Title Page
World Economic and Financial Surveys
Regional Economic Outlook
Asia and Pacific
Building on Asia’s Strengths during Turbulent Times
APR 16
Copyright
©2016 International Monetary Fund
Cataloging-in-Publication Data
Regional economic outlook. Asia and Pacific. – Washington, D.C.: International Monetary Fund, 2005–
v. ; cm. – (World economic and financial surveys, 0258-7440)
Once a year.
Began in 2005.
Some issues have also thematic titles.
1. Economic forecasting – Asia – Periodicals. 2. Economic forecasting – Pacific Area – Periodicals. 3. Asia – Economic conditions – 1945- – Periodicals. 4. Pacific Area – Economic conditions – Periodicals. 5. Economic development – Asia – Periodicals. 6. Economic development – Pacific Area – Periodicals. I. Title: Asia and Pacific. II. International Monetary Fund. III. Series: World economic and financial surveys.
HC412.R445
ISBN-13: 978-1-49835-092-1 (Paper)
ISBN-13: 978-1-48433-943-5 (Web PDF)
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
Executive Summary
1. Building on Asia’s Strengths during Turbulent Times
Recent Developments and Near-Term Outlook
Risks to the Outlook: Downside Risks are Looming Large
Policy Recommendations
2. Navigating the Transition: Trade and Financial Spillovers from China
Introduction and Main Findings
Channels of Spillovers from China’s Growth Slowdown
Trade Spillovers from China’s Rebalancing
China’s Financial Spillovers to Regional Markets
Policy Implications
Annexes
3. China’s Evolving Trade with Advanced Upstream Economies and Commodity Exporters
Introduction and Main Findings
Conclusion
Annex
4. Sharing the Growth Dividend: Analysis of Inequality in Asia
Introduction and Main Findings
Recent Trends and Developments
Drivers of Income Inequality
Conclusions and Policy Implications
Annex
References
Boxes
1.1 Housing Sector Developments in Australia and New Zealand: Diverging Tales
1.2 Household Debt in Korea: The Role of Structural Factors and Rising House Prices
1.3 U.S. Monetary Policy Uncertainty: What Have Been Its Effects on Asian Currencies?
1.4 Japan’s Sluggish Wages: Causes and Remedies
1.5 Paris Agreement on Climate Change and Asia-Pacific Countries
1.6 Cyclone Winston in Fiji
1.7 Rise in Services Trade: Looking Beyond Cross-Border Services
2.1 Regional Consequences of a Growth Slowdown in China
2.2 China’s Import Slowdown
2.3 China Opening Up: The Evolution of Financial Linkages
3.1 The Evolution of China’s Labor-Intensive Exports
3.2 Food Consumption Patterns in China
3.3 The Contribution of China’s Growth Transition to Commodity Price Declines
4.1 Understanding Rising Inequality in China and India
4.2 What Explains Declining Inequality in Malaysia, the Philippines, and Thailand?
4.3 Labor Share and Income Inequality
Tables
1.1 Asia: Real GDP
1.2 Asia: General Government Balances
1.3 Asia: Current Account Balance
1.4 Asia: Consumer Prices
3.1 World Consumption of Selected Major Commodities, 2011–15
Figures
1.1 United States: Financial Conditions
1.2 Global Commodity Prices
1.3 Market Volatility
1.4 Asia: Cumulative Portfolio Flows
1.5 Asia: Equity Prices and Price-to-Earnings (PE) Ratios
1.6 Asia: Ten-Year Sovereign Bond Yields: Change since End-June 2015
1.7 Sovereign Credit Default Swap Spreads
1.8 Selected Asia: Exchange Rates
1.9 Selected Asia: Foreign Exchange Reserve Accumulation
1.10 Selected Asia: Real Private Sector Credit Growth
1.11 Asia: Nonfinancial Corporate Sector Debt Issuance
1.12 Consolidated Foreign Claims
1.13 Asia: Financial Stability Heat Map
1.14 Ratio of Regulatory Tier 1 Capital to Risk-Weighted Assets
1.15 Return on Assets
1.16 Ratio of Nonperforming Loans to Total Gross Loans
1.17 Asia: Changes in Real GDP at Market Prices
1.18 Selected Asia: Exports to Major Destinations
1.19 Selected Asia: Retail Sales Volumes
1.20 Asia: Headline Inflation and Expectations
1.21 Selected Asia: Core Inflation
1.22 Asia: Current Account Balances
1.23 Selected Asia: Contributions to Projected Growth
1.24 Indicator Model for Asia: Projected versus Actual Real GDP Growth
1.25 Gordon Equity Price Model for Asia: Projected versus Actual Real GDP Growth
1.26 Asia: Output Gap versus Credit Gap
1.27 Selected Asia: Real Policy Rates
1.28 Estimated Central Bank Reaction Functions
1.29 Selected Asia: Cyclically Adjusted Fiscal Balance
1.30 China: Economic Activity Indicators
1.31 China: Daily Exchange Rate
1.32 China: Three-Month Implied Currency Volatility and Risk Reversal
1.33 United States: Interest Rates
1.34 Japan: Equity Prices and Exchange Rate
1.35 Low-Income Economies: Current Account and Fiscal Balances
1.36 Natural Disaster Risks: World Risk Index, 2014, Top 16
