Front Matter

Front Matter

Published Date:
October 2006
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    © 2006 International Monetary Fund

    Production: IMF Graphics Section

    Series design: Luisa Menjivar and Jorge Salazar

    Cataloging-in-Publication Data

    Regional economic outlook : Asia and Pacific—[Washington, D.C.] :

    International Monetary Fund, 2006

    p. cm.—(World economic and financial surveys, 0258-7440)

    September 2006

    Includes bibliographical references.

    ISBN 1-58906-595-6

    1. Economic forecasting—Asia. 2. Economic forecasting—Pacific Area. 3. Asia—Economic conditions. 4. Pacific Area—Economic conditions. 5. Asia—Economic conditions—Statistics. 6. Pacific Area—Economic conditions—Statistics.

    I. International Monetary Fund.

    HC412.R35 2006

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    Contents

    This Regional Economic Outlook was prepared by a team coordinated by Jerald Schiff, under the direction of David Burton of the Asia and Pacific Department. Kay Chung, Janice Lee, and Fritz Pierre-Louis provided research assistance and Corinne Danklou provided production assistance.

    Definitions

    In this Regional Economic Outlook, the following groupings are employed:

    • Emerging Asia refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, and Thailand.

    • Industrial Asia refers to Japan, Australia, and New Zealand.

    • Asia refers to emerging Asia plus industrial Asia.

    • Newly industrialized economies (NIEs) refers to Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.

    • ASEAN-4 refers to Indonesia, Malaysia, the Philippines, and Thailand.

    • Low-income countries in Asia (LIAs) include Bangladesh, Bhutan, Cambodia, Lao P.D.R., Mongolia, Myanmar, Nepal, Sri Lanka, Timor Leste, and Vietnam

    The following abbreviations are used:

    • SAAR refers to seasonally adjusted increase at an annual rate.

    • y/y refers to a year-on-year increase.

    • q/q refers to a quarter-on-quarter increase.

    Executive Summary

    The Asia region appears poised to continue its strong economic growth of recent years. (Chapter I). Growth is expected to reach 7.3 percent this year, declining marginally to 7.1 percent in 2007, again outpacing other regions. Relative to the May 2006 Regional Economic Outlook (REO), this represents an increase of about ½ percentage point per year, reflecting sizable upgrades for both China and India. While export growth for the region is projected to moderate next year in line with slowing growth in industrial countries, overall it is expected to remain strong, in part reflecting continued solid prospects in the electronics sector. Moreover, with the interest cycle in Asia likely nearing its peak and the prospect of stability in oil prices, there is an expectation that domestic demand—in particular investment in the ASEAN countries—will pick up steam. In China and India, rapid investment growth is expected to slow modestly in response to policy tightening, but domestic demand is projected to remain very robust.

    The region’s current account surplus is expected to remain broadly unchanged this year and next, at about 3½ percent of GDP. In emerging Asia, excluding China, surpluses are projected to decline by ¾ percent of GDP in 2006, reflecting a higher oil import bill and, in some cases, the impact of currency appreciation. But China’s surplus is projected to remain large, at about 7¼ percent of GDP.

    Inflation in the region remains well contained. Despite much higher prices for oil and other commodities, monetary policy tightening and exchange rate appreciation have helped keep CPI inflation at about 2¾ percent this year, with a similar outcome expected next year. Relatively high-inflation economies are expected to see a significant moderation of inflation.

    Prospects for capital flows to emerging Asia also remain good (Chapter II). Global financial market volatility in May-June served to illustrate the region’s resilience, as it came through less affected than emerging markets in other regions. Investors do not appear to have altered their positive view of regional fundamentals, which bodes well for the continuation of strong FDI and portfolio flows.

    While the outlook is good, near-term risks are slanted to the downside, and perhaps more so than at the time of the May 2006 REO:

    • The key risk for Asia is a more rapid than expected slowdown in the United States. Despite increased intra-Asia linkages, in particular with China, growth in the United States remains critical to Asia’s prospects. Our central scenario is consistent with a gradual return to potential growth in the United States. But a sharper slowdown—e.g., from a sharp correction in the housing market—would have a significant impact on Asia’s exports and, indirectly, on domestic demand.

