The latest IMF briefing on Asia says the region is expected to grow by 5.3 percent in 2016 and 2017, which is 2 to 4 percentage points higher than the growth rate in other regions. This growth rate accounts for two-thirds of global growth as it has been since 2010. So Asia remains the engine of the global growth. This is based on data in the Regional Economic Outlook, to be presented on May 3rd in Hong Kong.
While Asia’s relatively in better shape than other regions, it shares the same downside risk that my colleagues have emphasized the last two days, such as weakening global recovery, tighter global financial conditions, and China’s slowdown and its spillover.
In terms of policies, in addition to continuing its structural reform, Asia should prioritize building policy buffers and tackling vulnerabilities while being ready to support aggregate demand if downside risks materialize. Let me explain these points before we go on to the questions.
Overall Asia’s GDP growth rate is expected be 5.3 percent in 2016 and 2017, 0.1 percentage point lower than the growth rate in 2015. However, this aggregate number masks heterogeneity across the regional economies. Let’s start with China.
We actually revised up our growth forecast for China for this year from 6.2 percent to 6.5 percent, and then also revised the overall growth rate for the next year to 6.2 percent in 2017. You may be surprised because the IMF revised downward our global growth rate. Why did we just revise up the overall China’s growth rate? The main reason is that China recently announced its commitment to the new stimulus packages together with a variety of structural reforms in its 13th 5-year plan.
And we believe China has this policy space to achieve its growth target in the short-term. But I’d like to emphasize that depending on where this stimulus is used and whether the stimulus is used wisely and does not just go to boosting the old growth engines, the medium-term risk of ever rising credit and investment can also increase. So in the short-term, due to the structure reform and stimulus, China’s growth rate is upgraded. But on the other hand, depending on where the stimulus can be used, the medium-term risk can also increase.
In Japan, the GDP growth rate is projected to remain 0.5 percent in 2016, but it is expected to significantly slow down to -0.1 percent in 2017 assuming current policies. That means our -0.1 percent growth rate in 2017 incorporates the negative impact of the expected consumption tax increase from 8 to 10 percent in 2017, but does not assume offsetting measures to support economic activity. But in reality you can easily expect that Japan’s government will be more likely to rely on offsetting measures, including fiscal expansion, to offset the negative impact of the consumption tax increase, which means that the actual growth rate in 2017 should be higher than our forecast. And we will adjust once we know the details of Japan’s fiscal plans.
In India, India is the fastest growing emerging economy with a growth rate at 7.5 percent both in 2016 and 2017. Activity is expected to continue to be underpinned by private consumption, which has benefitted from low energy prices.
Australia’s growth rate is expected to remain stable at 2.5 percent in 2016, while mining investment will continue to contract.
Korea’s growth rate is expect to remain subdued but stable at 2.7 percent this year and rise moderately to 2.9 percent in 2017 as domestic demand benefits from low oil prices.
Developments in ASEAN economies will remain uneven, reflecting the bloc’s heterogeneity. Overall growth in ASEAN countries will average 4.7 percent in this year and 5 percent in 2017. Indonesia is projected to grow at 4.9 percent in 2016 and 5.3 percent in 2017. Growth in the Philippines, Malaysia, and Vietnam is expected to remain robust because of resilient domestic demand. Thailand’s growth rate will continue to be below its potential, but it will pick up modestly, driven by public spending.
For frontier economies and small states, growth remains generally strong, but several countries are facing vulnerabilities such as rising twin deficits, declining reserves, and also challenges from natural disasters. On the strong side Bangladesh’s growth rate is expected to exceed 6.5 percent in 2016 and ’17 helped by low commodity prices and investment in manufacturing. In Myanmar, the growth rate is projected to strengthen partly helped by the peaceful political transition and higher investment.
While this baseline outlook for Asia remains favorable there are downside risks that continue to dominate. External risks emanating from weak global growth and tighter global liquidity conditions compound domestic vulnerabilities. One big difference on the trade side from the past is that emerging markets, including China, are important contributors to the global trade slowdown at this moment, unlike the case in 2009 when advanced economies actually led the slowdown of global trade.
