Fears about the spillovers from global growth amid still high inflation pressures in much of the region mean that policymakers in Asia face a delicate balancing act, the International Monetary Fund (IMF) said in its latest Regional Economic Outlook for Asia and the Pacific, which was released in Asia today.
Growth in Asia has moderated since the second quarter of 2011, mainly reflecting a weakening of external demand. Domestic demand is still resilient, and it should continue to sustain activity across the region, contributing to relatively robust growth of 6.3 per cent in 2011 and 6.7 per cent in 2012 on average, slightly below our forecast last April.
In Japan, the tragic earthquake and tsunami earlier this year had grave social and humanitarian costs and also set back the recovery; however, domestic demand is picking up as reconstruction efforts get under way and growth is expected to reach 2.3 per cent next year.
Meanwhile, inflation pressures have been elevated in a number of other Asian economies amid accommodative financial conditions, but should recede as food and energy prices gradually moderate.
Nevertheless, the report cautions that risks for the Asia and Pacific region are decidedly tilted to the downside. An escalation of the euro area financial turbulence and a more severe slowdown than anticipated in the US would have clear macroeconomic and financial spillovers to Asia. While domestic demand remains strong, 'Asia has clearly not 'decoupled' from advanced economies,” the IMF says.
The report welcomed the successive measures Asian policymakers have taken to normalize monetary and fiscal policy stances following the stimulus that was put in place in response to the global financial crisis. What does the emergence of renewed global downside risks imply for policies? Asian policy makers need to balance growth considerations against inflation and balance sheet risks from prolonged easy financial conditions.
In economies where inflation pressures are still elevated and monetary conditions accommodative, the return to more neutral monetary stances should continue. However, for economies where expected inflation is within central banks’ target ranges and the exposure to severe external shocks is greater, a pause in monetary tightening may be warranted. Meanwhile, fiscal policy consolidation is rightly continuing in many economies as structural fiscal deficits are still above pre-crisis levels.
Asian countries have taken comprehensive reforms over the past decade to strengthen their financial, corporate and public sector balance sheets that are now providing strong buffers for the renewed global uncertainties. Thus, if the downside risks to the global outlook were to materialise, the IMF said that Asian economies have the scope to reverse course and use a range of measures to cushion the impact on economic activity, as many did in response to the global crisis in 2008.
Looking ahead, the crisis in advanced economies is a reminder of the need for Asia to now make further progress with economic rebalancing and develop stronger domestic engines of growth. In addition to structural reforms, this would require a reprioritisation of fiscal spending, in order to create fiscal space for critical infrastructure investment and social priority expenditure.
Despite fast growth and progress in poverty reduction, income inequality in Asia has increased over the last decade — and by more than it has done in other regions. Key elements of a strategy to reduce the share of vulnerable households in Asia would include better social safety nets and more investment in health and education. The report suggests that measures that would help increase domestic demand over time, and make the region more resilient to external shocks, would also help to make growth in Asia more 'inclusive'.
In sum, economies in the Asia Pacific region are still expected to continue growing at solid rates. However, downside risks from a weakening global economy have greatly intensified and underscore the need to shift the growth model for Asia. In the near-term, policy makers face the challenging task of navigating opposing risks to growth and financial stability amid a highly uncertain global environment, and a pause in monetary tightening may be warranted in some countries until such uncertainties have lessened. Looking farther ahead, strengthening Asia’s domestic sources of growth and making growth more inclusive are key to increase economic resilience over the medium-term.