Front Matter

Author(s):
Ranil Salgado
Published Date:
May 2017
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World Economic and Financial Surveys

Regional Economic Outlook

Asia and Pacific

Preparing for Choppy Seas

APR 17

©2017 International Monetary Fund

Cataloging-in-Publication Data

Names: International Monetary Fund.

Title: Regional economic outlook. Asia and Pacific : preparing for choppy seas.

Other titles: Asia and Pacific : preparing for choppy seas | Preparing for choppy seas | World economic and financial surveys

Description: [Washington, DC] : International Monetary Fund, 2017. | World economic and financial surveys, 0258-7440 | Apr. 2017. | Includes bibliographical references.

Identifiers: ISBN 978-1-47557-506-4 (paper)

Subjects: LCSH: Economic forecasting—Asia. | Economic forecasting—Pacific Area. | Economic development—Asia. | Economic development—Pacific Area. | Asia—Economic conditions. | Pacific Area—Economic conditions.

Classification: LCC HC412.R445 2017

The Regional Economic Outlook: Asia and Pacific is published annually in the spring to review developments in the Asia-Pacific region. Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.

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Contents

Definitions

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

“ASEAN” refers to Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, unless otherwise specified.

“ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Singapore, and Thailand.

“Advanced Asia” refers to Australia, Hong Kong SAR, Japan, Korea, New Zealand, Singapore, and Taiwan Province of China.

“Emerging Asia” refers to China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

“Frontier and Developing Asia” refers to Bangladesh, Cambodia, Lao People’s Democratic Republic, Mongolia, Myanmar, Nepal, and Sri Lanka.

“Asia” refers to ASEAN, East Asia, Advanced Asia, South Asia, and other Asian economies.

“EU” refers to the European Union

“G-7” refers to Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

“G-20” refers to Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.

The following abbreviations are used:

AAM

automatic adjustment mechanism

ASEAN

Association of Southeast Asian Nations

BIS

Bank for International Settlements

CDIS

Coordinated Direct Investment Survey

CPI

consumer price index

CPIS

Coordinated Portfolio Investment Survey

DSGE

dynamic stochastic general equilibrium

DVA

domestic value added

EBA

External Balance Approach

ECI

economic complexity index

FCI

financial conditions index

FDI

foreign direct investment

FSI

Financial Soundness Indicators

FX

foreign exchange

GDP

gross domestic product

GFCF

gross fixed capital formation

GMM

generalized method of moments

GVC

global value chain

IS

investment saving

LFPR

labor force participation rate

LICs

low-income countries

NAFTA

North American Free Trade Agreement

OECD

Organisation for Economic Co-operation and Development

PICs

Pacific island countries

QQE

quantitative and qualitative easing

R&D

research and development

REER

real effective exchange rate

RFI

rapid financing investment

TFP

total factor productivity

UN

United Nations

UNCTAD

United Nations Conference on Trade and Development

VAR

vector autoregression

VIX

Chicago Board Options Exchange Market Volatility Index

WEO

World Economic Outlook

WTO

World Trade Organization

The following conventions are used:

In tables, a blank cell indicates “not applicable,” ellipsis points (. . .) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

In figures and tables, shaded areas show IMF projections.

An en dash (–) between years or months (for example, 2007–08 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2009).

An em dash (—) indicates the figure is zero or less than half the final digit shown.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Ranil Salgado of the IMF’s Asia and Pacific Department, under the overall direction of Changyong Rhee and Kenneth Kang. Contributors include Serkan Arslanalp, Sergei Dodzin, Xinhao Han, Thomas F. Helbling, Minsuk Kim, Tidiane Kinda, Dongyeol Lee, Jaewoo Lee, Dirk Muir, Ryota Nakatani, Shanaka J. Peiris, Umang Rawat, Jacqueline Pia Rothfels, Sandra Valentina Lizarazo Ruiz, Jochen Markus Schmittmann, Tahsin Saadi Sedik, Marina Mendes Tavares, Volodymyr Tulin, Niklas Westelius, and Yiqun Wu. Xinhao Han, Ananya Shukla, and Qianqian Zhang provided research assistance. Alessandra Balestieri and Socorro Santayana provided production assistance. Rosanne Heller, former IMF APD editor, and Linda Long of the IMF’s Communications Department edited the volume and coordinated its publication and release, with editing help from David Einhorn and Lucy Morales. The Grauel Group provided layout services. This report is based on data available as of April 3, 2017, and includes comments from other departments and some Executive Directors.

Executive Summary

The outlook for the Asia-Pacific region remains robust—the strongest in the world, in fact—and recent data point to a pickup in momentum. The near-term outlook, however, is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside. Medium-term growth faces secular headwinds, including from population aging and sluggish productivity. Macroeconomic policies should continue to support growth while boosting resilience, external rebalancing, and inclusiveness. The region needs structural reforms to address its demographic challenges and to boost productivity.

