- Ranil Salgado
- Published Date:
- May 2017
World Economic and Financial Surveys
Regional Economic Outlook
Asia and Pacific
Preparing for Choppy Seas
©2017 International Monetary Fund
Names: International Monetary Fund.
Title: Regional economic outlook. Asia and Pacific : preparing for choppy seas.
Other titles: Asia and Pacific : preparing for choppy seas | Preparing for choppy seas | World economic and financial surveys
Description: [Washington, DC] : International Monetary Fund, 2017. | World economic and financial surveys, 0258-7440 | Apr. 2017. | Includes bibliographical references.
Identifiers: ISBN 978-1-47557-506-4 (paper)
Subjects: LCSH: Economic forecasting—Asia. | Economic forecasting—Pacific Area. | Economic development—Asia. | Economic development—Pacific Area. | Asia—Economic conditions. | Pacific Area—Economic conditions.
Classification: LCC HC412.R445 2017
The Regional Economic Outlook: Asia and Pacific is published annually in the spring to review developments in the Asia-Pacific region. Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.
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- Executive Summary
- 1. Preparing for Choppy Seas
- 2. Asia: At Risk of Growing Old before Becoming Rich?
- Introduction and Main Findings
- Demographic Trends in Asia
- Growth Implications of Demographic Trends
- External Balance Implications of Demographic Trends
- Financial Market Implications of Demographic Trends
- Policy Implications of Demographic Trends
- Annex 2.1 Data and Methodology: Estimating the Impact of Demographic Trends on Growth and Financial Markets
- 3. The “New Mediocre” and the Outlook for Productivity in Asia
- Introduction and Main Findings
- The Productivity Picture in Asia and the Pacific
- Domestic and External Factors in Productivity Growth
- Understanding Productivity Developments and Prospects in Asia: A Narrative Approach
- Conclusions and Policy Implications
- Annex 3.1 Methodology and Data for the Sector-Level Productivity Anaylsis
- Annex 3.2 Methodology and Data for the Country-Level Productivity Analysis
- 1.1 India’s Currency Withdrawal and Exchange and Its Economic Impact
- 1.2 Global Financial Spillovers to the Association of Southeast Asian Nations (ASEAN) Economies
- 1.3 Rising Household Debt in Asia
- 1.4 Potential Policy Changes in the United States and Implications for Asia
- 1.5 Myanmar: Macroeconomic and Distributional Implications of Financial Reforms
- 2.1 Japan: At the Forefront of the Demographic Transition
- 2.2 Fiscal Implications of Demographic Trends in Asia
- 3.1 Biased Technical Change and Productivity
- 3.2 The Roles of Government in Productivity: Case Studies of Australia and Singapore
- 1.1 Asia: Real GDP
- 1.2 Asia: General Government Balances
- 1.3 Asia: Current Account Balance
- 1.4 Asia: Consumer Prices
- 1.3.1 Drivers of Household Debt
- 2.1 Asia: Demographic Classification
- 2.2 Asia: Old-Age Dependency Ratios
- 2.3 Expected Impact of Demographic Variables on Current Account
- 2.4 Expected Impact of Demographic Variables on Interest Rate
- 2.5 Openness and Estimated Impact of Demographic Variables
- 2.6 Expected Impact of Demographic Variables on Asset Returns
- 2.2.1 Characteristics of Asian Public Pension Systems, End of 2015
- Annex Table 2.1.1 Panel Regression: Demographics and Labor Productivity
- Annex Table 2.1.2 EBA: Demographic Variables
- Annex Table 2.1.3 Panel Regression and Long-Term Interest Rates, Stock Returns, and Property Prices
- Annex Table 2.1.4 F Tests: Demographics and Interaction Variables
- Annex Table 2.1.5 Panel Regressions: Demographics and Long-Term Interest Rates
- Annex Table 2.1.6 Null: Non-Stationarity (of order 1)
- Annex Table 2.1.7 Long-Horizon Evidence on Demographic Structure and Real Rates