And second, asynchronous monetary policy in the U.S., Euro Area, and Japan can also increase volatility and the possibility of capital outflows from the region. But so far we have not seen major capital outflows in the region, except China, but that does not mean that asynchronous monetary policy of the advanced economies does not have an impact on the region. We saw that financial volatility has been high, and for many Asian countries, their currencies also have depreciated quite significantly.
The turning of the credit and financial cycle amid high debt poses significant risk to the growth in Asia. Several Asian countries have pockets of high corporate debt leverage problems while corporate profit also has significantly weakened.
And as for the spillover impact from China, we believe that while China’s necessary rebalancing will make growth more sustainable and in the longer-term its spillover effect must be positive to the global economy. But in the short-term its transition can have adverse but heterogeneous spillovers in the region through trade channels.
On trade, the impact depends on the type of exposure, type of goods you’re exporting to China. Countries which sell more consumption goods can be winners. On the other hand, countries which are selling more investment goods and manufacturing goods can lose in the near-term. And we also find that spillovers through financial channels are actually increasing as China is more integrated to the global financial market, especially the strength of financial spillovers have increased quite rapidly after the global financial crisis.
China’s slowdown has also had a larger impact on global commodity demand, but here, the impact is also quite heterogeneous. We find that the unexpected decline in demand for commodities such as metals, iron ore, and nickel has been much stronger, as these metals are the major input for construction and heavy industries.
On the other hand, it’s impact on oil demand has been relatively diluted but the demand for food is actually benefiting from China’s rebalancing so in some sense, China’s rebalancing has a very heterogeneous impact on commodities and has focused more and has a larger impact on metals.
In Asia, geopolitical tensions and domestic policy on certain things could also cause trade disruptions for lower growth rate. Natural disasters are another risk to the region, especially low income countries and small states. Small states also face new challenges such as de-risking by global banks which could undermine financial inclusion and growth for many Pacific island countries that heavily depend on remittances.
So far, we have just focused on the downside risk but I want to emphasize, before I move to the policy issues that Asia also has some upside risk. Low commodity prices could be a big net boost to the region, and also progress on the regional and multilateral trade negotiations such as TPP could benefit its member countries even before it is ratified. Finally, China — recent statistics from China show that it has surprised on the upside and that this could be good news for the region.
So let’s move on to the challenges now to navigate the turbulent global environment. I am glad to say that Asia can build on a number of strengths. In general, Asian economies have much stronger efforts and are well positioned to face challenges compared with other emerging markets in the other regions.
Broadly speaking, monetary policy settings are appropriate at this moment and inflation remains quite low, therefore, if growth disappoints, there is room to cut policy rates in a number of Asian economies.
Fiscal conditions vary across countries and several economies have fiscal space that can be used if the downside risk materializes or to prevent the downside risk. However, many others, especially low income Asian economies, are now seeing more vulnerabilities, and gradual fiscal consolidation is desirable to build policy space. For most of them, the composition of spending to allow for the infrastructure and social spending is important, including considering the rising inequality trend in the region.
Exchange rates should remain the major line of defense and macro potential policies, which have been used more extensively in Asia, can be used to deal with financial risk.
On structural reform, Asia has made lots of structure reforms in many countries and I am very glad that in our recent report, Asia is really outstanding, that we are actually doing a lot more structure reform than other regions. Pushing ahead with the structure reform will help ensure that Asia remains a global growth leader and they can also help reduce inequalities and foster inclusive growth. The reform agenda definitely is country specific, but timing and effective implementation will be quite critical.
So in conclusion, let me reiterate that Asia is in a relatively strong position, but there are pockets of vulnerabilities and the external environment has become much more difficult. So in order to build on its strengths during these turbulent times, Asia needs to continue to build buffers and to tackle urgently the high leverage problem it has and also needs to continue to implement structural reform to boost potential growth.
