THE outlook for Asia and the Pacific is the strongest in the world, but it is shrouded by challenges at home and abroad, according to the latest International Monetary Fund (IMF) report for the region.
The April 2017 Regional Economic Outlook for Asia and Pacific: Preparing for Choppy Seas finds that policy stimulus continues to support healthy domestic demand in China and Japan in the near term, which is good for other economies in Asia as well.
Broader global conditions are also favourable. Growth is accelerating in many major advanced and emerging market economies, notably the United States and commodity exporters, and financial markets are still resilient for the most part.
Nonetheless, there are challenges ahead. Particularly, over the medium term, there are fundamental headwinds to sustained strong growth, including from ageing populations in some countries and a slower catch-up in productivity.
After a slowdown last year, regional growth is forecast to speed up this year. Growth in the region decelerated to 5.3 per cent last year from 5.6 per cent in 2015 despite broad improvement in economic activity in the second half of last year.
Net exports continued to pull down growth; domestic demand remained strong, supported by robust private consumption. Gross domestic product growth is forecast to reach 5.5 per cent this year, revised up by 0.1 percentage point compared to the estimate in the IMF’s October 2016 World Economic Outlook, and 5.4 per cent next year.
Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. The acceleration this year reflects expected recovery in Asian trade, resilient domestic demand and continued policy support. The aggregate outlook for the region, however, masks differences across countries.
Among the larger economies, projected growth in China and Japan for this year is revised up because of continued policy support and strong data toward the end of last year.
China’s GDP growth is expected to stay strong but continue to slow gradually to 6.6 per cent this year and 6.2 per cent next year as tightening measures take effect.
Japan’s growth is projected at 1.2 per cent, but will probably then weaken along with fiscal policy consolidation and the planned consumption tax increase.
In India, temporary disruptions (primarily to private consumption) caused by cash shortages accompanying the currency exchange initiative are expected to gradually dissipate this year. Thus, growth is projected to rebound to 7.2 per cent in the financial years (FY) 2017/2018 and to 7.7 per cent in FY2018/2019.
In South Korea, growth is expected to remain subdued at 2.7 per cent this year, owing to geopolitical uncertainty, and increase to 2.8 per cent next year.
Projected growth for Asia, excluding India and South Korea, was revised up this year by 0.3 percentage point, compared with the estimate in the October 2016 World Economic Outlook.
Despite a challenging economic environment, the Malaysian economy performed well over the past few years, reflecting sound macroeconomic policy responses. Its growth rate is expected to rise moderately to 4.5 per cent this year and 4.7 per cent next year, led by private consumption.
Near-term growth is encouraging, but downside risks continue to dominate the economic landscape.
Global growth could get a boost from stimulus in some large economies, particularly the US.
However, continued tightening in global financial conditions could trigger further capital flow volatility. Private debt has risen in many economies in the region over the past decade, and higher borrowing costs could tip some companies and households over the edge and constrain growth.
More inward-looking policies in major global economies would significantly impact Asia, given that the region has benefited substantially from cross-border economic integration. A bumpier-than-expected transition in China would also have serious repercussions.
Medium-term regional growth faces challenges from population aging and slowing output . Asia is a diverse region and some areas risk growing old before becoming rich.
This is because the pace of aging is faster in Asia, compared with Europe and the US. For many countries in the region, on current trends, per capita income (benchmarked against the US) will be much lower than that reached by advanced economies at a similar peak in their aging cycle.
Slowing productivity growth since the global financial crisis, which kept the region from catching up with the US and other countries at the technological frontier, has made matters worse.
The slowdown has been most severe in the advanced economies of the region. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.
Growth can be reinforced by appropriate demand support and structural reforms. Buffers are needed, especially for countries nearing full productive capacity.
Policymakers should deploy macroeconomic policies to support and complement structural reforms and external rebalancing and, if needed, to boost demand.
For Malaysia, anchoring fiscal policy to the medium-term consolidation objective and careful calibration of monetary policy will help to balance sustaining growth and preserving the resilience of the economy.
Exchange rate flexibility should also generally remain the main shock absorber against a sudden tightening in global financial conditions or a shift towards protectionism in major trading partners.
Policymakers should continue to rely on macro-prudential policies to mitigate financial stability risks.
But what is really needed is structural reforms to meet challenges of changing demographics to boost productivity. At the top of the list are labour market and pension system reforms.
Advanced economies should focus on strengthening the effectiveness of research and development spending and taking measures to raise productivity in the services sectors.
Emerging and developing economies must focus on attracting foreign direct investment and expanding the economy’s capacity to absorb new technology and boost domestic investment.
For Malaysia, improved labour market participation, enhanced education quality and policies to support innovation are key to boost long-term economic potential.
Daisaku Kihara is International Monetary Fund’s Mission Chief for Malaysia, and Division Chief of the Asia and Pacific Department.
Geoffrey Heenan is International Monetary Fund’s representative in Singapore.