- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- April 2008
©2008 International Monetary Fund
Regional economic outlook : Asia and Pacific – [Washington, D.C.] : International Monetary Fund, 2008.
p. cm. -- (World economic and financial surveys)
Includes bibliographical references.
1. Asia – Foreign economic relations – United States. 2. Asia – Economic conditions – 1945- 3. Asia – Economic conditions – 1945- – Statistics. 4. Pacific Area – Economic conditions. 5. Pacific Area – Economic conditions – Statistics. I. International Monetary Fund. II. Series (World economic and financial surveys)
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- Executive Summary
- I. Overview
- II. Can Asia Decouple? Investigating Spillovers from the United States to Asia
- 1.1 Price-Earnings Ratios
- 1.2 Asia: Real GDP Growth
- 1.3 Asia: Real Export Growth
- 1.4 Asia: Investment Growth
- 1.5 Asia: Private Consumption Growth
- 1.6 Asia: Selected Fiscal Indicators
- 2.1 Export Exposure to Industrial Countries
- 2.2 Financial Exposure to the United States
- 2.3 Growth Correlation with the United States
- 2.4 Correlations in Stock Market Returns
- 2.5 Growth Spillovers Among Regions
- 2.6 Recent Growth Spillovers Among Regions
- 2.7 Globalization and Spillovers
- 2.8 Impact of 1 Percentage Point Decline in U.S. Growth
- 2.9 Impact of U.S. Recessions
- 2.10 Impact of 2001 U.S. Recession
- 2.11 Summary of Results: Impact of a U.S. Slowdown on Asia
- 1.1 Emerging Asia: Real GDP Growth
- 1.2 ASEAN-5: Contributions to GDP Growth
- 1.3 NIEs: Contributions to GDP Growth
- 1.4 Selected Asia: Industrial Production
- 1.5 Emerging Asia: Retail Sales Volume
- 1.6 Japan, China, and India: Exports of Non-Oil Goods
- 1.7 Emerging Asia: Exports of Goods
- 1.8 Japan, China, and India: Imports of Non-Oil Goods
- 1.9 Emerging Asia: Imports of Goods
- 1.10 Emerging Asia: Consumer Prices
- 1.11 Emerging Asia: Core CPI
- 1.12 Emerging Asia: Producer Prices
- 1.13 Emerging Asia: Consumer and Producer Prices
- 1.14 Price-Earnings Ratio
- 1.15 Nominal Effective Exchange Rates
- 1.16 Selected Asia: Stock Market Indices
- 1.17 Selected Asia: Net Equity Inflows
- 1.18 Hedge Funds: Total Return
- 1.19 Selected Asia: Credit Risk
- 1.20 Selected Asia: Bank Loan-to-Deposit Ratios
- 1.21 Liquidity Risk: Composite Indicator
- 1.22 Japan Domestic Bond Issuance: Samurai Bonds
- 1.23 Emerging Asia: Quarterly GDP Growth Forecasts
- 1.24 Selected Asia: Private Sector Credit Growth
- 1.25 Selected Asia: Changes in Policy Rates Since January 1, 2007
- 1.26 Selected Asia: Private Sector Inflation Forecasts
- 1.27 Selected Asia: Real Monetary Conditions Indices
- 2.1 Impact of 1 Percentage Point Decline in U.S. Growth: Singapore
- 2.2 Impact of 1 Percentage Point Decline in U.S. Growth: Taiwan Province of China
- 2.3 GEM Simulation: Spillover from U.S. Slowdown (Without Confidence Effect)
- 2.4 GEM Simulation: Spillover from U.S. Slowdown (With Confidence Effect)
- 2.5 GEM Simulation: Contribution of Countercyclical Policies
- 2.6 Change in Output Gap and Change in Fiscal Policy in Asia
- 2.7 Change in Output Gap and Change in Monetary Policy in Asia
In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:
- “Emerging Asia” refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
- “Industrial Asia” refers to Japan, Australia, 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-5” refers to Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
- “EU-15” (mentioned in Chapter II) includes Austria, Belgium and Luxembourg, Germany, Denmark, Spain, Finland, France, the United Kingdom, Greece, Ireland, Italy, the Netherlands, Portugal, and Sweden.
- Ex-Japan means excluding Japan.
The following abbreviations are used:
Certificate of deposit
Collateralized debt obligation
Credit default swap
Collateralized loan obligation
Global Financial Stability Report
Initial public offering
Nominal effective exchange rate
Regional Economic Outlook: Asia and Pacific
Seasonally adjusted increase at an annual rate
Structured investment vehicle
World Economic Outlook
The following conventions are used:
- In tables, a blank cell indicates “not applicable” and 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, FY2008).
- 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.
This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Jerald Schiff and Paul Gruenwald, under the direction of David Burton of the IMF’s Asia and Pacific Department. Kay Chung, Xiangming Fang, Souvik Gupta, Janice Lee, and Fritz Pierre-Louis provided research assistance, and Corinne Danklou, Yuko Kobayashi, and Livia Tolentino provided production assistance.
