©2010 International Monetary Fund

Cataloging-in-Publications Data

Regional economic outlook: Asia and Pacific: leading the global recovery: rebalancing for the medium term. – Washington, D.C.: International Monetary Fund, 2010. p.; cm. – (World economic and financial surveys, 0258-7440)

Includes bibliographical references.

ISBN 978-1-58906-917-6

1. Economic forecasting – Asia. 2. Economic forecasting – Pacific Area. 3. Economic development – Asia. 4. Economic development – Pacific Area. 5. Capital movements – Asia. 6. Capital movements – Pacific Area. I. International Monetary Fund. II. Series: World economic and financial surveys.

HC412.R445 2010

Please send orders to:

International Monetary Fund, Publication Services

PO Box 92780, Washington, DC 20090, U.S.A.

Tel.: (202) 623-7430 Fax: (202) 623-7201

E-mail: publications@imf.org

Internet: www.imfbookstore.org

Contents

• Definitions
• Executive Summary
• Section A—Asia and Pacific: Leading the Global Recovery
• I. Recent Developments and Main Themes
  • A. Overview
  • B. Recent Developments
  • C. Asia, the Inventory Cycle, and the Role of China
  • D. Transitioning from Public to Private Domestic Demand?
  • E. Are Large Capital Flows Threatening Financial Stability?
• II. Projections, Risks, and Policy Challenges
  • A. Projections for 2010–11
  • B. Risks to the Outlook
  • C. Policy Challenges
• Section B—Asia and Pacific: Rebalancing for the Medium Term
• III. Does Asia Need Rebalancing?
  • A. Introduction
  • B. Assessing Asia’s Export Dependence
  • C. What Does Rebalancing Mean for Asian Economies?
  • D. Are There Any Supply-Side Imbalances?
  • E. Impact of Rebalancing: Illustrative Model Simulations
  • F. Conclusions
  • Technical Appendix 3.1
• Annex—Low-Income Countries and Pacific Islands Countries
• A1 Asian Low-Income Countries: Recovery Prospects and Policy Challenges
• A2 Impact of the Global Crisis on the Pacific Island Countries
• A3 Restoring Macroeconomic Sustainability in Maldives
• References
• Boxes
• 1.1 Recent Exchange-Rate Developments in Asia
• 1.2 What is the Outlook for Japan’s Domestic Demand?
• 1.3 China: An Extraordinary Investment Response in 2009
• 1.4 Lessons from Past Episodes of Large Capital Inflows in Asia
• 2.1 Assessing Monetary Policy Stances in Asia
• 3.1 Boosting Consumption in China: Is Public Spending on Health the Right Medicine?
• 3.2 Consumption and Financial Development in Asia
• 3.3 Rebalancing Growth in Asia: What Role for Investment?
• 3.4 The Asia GIMF Model and Policy Assumptions
• Tables
• 2.1 Asia: Real GDP Growth
• 2.2 Selected Asia: Macroprudential Measures
• Figures
• 1.1 Assessing Global Growth Momentum
• 1.2 Contributions to Global Growth
• 1.3 Asia: Domestic Demand Around Business Cycles
• 1.4 Selected Emerging Asia: Growth Differential vis-à-vis the United States versus Net Capital Inflows
• 1.5 Selected Asia: Exports
• 1.6 Net Flows to Equity Funds
• 1.7 Selected Asia: Corporate Bond (AAA) Spread over Government Securities
• 1.8 Selected Asia: Labor Market Conditions
• 1.9 Selected Asia: Manufacturing Capacity Utilization
• 1.10 Emerging Asia: Consumer Prices
• 1.11 Asia: Growth Momentum
• 1.12 Selected Asia: Industrial Production and Inventory Cycle
• 1.13 Selected Asia: Inventory and Shipments
• 1.14 Asia’s Exports to the United States and Inventory Cycle in the United States
• 1.15 Asia: Export Links
• 1.16 Selected Asia: GDP Growth and Value Added Linked to China Final Demand
• 1.17 Selected Asia: Change in REER and World Export Market Shares
• 1.18 Asia’s Exports: Forward-Looking Indicators
• 1.19 Impact of Fiscal Stimulus on 2009 Real GDP
• 1.20 Selected Export-Oriented Asia: Contribution of Private Domestic Demand (excl. Inventories) to Growth