1.37 Asia: Resistance Index
1.38 Asia: Exchange Market Pressure Index (EMPI)
2.1 China’s Role in the Global Economy
2.2 Recent Developments in Global Trade and Asian Financial Markets
2.3 Channels of Spillovers from a Slowdown in China
2.4 Share of Domestic Value Added Exported from China’s Final Demand
2.5 A Tale of Two Exporters to China, 1995–2011
2.6 Change in Value-Added Exports to China after China’s Rebalancing
2.7 Estimated Impact of China Rebalancing on Partner-Country Growth Transmitted Through the Trade Channel
2.8 Impact of Historical Rebalancing on GDP Growth
2.9 Impact on GDP Growth Over the Medium Term: By Region
2.10 Asian Market Correlations with China, Japan, and the United States
2.11 Asia: Business Cycle Synchronization with China
2.12 Regional Equity and Foreign Exchange Markets during China-Related Shocks
2.13 Event Study: Stock Market Movements Due to Shocks from China
2.14 Event Study: Stock Market Movements Due to Shocks from China, by Trade Links with China
2.15 Event Study: Exchange Rate Movements Due to Shocks from China
2.16 Event Study: Exchange Rate Movements Due to Shocks from china, by Trade Links with China
2.17 Equity Market Spillover
2.18 Determinants of Market Sensitivity to China and Japan
2.19 Contribution to Explained Variance in Market Sensitivities to China
2.20 Scenario Analysis: Transmission of Shocks
2.21 Asian Market Sensitivity to China under Different Scenarios
3.1 Import Intensity of GDP Components, 2011
3.2 Consumption Imports
3.3 China: Consumption Imports
3.4 Real Commodity Import Growth
3.5 Domestic Value Added in Exports
3.6 Processing Trade
3.7 Import Intensity
3.8 Exports of LCD Screens and Transistors
3.9 Trade Balance with China by Technology Sophistication
3.10 Trade Balance with China by End-Use Category
3.11 China: Commodity Consumption and Production
3.12 China: Deviations of Actual Consumption from Counterfactual
3.13 Commodity Production in China: Deviation of Actual from Counterfactual
3.14 China: Contribution to Changes in Net Commodity Imports, 2011–15
3.15 Commodity Exports to China from Latin America and Asia and China’s Import Volumes from Latin America and Asia
4.1 World and Asia: Income Inequality
4.2 World and Asia: Population Weighted Income Inequality
4.3 Regional Comparison: Income Inequality Level
4.4 Regional Comparison: Income Inequality Trend
4.5 Asia: GDP per Capita and Net Gini Index
4.6 Selected Asia: Net Gini Index
4.7 Asia: Top 10 Income Share
4.8 Selected Asia: Growth of Income Share by Decile
4.9 Asia: Growth in Mean Income/Consumption by Decile
4.10 Poverty in Asia
4.11 Decomposition of Changes in Headcount Ratio
4.12 The Middle Class in Asia
4.13 Education by Wealth Quintile
4.14 Health by Wealth Quintile
4.15 Financial Services by Income Share in 2014
4.16 Nonregular Employment by Type in 2013
4.17 Nonagricultural Informal Employment
4.18 Advanced versus Emerging Market and Developing Economies
4.19 Asia: Financial Deepening
4.20 Population with Bank Accounts in 2014
4.21 Asia: Fiscal Policy
4.22 Composition of Social Spending
4.23 Pension Receipt Rate
4.24 Asia: Skill Premium
4.25 Regional Comparison: Return to Schooling Rate
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, the Russian Federation, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.
The following abbreviations are used:
| 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 |
| ECI | economic complexity index |
| FCI | financial conditions index |
| FDI | foreign direct investment |
| FX | foreign exchange |
| GDP | gross domestic product |
| GFCF | gross fixed capital formation |
| GMM | generalized method of moments |
| GVC | global value chains |
| LICs | low-income countries |
| 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 |
| 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 Kalpana Kochhar. Contributors include Serkan Arslanalp, Michael Robert Dalesio, Ding Ding, Luc Everaert, Giovanni Ganelli, Geoff Gottlieb, Roberto Guimarães Filho, Thomas Helbling, Gee Hee Hong, Sonali Jain Chandra, Tidiane Kinda, Wei Liao, Yihan Liu, Jaewoo Lee, Rui Mano, Koshy Mathai, Adil Mohommad, Dan Nyberg, Shi Piao, Sohrab Rafiq, Jacqueline Pia Rothfels, Johanna Schauer, and Dulani Seneviratne. Shi Piao and Dulani Seneviratne provided research assistance. Kathie Jamasali and Socorro Santayana provided production assistance. Rosanne Heller, former IMF APD editor, and Joanne Creary Johnson of the IMF’s Communications Department edited the volume. Joanne Creary Johnson coordinated its publication and release. This report is based on data available as of April 1 and includes comments from other departments and some Executive Directors.
