Man reflected in Shanghai stock exchange electronic screen. Asia should benefit
from the ongoing global economic recovery, suggests the IMF (photo: TPS/Top Photos/Corbis)
REGIONAL ECONOMIC OUTLOOK
GDP growth is expected to reach 5.5 percent in 2014, ticking up slightly to 5.6
percent in 2015, say IMF economists in the latest Asia and Pacific Regional Economic
Outlook Update.
The region’s economies should benefit from the ongoing global economic recovery,
and still supportive financial conditions and policies.
The modest global recovery will provide a lift to Asia’s exports, while relatively
low interest rates, strong credit growth, and high asset prices will continue to
support domestic demand, say the report’s authors.
Downside risks, medium-term challenges
While the likelihood of sluggish global growth in advanced economies and emerging
markets has increased, valuations in financial markets have been further stretched,
reflecting still-abundant global liquidity and greater risk appetite by investors.
A disorderly reaction to the normalization of monetary policy in the United States
remains an important risk, as it would likely lead to a spike in global interest
rates and sharp reversals in capital inflows. This would contribute to bouts of
asset price volatility and a likely decompression in term premia and spreads.
Geopolitical tensions could also disrupt trade and capital flows in the region,
although Asia is less exposed to the Russia-Ukraine situation than some other regions.
In the near term, the region could also be adversely impacted by a sharper correction
in stretched real estate sectors such as in China or less-effective-than-envisaged
Abenomics in Japan.
In China, real estate has been a significant growth engine, but it has shown growing
signs of imbalance and is undergoing a correction. This could affect real and financial
activity, given significant linkages between housing finance and shadow banking.
More broadly, declines in house prices elsewhere in the region would also adversely
affect activity and private consumption: IMF estimates suggest that a 5 percent
decline in house prices could lower GDP (relative to the baseline) by an average
of 1.3 percent after one year.
In Japan, delays in implementing structural reforms—the third arrow of Abenomics—could
lead to slower potential growth, which could, in turn, adversely affect regional
trade and growth prospects.
Growing medium-term risks compound the region’s challenges. For the region
as a whole, potential growth has already declined and could weaken further, particularly
if reform implementation is delayed, and the investment outlook remains subdued.
Protracted weaker global potential growth could have a further impact on Asia’s
export growth prospects.
Rebuilding buffers, delivering on reforms
As U.S. long-term rates rose last year, economies with stronger fundamentals, or
those that undertook significant adjustments to lower their inflation and external
imbalances, benefitted from positive differentiation by global investors. Further
strengthening fundamentals and rebuilding policy space will help weather future
turbulence in global markets. The authors of the report note that reforms to boost
potential growth can also contribute to lower near-term vulnerabilities.
Tighter fiscal and monetary policies needed
Policymakers in the region need to pursue gradual fiscal consolidation assuming
the global recovery firms up as expected. The extent and pace of fiscal consolidation
should be stronger where fiscal positions are weak and/or where output is close
to, or above potential.
Many economies in the region should also start or continue a gradual tightening
of monetary conditions. As in the case of fiscal policy, the recalibration toward
tighter monetary policy will depend on country circumstances, including the current
stance as well as inflation and growth developments.
Considering their generally accommodative stance and limited spare capacity, and
in some cases to ensure inflation expectations remain well anchored, a few central
banks in the region, such as Malaysia, the Philippines, and New Zealand, have started
hiking interest rates.
By contrast, in a few other economies including Korea and Thailand, interest rates
have been cut to raise growth. Japanese monetary policy should remain accommodative
until inflation is consistent with the current target.
Policies to defend against capital flow reversals
Exchange rate flexibility should remain the first line of defense in the event of
capital flow reversals. As seen in the aftermath of the “taper tantrum”
in May of last year, flexible exchange rates have facilitated macroeconomic adjustment.
Foreign exchange intervention can continue to help limit excess volatility, and
smooth the impact of large exchange rate changes on balance sheets. Exchange rate
liquidity provision in the event of market dislocations should also remain in the
toolkit.
Macroprudential measures should continue to be deployed to address financial stability
risks, but should remain a complement rather than a substitute to policy adjustments
and structural reforms, say the IMF in the report.
After several years of tightening, the stance of macroprudential policies is generally
tight across Asia. But some further tightening could be warranted where financial
risks, such as growing corporate and household leverage and their potential impact
on bank balance sheets, continue to build up. Easing certain measures could be considered
in the event of a downturn in the financial cycle.
Structural reforms to secure global growth leadership
Given the region’s need to maintain high and sustainable growth over the medium
term, policymakers should push vigorously to implement reforms. As potential growth
in some of the major economies in the region has deteriorated, the report calls
for the full and swift implementation of the structural reform agenda, which will
help secure Asia’s global growth leadership while also lowering the region’s
vulnerabilities.
The reform agenda varies considerably across the region. China should implement
its comprehensive reform blueprint to rebalance the economy and achieve sustainable
growth, while many other emerging and frontier economies should prioritize reforms
to boost productivity, including addressing long-standing supply-side bottlenecks
and improving the efficiency of tax and public spending.
Recent and ongoing efforts to lower fuel subsidies in India, Indonesia, and Malaysia
are encouraging. For Japan and Korea, the priority is to tackle inefficient services
and address the distinction between secure permanent workers and vulnerable temporary
workers, often referred to as the dualism in the labor market.