• 1.21 Contribution to Recovery of Private Consumption in Asia
• 1.22 Selected Asia: Private Consumption, Consumer Confidence, and Stock Prices
• 1.23 Employment
• 1.24 Household Credit, 2009
• 1.25 Selected Asia: Private Domestic Demand
• 1.26 Selected Asia: Change in Real Cost of Capital
• 1.27 Selected Asia: Bank Credit to Corporate Sector
• 1.28 Selected Asia: Credit to Households and Corporations
• 1.29 Asia: Corporate Balance Sheet
• 1.30 Selected Asia: Bond Issuance in Local Currency
• 1.31 Bank Credit to SMEs and Large Corporations
• 1.32 Asia: Fiscal Impulse, 2010
• 1.33 Impact of Fiscal Stimulus on 2010 Real GDP
• 1.34 Selected Emerging Asia: Net Capital Inflows
• 1.35 Selected Asia: Net Capital Inflows
• 1.36 Emerging Asia: Equity Prices and Price-Earnings Ratio
• 1.37 Selected Asia: Property Prices
• 1.38 Emerging Asia (excl. China): Excess Liquidity and Net Capital Inflows
• 1.39 China and India: Composition of Reserve Money
• 2.1 China and India: Contributions to Growth
• 2.2 NIEs and ASEAN-5: Contributions to Growth
• 2.3 Industrial Asia: Contributions to Growth
• 2.4 Asia: Consumer Prices
• 2.5 Asia: Current Account Balance
• 2.6 Asia: GDP Growth
• 2.7 Outstanding Consolidated Claims of BIS Reporting Banks vis-à-vis Major Asian Economies
• 2.8 Emerging Economies: Projected Rollover of Foreign Currency Bonds and Loans by Corporations
• 2.9 Selected Asia: Policy Interest Rate and Implied 6-Month Forward Interest Rate
• 2.10 Output Gap: Projected Closure Dates
• 2.11 1-Year Ahead Inflation Expectation: Change between 2009:Q2 and 2010:Q1
• 2.12 Selected Asia: Mortgage Loans
• 2.13 Asia: Cyclically Adjusted General Government Balance
• 2.14 Public Debt
• 2.15 Japan: Consumer Price Inflation
• 3.1 Effect of Vertical Integration on Trade
• 3.2 Share of Export Value Added in GDP
• 3.3 Selected Asia: Export Dependence and Exposure
• 3.4 Selected Asia: Average Contribution to Real GDP Growth
• 3.5 Selected Asia: Share of Export Value Added in GDP
• 3.6 Selected Asia: Share of Medium and High-Tech Goods in Total Exports
• 3.7 Selected Asia: Impact on Value Added of Actual Decline in U.S. Private Final Demand
• 3.8 Private Consumption
• 3.9 Consumption Relative to Steady State
• 3.10 Cumulative Change in Ratio of Private Consumption to GDP (2000-07): Estimated Contribution of Disposable Income and Savings Rate
• 3.11 Investment
• 3.12 Capitals-to-Output and Investment-to-Output Ratio
• 3.13 Model Based Determinants of Deviation of Investment-to-GDP Ratio from Sample Mean
• 3.14 Selected Asia: Excess Share of Industry in GDP
• 3.15 Selected Asia: Model Based Excess Share of Industry in GDP
• 3.16 Asia: Productivity Levels
• 3.17 Output
• 3.18 Investment-to-GDP Ratio
• 3.19 Consumption-to-GDP Ratio
• 3.20 Current Account Balance-to-GDP Ratio
• 3.21 Exports
• 3.22 Imports

Definitions

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

• “Emerging Asia” refers to China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam.
• “Industrial Asia” refers to Australia, Japan, 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
• “ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
• “EU-15” refers to Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
• “G-2” refers to the euro area and the United States.
• “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, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.
• “TED Spreads” refers to the difference between the interest rates on interbank loans and short-term government debt.

The following abbreviations are used:

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.
• 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.

