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Regional Surveillance: Regional Economic Outlook: Asia, Facing Continued Strong Growth, Should Rebalance Economies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
October 2006
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Asia, in the fifth year of an economic boom, is expected to post overall growth of 7.3 percent in 2006, up slightly from the previous year’s 7.2 percent, before declining to 7.1 percent in 2007, according to the IMF’s Regional Economic Outlook (see Table 1). The projected moderation next year reflects some modest easing of export performance because of slowing growth in industrial countries. David Burton, Director of the IMF’s Asia and Pacific Department, told a briefing in Singapore on September 16 that domestic demand in the region should hold up well, thanks to peaking interest rates and the expected stabilization of oil prices. Inflation appears to be well under control because many countries have been proactive in monetary tightening. Prospects for capital flows to emerging Asia remain good, as evidenced by the region’s resilience in the face of the global financial market volatility in May and June.

Table 1.Continuing success

Asia’s strong growth performance is expected to last through 2007.

Proj.Proj.
2004200520062007
(real GDP year-on-year percent change)
Industrial Asia2.52.62.72.3
Japan2.32.62.72.1
Australia3.52.53.13.5
New Zealand4.31.91.31.7
Emerging Asia8.48.58.58.3
Hong Kong SAR8.67.36.05.5
Korea4.74.05.04.3
Singapore8.76.46.94.5
Taiwan POC6.14.04.04.2
China10.110.210.010.0
India7.38.28.37.3
Indonesia5.15.65.26.0
Malaysia7.25.25.55.8
Philippines6.25.05.05.4
Thailand6.24.54.55.0
Asia7.17.27.37.1
Data: IMF Asia and Pacific Department, World Economic Outlook database, and staff estimates.

The most important downside risk for Asia, the IMF said, could be a more-rapid-than-expected slowdown in the U.S. economy—particularly a sharp cooling of the U.S. housing market—which could affect U.S. demand and Asia’s exports, indirectly dampening domestic demand in Asia. If these risks materialize, investors may turn away from emerging markets, slowing growth and weakening regional financial markets. Despite the risks, Asia is well placed to weather any difficulties.

Although the strategy of export-led growth has long been a successful one for Asia, sustained success will mean shifting away from a heavy dependence on exports and more toward domestic demand. “We think some rebalancing of growth would make the region less vulnerable to shifts in the global economy and would allow people in the region to begin to benefit more from the rapid growth,” Burton said.

He said that consumption as a share of GDP is quite low by global standards and has not really kept up with GDP growth. The prospective aging of Asia—which will bring its own challenges—will likely increase consumption. But policies can also help boost domestic consumption, particularly those that ensure provision of education, health care, and social safety nets, he argued. In addition, further financial sector development is one key to continued success, particularly in advancing intraregional financial integration to provide added stimulus for capital market development. This allows more people in the region to share in Asia’s rapidly growing corporate profits and increases access by the poor to financial markets.

According to the WEO, the economic outlook for the region’s low-income countries is generally good, particularly in Vietnam, where growth is projected at 7.8 percent in 2006, declining slightly to 7.6 percent in 2007 (see Table 2). While the Pacific islands have potential for more rapid growth—particularly in tourism, fisheries, forestry, mining, and agriculture—structural impediments remain. Emerging Asia is expected to post 8.3 percent growth in 2007, and the Pacific islands are expected to boost growth slightly to 3.1 percent in 2007 from 2.8 percent in 2006 (see Table 3).

Table 2.Sharing in the boom

Growth in Asia’s low-income countries remains strong.

Proj.Proj.
2004200520062007
(real GDP year-on-year percent change)
Low-income countries in Asia7.57.86.56.5
Bangladesh6.16.26.26.2
Bhutan7.57.412.714.3
Cambodia10.013.45.06.5
Lao PDR6.47.07.36.6
Mongolia10.76.26.55.5
Myanmar13.613.27.05.5
Nepal3.82.71.94.2
Sri Lanka5.46.05.66.0
Timor-Leste0.32.30.94.6
Vietnam7.88.47.87.6
Data: IMF, Asia and Pacific Department, World Economic Outlook database, and staff estimates.
Table 3.Exposed islands

Structural problems are holding back the Pacific island economies.

Proj.Proj.
2004200520062007
(real GDP, year-on-year percent change)
Pacific islands2.62.92.83.1
Fiji4.11.62.52.5
Kiribati-3.70.30.80.8
Marshall Islands4.71.40.93.5
Micronesia-4.41.5-0.73.0
Palau4.95.55.75.0
Papua New Guinea2.93.13.74.0
Samoa2.85.44.63.5
Solomon Islands8.05.05.34.3
Tonga1.42.31.90.6
Vanuatu4.82.63.03.5
Data: Country authorities and IMF staff estimates.

Current account balances are expected to remain broadly stable in most of Asia, except for China and Korea, the IMF said. Emerging Asia (excluding China) is likely to see its current account surplus decline modestly in 2006 and then stabilize in 2007. China’s surplus is projected to rise even further with strong exports, reaching over $200 billion in 2007 (see Table 4). In contrast, Korea’s current account surplus is expected to fall sharply, to less than ½ of 1 percent of GDP in 2006 and 2007, because of higher imports and a rising oil import bill. India’s current account deficit is forecast to widen in 2006-07 amid vibrant domestic demand, and Thailand’s deficit is expected to expand next year with infrastructure megaprojects.

Table 4.Less imbalanced?

While China’s current account surplus is still growing, balances in most of Asia are moderating.

Proj.Proj.
2004200520062007
(current account balance, billion dollars)
Industrial Asia125.4114.0116.1111.2
Japan172.1165.7167.3162.9
Australia-40.1-42.1-41.4-42.3
New Zealand-6.5-9.7-9.8-9.3
Emerging Asia183.7254.6269.9288.1
excluding China115.193.885.881.7
China68.7160.8184.2206.5
India1.4-11.9-17.6-25.1
NIEs188.786.178.580.1
ASEAN-4224.919.624.826.7
Asia309.2368.5386.0399.3

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