Executive Summary
Asia remains the most dynamic part of the global economy but is facing severe headwinds from a still weak global recovery, slowing global trade, and the short-term impact of China’s growth transition. Still, the region is well positioned to meet the challenges ahead, provided it strengthens its reform efforts. To strengthen its resilience to global risks and remain a source of dynamism, policymakers in the region should push ahead with structural reforms to raise productivity and create fiscal space while supporting demand as needed.
Growth in the Asia-Pacific economies is expected to decelerate slightly to about 5¼ percent during 2016–17, partly reflecting the sluggish global recovery. As external demand remains relatively subdued and global financial conditions have started to tighten, domestic demand is expected to be a major driver of activity across most of the region. Domestic demand, particularly consumption, will continue to be propelled by robust labor market conditions, lower commodity prices, and disposable income growth, along with, in some economies, macroeconomic stimulus.
Downside risks continue to dominate the economic landscape. Slower-than-expected global growth and tighter global financial conditions combined with high leverage in the region could have an adverse effect on regional growth. In particular, the turning of the credit and financial cycles amid high debt poses a significant risk to growth in Asia, especially because debt levels have increased markedly over the past decade across most of the major economies in the region, including China and Japan.
Moreover, although China’s economic transition toward more sustainable growth is critical over the medium term for both China and the global economy, adverse spillovers could emerge in the near term. Chapter 2 assesses potential spillovers from China’s rebalancing on regional economies and financial markets. Overall, the region has become more sensitive to the Chinese economy. While China’s rebalancing will have medium-term growth benefits, there are likely to be adverse short-term effects, though the impact will be relatively more positive for economies more exposed to China’s consumption demand. Financial spillovers from China to regional markets—in particular equity and foreign exchange markets—have risen since the global financial crisis and are stronger for those economies with stronger trade linkages.
Chapter 3 examines how China’s rebalancing has affected advanced economies that are upstream in production or value chains, and commodity exporters. It offers evidence that the former have lost market shares for some products, as China has onshored the production of previously imported intermediate goods and started exporting them. Commodity consumption growth has also slowed with China’s rebalancing, but only some exporters have seen their export volume growth decline substantially. Many exporters have been more affected by global commodity price declines, only part of which can be attributed to China’s rebalancing.
The region faces other important downside risks, including natural disasters and trade disruptions. While Abenomics has been supportive, durable gains in growth in Japan have so far not materialized. A further growth slowdown there could lead to an overreliance on expansionary monetary policy. More broadly, domestic political and international geopolitical tensions could cause significant trade disruptions, leading to a generalized slowdown. Finally, natural disasters are a major perennial risk to most Asian and Pacific economies. Because of their poorer infrastructure and their geographical susceptibility to natural disasters and climate change, low-income, frontier, and developing economies as well as Pacific island countries are particularly at risk.
On the upside, regional and multilateral trade agreements could provide a boost to trade and growth. Further progress on these agreements, including, for example, a broadening of the Trans-Pacific Partnership, could benefit many economies in the region.
What is the role of policies in helping Asia to address its challenges and maintain its leadership in the global economy? Harnessing Asia’s potential will require supporting demand, cushioning the blow from external shocks, and implementing a wide-ranging policy agenda. Structural reforms, aided by macroeconomic policies, should support economic transitions and bolster potential growth. While gradual fiscal consolidation is desirable for most economies, in order to rebuild policy space, it should generally be undertaken together with adjustments to the composition of spending to allow, where needed, for further infrastructure and social spending. Monetary policy should remain focused on supporting demand and addressing near-term risks, including from large exchange rate depreciations and deflationary shocks. Recent bouts of financial volatility underscore the need for flexible and proactive monetary and exchange rate policies. Effective communication of policy goals can also play a role in bolstering confidence and lowering market volatility. Policies to manage risks associated with high leverage and financial volatility will play an important role, including exchange rate flexibility, targeted macroprudential policies, and, in some cases, capital flow measures.
Pushing ahead with structural reforms will be critical to ensure that Asia remains the global growth leader. Structural reforms are needed to help rebalance demand and supply, reduce vulnerabilities, and increase economic efficiency and potential growth. In a number of economies, reforms can also help address climate change and improve the environment, particularly in large countries that rely heavily on fossil fuels. Past reforms have shown themselves to have been highly effective, including by fostering economic and trade diversification and facilitating Asia’s entry into global markets, but a new wave of high-impact reforms is needed, ranging from state-owned enterprise reform in China to labor and product market reforms in Japan and reforms to remove bottlenecks in India and elsewhere in the region.
Reforms will also be needed to foster more inclusive growth, including by reducing income inequality, which in contrast to other regions has risen in most of Asia. Chapter 4 finds that, unlike in the past, fast growing Asian economies have been unable to replicate the “growth with equity” miracle. The chapter argues that it is imperative to address inequality of opportunities, in particular to broaden access to education and health and promote financial and gender inclusion. In this connection, fiscal policy is an important tool to address rising inequality, including by expanding and broadening the coverage of social spending and improving tax progressivity.