Executive Summary

One year after the deepest recession in recent history, Asia is leading the global recovery. The pace of the recovery in advanced economies has been held back by high unemployment rates, weak household balance sheets, and anemic bank credit, and it remains heavily dependent on macroeconomic policy support. By contrast, activity in many emerging and developing markets has continued to rebound swiftly over the course of 2009 and in the first quarter of 2010, particularly in Asia. The pattern of economic recovery has varied within Asia, with the more domestically oriented economies (China, India, and Indonesia) and Australia escaping a recession, and the more export-oriented economies experiencing a sharply V-shaped business cycle. By the end of 2009, output in most of Asia had returned to pre-crisis levels, even in those economies hit hardest by the crisis.

Asia’s faster recovery relative to the rest of the world seems to mark a break from the past. Although Asia’s GDP trend growth has exceeded that of advanced economies over the last three decades, this is the first time that Asia’s contribution to a global recovery has outstripped that of other regions. Furthermore, while in past recessions Asia’s recovery generally was driven by exports, this time it has also been reinforced by resilient domestic demand, particularly household consumption. Finally, while in past recoveries capital was slow to return to Asia, this time net capital inflows to the region have surged, a reflection of extremely high levels of global liquidity but also a testament to Asia’s improved resilience and economic framework.

As discussed in Chapters I and II, over the near term, Asia is expected to continue leading the global recovery, for two main reasons. First, the global and domestic inventory cycle is likely to boost Asia’s industrial production and exports further for most of 2010 as demand finally recovers in advanced economies. Second, although macroeconomic policies may become less accommodative, private domestic demand is expected to remain robust. With the recovery of economic activity becoming more entrenched, many governments are now planning a gradual withdrawal of both fiscal and monetary policy stimulus. In many regional economies, however, private domestic demand appears to have sufficient momentum to sustain near-term growth, as high asset values, strong consumer confidence, and a gradual improvement in employment conditions are expected to sustain consumption, while the return of capacity utilization to more normal levels is expected to boost investment.

The pace of the recovery will, nonetheless, remain uneven across Asia. In China, growth is expected to return to double digits in 2010, with private domestic demand boosted by measures to increase consumption and private investment. This is having positive spillovers for the rest of the region, as Chinese demand boosts imports, particularly of commodities and capital goods. Given this strength in demand, the authorities have begun to stem the very rapid growth of credit in order to safeguard the quality of bank balance sheets. In Japan, private sector demand continues to face severe headwinds despite the recovery in the export sector, and inflation has fallen back into negative territory, requiring the authorities to reiterate their commitment to prolonged policy accommodation.

Asia’s relatively strong cyclical position may pose near-term risks to this outlook, particularly if bright growth prospects and widening interest rate differentials with advanced economies lead to further capital inflows to the region. These inflows could lead to overheating in some economies and increase their vulnerability to a strong upswing in the credit and asset price cycles, with the propensity for a subsequent abrupt reversal. Although asset-price inflation in Asia has so far been generally contained, the increase in excess liquidity in many regional economies over the course of 2009 raises concerns. Policymakers will need to be attentive to safeguarding the macroeconomy and financial system against the build-up of imbalances in local asset and housing markets.

Over the medium term, Asia’s main policy challenge will be to ensure that private domestic demand becomes a more prominent engine of growth. Once the adjustment in inventories has run its course, Asia’s exports to advanced economies should moderate somewhat, as domestic demand in these economies is expected to remain below pre-crisis levels, undermining global demand. Even in a best case scenario, China will provide only a partial offset to the weaker demand from advanced economies, given the relatively small size of Chinese consumption and its import of consumer goods. The global crisis has highlighted the importance for Asia of a second, domestic “engine of growth” that can substitute for lost demand from the industrialized world and lessen the impact of external shocks on Asian economies. This private domestic demand will need to be nurtured primarily through a range of structural reforms in the region.

Indeed, Chapter III suggests that Asia has remained heavily dependent on external demand—more than other regions. Rebalancing toward domestic demand will require many regional economies to act across a range of areas. Some economies may need to increase consumption, others will need to increase investment, and many will need to boost productivity in service sectors. A comprehensive package of measures adopted in the region—including fiscal measures, reforms in product, labor, and financial markets and more exchange rate flexibility—will critically contribute to the rebalancing of global demand.