    • Higher oil prices could affect both growth and inflation. With supply still tight and geopolitical risks high, significant spikes in oil prices from current levels cannot be ruled out. While Asian economies have managed to absorb large increases over the past several years, their ability to continue to do so could be challenged, in particular if price increases coincide with weakening global demand.

    • A return to the sort of financial market volatility seen in May-June could slow growth and raise inflation. A rise in risk assessments or risk aversion for emerging markets would lower asset prices, and potentially domestic demand, while currency depreciation could increase inflation.

    • Rapid growth in China is a decidedly mixed blessing for the region. Should growth in China again exceed expectations, regional growth would benefit. However, such rapid growth may be unsustainable, raising concerns that increased tightening could lead to a sharper-than-expected slowdown.

    Macroeconomic policies in the region have been generally appropriate but the policy environment could become more challenging in the coming year (Chapter III). Timely monetary tightening and increased exchange rate flexibility in the region have helped keep inflation in check. Fiscal policy has in most countries been broadly appropriate, but some countries have not taken full advantage of rapid growth to make progress on fiscal consolidation. Looking forward, there may be scope for a loosening of monetary policy in some countries, but high oil prices and narrowing interest rate differentials with industrial countries will pose constraints. And some countries—notably China and India—will need to tighten to slow booming domestic demand. Greater exchange rate flexibility in some countries will also be important for addressing pressures from large foreign inflows.

    While the boom in Asia is now in its fifth year, the region faces important challenges in the medium term as it seeks to sustain its impressive economic performance.

    Global imbalances remain a concern over the medium term. Any solution will involve policy action on a global scale. But a rebalancing of growth in Asia will need to contribute and, in any case, would be beneficial to Asian economies by ensuring that their current robust growth can be sustained. In previous REOs, this issue was examined from several perspectives: the potential role of exchange rates; Asia’s investment decline; and the need to raise consumption in China. In this REO (Chapter V) we focus on consumption in the rest of emerging Asia. We find that consumption is indeed low by international standards and has failed to keep up with rapid GDP growth. The prospective aging of Asia—which will bring with it many of its own challenges—will raise consumption over the medium term, in some cases dramatically. But policies can also play a supporting role. While the appropriate response will be country-specific, reducing the need for precautionary savings—for example by raising public provision of education, health care and social safety nets—and enhancing access of households to bank lending and capital markets are two areas on which policymakers may focus their efforts.

    A growing divide between rich and poor also raises important issues for policymakers. After an extended period in which emerging Asia experienced the best of both worlds—rapid growth and increased equality—more recent years (beginning before the Asia crisis) have seen rising inequality and polarization, including along geographic and urban/rural lines (Chapter VI). This is a matter of concern, not only because rising inequality makes it more difficult to reduce poverty but also because there is evidence linking large income disparities to lower growth and higher macroeconomic volatility. No single factor can explain the trend of rising inequality, and no one policy measure alone can reverse it. However, the analysis suggests a number of policy options to enhance economic opportunity, including: increased or more effective spending on education; provision of economic infrastructure, in particular in less well-off regions; reforms to eliminate dualism in labor markets; and elimination of barriers to financial sector access by the poor.

    Continued development of Asian financial sectors is critical to sustainable rapid growth in Asia. In this context, Chapter IV examines the development of regional equity markets. These markets have grown significantly since the early 1990s, driven by strong international interest, greater regional integration, capital account liberalization and structural improvements to markets. Continued development will allow for greater efficiency of financial intermediation and investment and more robustness to shocks. Greater equity market participation can also aid rebalancing of growth and perhaps contribute to addressing rising inequality, by allowing individuals to share in increased corporate profits and raise disposable incomes, which have lagged growth in GDP in recent years. But growing equity markets also pose challenges to regulators and raise new issues for monetary policy.

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