Regional Economic Outlook: Asia Pacific

Asia and Pacific, October 11, 2018

Source details

Asia has achieved "remarkable economic success" over the past five decades, lifting "hundreds of millions of people" out of poverty and moving many economies to middle-income and advanced-economy status.
The region accounts for "more than 60 percent of world growth" and is "projected to grow at 5.6 percent in 2018 and 5.4 percent in 2019."
Growth drivers cited: integration with the global economy via trade and foreign direct investment (FDI), high savings rates, large investments in human and physical capital, and sound macroeconomic policies.
Overall per capita income in Asia still "substantially lags" that in the United States and Europe.

The synchronized global recovery is "starting to fade"; risks to the Asian and global forecast are "tilted to the downside."
Specific downside risk factors identified: increased financial market volatility, rising trade tensions, and slowing momentum in China.
Short- to medium-term policy stance: with low inflation and increasing downside risks, "most economies can afford to keep monetary policy accommodative," fiscal policy should focus on "building buffers," and "exchange rates should be kept flexible." Economies with rising inflation or volatile capital flows should "maintain a tight monetary stance."

Policymakers confront the possibility of a "pronounced and protracted slowdown in trade" if tariffs escalate and economies move toward autarky.
Model simulation results from the trade background paper (IMF 2018b):
- Impact on China’s output could be "up to 1.6 percent over the first two years."
- For the region as a whole, GDP could drop by "up to 0.9 percent."
- Short-term policy stimulus is expected to offset much of the impact, and "the effects would fade over time."
Policy recommendation: liberalize trade and investment (particularly in services) to offset weaker external demand and develop a new driver of regional growth; recognize that reforms will have distributional consequences and require time.

Population aging: some economies (India, Indonesia, the Philippines) retain young populations and growing labor forces; others (Japan, Korea, Thailand, and several other economies) are "well past their demographic dividend."
- Reference: April 2017 Regional Economic Outlook: Asia and Pacific warned many Asian economies risk "growing old before they grow rich."
Slowing productivity growth: the April 2017 background paper documented a productivity slowdown since the global financial crisis driven by declining R&D investment, trade openness, and FDI, and by firm-level misallocation.
Firm dynamics and financial constraints: decline in firm dynamism and growing financial constraints such as "excessive leverage" have been important drivers of the productivity slowdown.

Asia is "at the forefront of digitalization" and has "reaped major benefits":
- Digital innovation has accounted for "nearly one-third of Asia’s per capita growth over the past two decades."
- E-commerce appears associated with "higher firm productivity."
- Digitalization is helping to improve "both revenue collection and expenditure targeting."
Concerns and adjustment needs:
- Labor market disruptions and worker dislocation fears (e.g., automation/robots).
- Financial stability risks from fintech innovations.
- Need for policies to soften labor market impacts and to enhance financial stability.
- Complementary measures—improving education, infrastructure, and regulatory environments—can strengthen digitalization’s contribution to future growth.

Strengthen macro building blocks:
- Keep monetary policy accommodative in most economies amid low inflation, build fiscal buffers, and keep exchange rates flexible.
- Maintain tight monetary policy where inflation is rising or capital flows are volatile.
Liberalize trade and investment:
- Use trade and investment liberalization—especially in services—to offset declines in external demand and boost intraregional trade.
Strengthen productivity prospects:
- Ensure active entry and exit to prevent resource absorption by nonviable "zombie" firms.
- Help firms address debt overhang and foster innovation and trade openness.
Seize opportunities from the digital economy while managing spillovers:
- Implement policies to mitigate labor-market impacts and safeguard financial stability.
- Improve education, infrastructure, and regulatory environments to amplify digital gains.

Asia faces fundamental challenges—trade tensions, demographic shifts, slowing productivity, and managing digital transitions—that may require a shift in the region’s growth model.
With "appropriate policy responses," the report concludes Asia "will be able to meet its challenges and secure its growth prospects" and should have good prospects for staying at the forefront over the coming decade and beyond.

Regional Economic Outlook: Asia Pacific (October 2018).

apd-reo-background-papers-1018
- apd-reo-background-papers-1018 (Markdown version)
- apd-reo-background-papers-1018 (PDF)
IMF Asia and Pacific Regional Economic Outlook, October 2018
- IMF Asia and Pacific Regional Economic Outlook, October 2018 (Markdown version)
- IMF Asia and Pacific Regional Economic Outlook, October 2018 (PDF)