The recent growth momentum in the largest economies in the region remains particularly strong, reflecting policy stimulus in China and Japan, which in turn is benefiting other economies in Asia. More broadly across the region, forward-looking indicators such as the Purchasing Managers’ Index suggest continued strength in activity into early 2017.

Against this backdrop, growth is forecast to accelerate to 5.5 percent in 2017 from 5.3 percent in 2016. Growth in China and Japan is revised upward for 2017 compared to the October 2016 World Economic Outlook, owing mainly to continued policy support and strong recent data. Growth is revised downward in India due to temporary effects from the currency exchange initiative and in Korea owing to political uncertainty. Over the medium term, slower growth in China is expected to be partially offset by an acceleration of growth in India, underpinned by key structural reforms.

While additional stimulus in the United States and stronger growth in China could provide short-run support, the risks to the outlook, on balance, are still tilted to the downside. In the near term, tighter global financial conditions could trigger capital flow volatility, which could interact with and exacerbate balance sheet weaknesses in a number of economies. More inward-looking policies in advanced economies would significantly impact Asia, given the region’s trade openness. A bumpier-than-expected transition in China would also have large spillovers. Geopolitical tensions and domestic political uncertainties could burden the outlook for various countries. Over the medium term, growth faces secular headwinds, including from population aging in some countries and slowing productivity catch-up, topics covered in Chapters 2 and 3.

Chapter 2 highlights the demographic challenges facing Asia—namely that parts of Asia risk “growing old before becoming rich.” The speed of aging is especially notable compared to the experience in Europe and the United States. For many countries in the region, on current trends, per capita income (benchmarked against the United States) will be much lower than that reached by advanced economies at a similar peak in their aging cycle. The drag on future growth from aging could be significant especially in relatively old Asian countries.

Chapter 3 finds that productivity growth has slowed since the global financial crisis, with limited catchup (“convergence”) toward the United States and other countries at the technological frontier. The slowdown has been most severe in the advanced economies of the region and in China. Many factors behind the productivity slowdown identified elsewhere apply to Asia as well, including sluggish investment, little impetus from trade, slowing human capital formation, reallocation of resources to less productive sectors, and the aging population. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.

On policies, appropriate demand support and structural reforms are needed to reinforce growth momentum where it is weak. Monetary policy should remain accommodative, given that inflation is below target and there is slack in most economies in the region. However, some central banks should stand ready to raise the policy rate if inflationary pressures gather pace. Some others need to tighten macroprudential settings and gradually raise interest rates to slow credit growth. Fiscal policy should support and complement structural reforms and external rebalancing, where needed and fiscal space is available. At the same time, countries with closed output gaps should start rebuilding fiscal space. Delivering on medium-term fiscal consolidation plans is also critical in some countries, especially where debt levels are high and fiscal credibility needs to be enhanced. Structural reforms are needed to help reduce external imbalances, mitigate domestic and external vulnerabilities, and promote faster and more inclusive growth. The appropriate policy mix varies across economies, depending on the output gap, policy space, and reform priorities, as well as the need for external rebalancing.

In addition, addressing vulnerabilities while safeguarding against external shocks will help preserve financial stability. Exchange rate flexibility should generally remain the main shock absorber against a sudden tightening in global financial conditions or a shift toward protectionism in major trading partners. Policymakers should continue to rely on macroprudential policies to mitigate systemic risks associated with high corporate and household leverage and rising interest rates, while over time addressing underlying balance sheet vulnerabilities. Macroprudential policies could also be used to increase the resilience to shocks, including shocks associated with reversal of capital flows.

To sustain long-term growth, structural reforms are needed to deal with challenges from demographic transition and to boost productivity. Given the rapid pace of demographic transition, policies aimed at protecting the vulnerable elderly, raising labor force participation (especially for women and the elderly), and boosting potential growth take on a particular urgency. Priority structural reforms to tackle these challenges include labor market and pension system reforms. Macroeconomic policies should adjust early on before aging sets in, particularly with a view to safeguarding debt sustainability. The other major policy challenge is to raise productivity when external factors might not be as supportive as in the past. Overall, the empirical results stress the importance of openness and foreign direct investment (FDI) in boosting productivity, particularly for emerging market and developing economies. In these economies, the priority should be to capitalize on recent achievements, including with respect to increased FDI inflows, through further increases in absorptive capacity and domestic investment. Advanced economies should focus on strengthening the effectiveness of research and development spending and taking measures to raise productivity in the services sectors, as well as supporting trade integration and liberalization in services.

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