2008 is shaping up as a challenging year for Asia. Activity in the region remains fairly buoyant, but growth in the United States and, to a lesser extent, Europe is slowing sharply. Given its extensive trade and financial linkages with the rest of the world, Asia is unlikely to delink. Moreover, the still-unfolding global financial crisis adds a dimension of uncertainty to the picture, and the balance of risks remains on the downside. Policymakers will need to remain vigilant and utilize their scope for action as conditions warrant.
Despite another year of strong growth in 2007, signs of moderating activity appeared in Asia late in the year and into early 2008. While growth remains high, led by China and India, and domestic demand is still robust, key activity indicators in recent months suggest that momentum is easing. Confidence indicators also point to a slowing pace of activity. Asia’s trade performance remains positive, despite lackluster electronics exports. Part of the explanation is strong growth of exports to “nontraditional” markets in Latin America, eastern Europe and Russia, and the Middle East. Import growth has picked up in recent months, even when excluding oil, suggesting some strength in domestic demand.
Inflation pressures are rising across most of Asia. Headline inflation momentum has increased noticeably in India and the ASEAN-5 in recent months and has picked up anew in China, after having leveled off in late 2007. Core inflation has also risen, as food and commodity price rises have begun to generate some second-round effects. Moreover, producer price inflation is now running above headline inflation across much of the region, pointing to the potential for further price pressures ahead.
Exchange rate trends have become less uniform across Asia. While the region’s currencies as a whole have appreciated marginally in nominal effective exchange rate (NEER) terms since the October 2007 Regional Economic Outlook: Asia and Pacific (REO), much of this is being driven by the sharp appreciation of the Japanese yen as carry trades are being unwound. Emerging Asian currencies as a group have weakened somewhat, led by the newly industrialized economies (NIEs) and India. Notably, the Chinese renminbi, while appreciating further against the U.S. dollar, has appreciated only modestly in NEER terms.
Asian financial markets have not been immune to the global turbulence. Equities are sharply lower than at the beginning of the turmoil, although price-earnings ratios remain elevated, and spreads have risen substantially. Risk aversion remains high, and fund managers in the region have reportedly shifted allocations toward cash and high-quality paper. However, markets have functioned well overall and there are few signs of a credit squeeze. Indeed, Asian banks’ limited exposure to structured credit products and widening interest rate differentials vis-à-vis the U.S. dollar are lending support to local currency loan and debt markets in the region. Moreover, investor sentiment on long-term prospects for Asia remains positive.
The external environment facing Asia has weakened substantially since the previous REO. As a result, the baseline forecast for 2008 calls for a reduction in GDP growth for the region by 1¼ percentage points to 6.2 percent. This markdown mainly reflects lower export growth, because a drop in external demand from the United States and Europe affects the region foremost through the trade channel. Domestic demand growth should remain relatively buoyant but soften. The quarterly growth profile is projected to decline steadily throughout 2008, before recovering gradually during 2009.
The risks to the outlook remain on the downside. The main risk is a further credit market–led deterioration of global financial conditions. While foreign demand for Asian exports would be lower in such a scenario, it is likely that the financial transmission channel would be more virulent and perhaps more complicated. This channel could include (1) the balance sheet impact of lower equity and other asset prices; (2) lower consumer and business confidence, leading to sharp declines in consumption and investment; and (3) a spike in counterparty risk, leading to sharply higher borrowing costs for banks and corporates. As in the past, some upside risk to growth emanates from domestic demand in the region. This could reflect autonomous factors or, less positively, unsuccessful efforts by authorities, particularly in China, to rein in investment, or continued portfolio inflows feeding into high credit growth.
Policymakers in Asia face potentially difficult choices in this environment. The combination of ongoing growth momentum and high, rising inflation suggests that growth concerns should be balanced against price stability concerns. As such, the room for monetary policy maneuver would appear limited in a number of countries, although greater exchange rate flexibility in many countries would help dampen imported price pressures; it could also contribute to a rebalancing of global demand. However, if the region finds itself in a substantially weaker growth environment, most Asian economies would have considerable scope to ease macroeconomic policies, particularly on the fiscal front. Given the financial sector risks, monetary and supervisory authorities should step up monitoring and review contingency plans, including for central bank liquidity provision and bank capitalization.
Chapter II of this REO investigates the delinking issue by studying spillovers from the United States to Asia over the past 15 years. It concludes that Asia has not delinked and that spillovers could be significant. While spillovers have been moderate on emerging Asia on average—a 1 percentage point slowdown in the United States has led to a ¼–½ percentage point average slowdown (Japan is at the lower end of this range)—there are reasons to believe that the current U.S. slowdown could have a significantly larger impact. In particular, there is evidence that spillovers from the United States, in particular to China, have risen in recent years, and that financial contagion and global confidence effects (certainly in play at the moment) could raise significantly the size of spillovers. The 2001 tech recession underscores that the impact of lower U.S. growth on Asia can be substantial.