropriately to contain credit growth and address financial stability risks.
- With output gaps closing, focus fiscal policy on strengthening buffers, increasing resilience, and ensuring sustainability; improve revenue mobilization where needed to fund infrastructure and social spending and support reforms.
- Structural reform:
- Push ahead with structural reforms to address population aging, declining productivity growth, and to maximize benefits from digitalization (ICT, infrastructure, trade, labor markets, education).
- Tailor measures to boost productivity and investment, narrow gender gaps in labor force participation, address climate change, and support workers affected by technological and trade shifts.
- Download Chapter 1 Full PDF
- Download Chapter 2 Full PDF
Regional Economic Outlook: Asia Pacific (May 2018).
Content in this bundle
- Asia Pacific Regional Economic Outlook May 2018, Chapter 1
- Asia Pacific Regional Economic Outlook May 2018, Chapter 2
- Asia Pacific Regional Economic Outlook, May 2018
References
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