- 3.1 Levels of Enrollment in Tertiary Education
- Annex Table 3.1.1 Variables and Their Data Sources
- Annex Table 3.1.2 Industries
- Annex Table 3.1.3 Sectoral Productivity Growth: Domestic and External Factors
- Annex Table 3.2.1 Variables and Their Data Sources
- Annex Table 3.2.2 Baseline Country-Level Total Factor Productivity Results
- Annex Table 3.2.3 Absorptive Capacity in Asia
- Annex Table 3.2.4 Asia Before and After the Global Financial Crisis
- Annex Table 3.2.5 Complementarity between Domestic Investment and Foreign Direct Investment in Emerging and Developling Asia and the Pacific
- 1.1 Asia: Cumulative Portfolio Flows
- 1.2 Asia: Equity Prices and Price-to-Earnings Ratios
- 1.3 Asia: Ten-Year Sovereign Bond Yields
- 1.4 Sovereign Credit Default Swap Spreads
- 1.5 Selected Asia: Exchange Rates
- 1.6 Selected Asia: Foreign Exchange Reserve Accumulation
- 1.7 Selected Asia: Real Private Sector Credit Growth
- 1.8 Consolidated Foreign Claims
- 1.9 Asia: Nonfinancial Corporate Sector Debt Issuance
- 1.10 Asia: Financial Stability Heat Map
- 1.11 Selected Banking Indicators
- 1.12 Asia: Changes in Real GDP at Market Prices
- 1.13 Selected Asia: Exports to Major Destinations
- 1.14 Emerging Asia: Exports and Demand in the West
- 1.15 Selected Asia: Retail Sales Volumes
- 1.16 Global Commodity Prices
- 1.17 Selected Asia: Headline Inflation
- 1.18 Selected Asia: Core Inflation
- 1.19 Asia: Current Account Balances
- 1.20 Selected Asia: Contributions to Projected Growth
- 1.21 Indicator Model for Asia: Projected versus Actual Real GDP Growth
- 1.22 Asia: Output Gap versus Credit Gap
- 1.23 Selected Asia: Real Policy Rates
- 1.24 Estimated Central Bank Reaction Functions
- 1.25 Selected Asia: Cyclically Adjusted Fiscal Balance
- 1.26 United States: Interest Rates
- 1.27 Selected Vulnerability Indicators
- 1.28 Selected Asia: Vulnerability Indicators
- 1.29 Trade Exposure to Major Partners
- 1.30 Emerging Asia: Remittance Inflows and Migrant Stock
- 1.31 World Risk Index, 2016
- 1.1.1 Number of Payment Cards, 2015
- 1.1.2 Number of Transactions with Payment Instruments, 2015
- 1.1.3 India: Purchasing Managers’ Index for Services and Manufacturing
- 1.1.4 India: GDP Growth Forecast
- 1.2.1 ASEAN-5: Cumulative Portfolio Flows
- 1.2.2 ASEAN-5: Bond Yields after U.S. Election and Taper Tantrum
- 1.2.3 Determinants of Sovereign Bond Yields in the ASEAN-5 before and after U.S. Unconventional Monetary Policies
- 1.3.1 Change in Household-Debt-to-GDP Ratio from End-2017 to End-2015
- 1.3.2 Household Debt and House Prices
- 1.3.3 Household Debt and Future Income Growth
- 1.5.1 Myanmar: Annual Average GDP Growth
- 1.5.2 Myanmar: Gini Coefficient
- 1.5.3 Myanmar: Poverty Rate
- 2.1 Asia: Fertility, Life Expectancy, and Population Growth
- 2.2 Number of Years for the Old-Age Dependency Ratio to Increase from 15 Percent to 20 Percent
- 2.3 Per Capita Income Level at the Peak of Working-Age Population Share
- 2.4 Asia and the Rest of the World: Change in Working-Age Population
- 2.5 Asia: Baseline Growth Impact of Demographic Trends
- 2.6 Asia: Share of Older Workers in Working-Age Population
- 2.7 Share of Workforce Whose Productivity Rises or Falls with Aging
- 2.8 Baseline Growth Impact of Demographic Trends and Impact of Aging on Total Factor Productivity
- 2.9 Labor Force Participation Rates by Ages 15–64 in 1990 and 2015
- 2.10 Baseline Growth Impact of Demographic Trends and Higher Labor Force Participation
- 2.11 Demographic Impact on Current Account Norms
- 2.12 Changes in Current Account Norms Induced by Demographics and Current Account Balances in 2015
- 2.13 Selected Asia: Change in 10-Year Government Yield
- 2.14 World Real Interest Rates
- 2.15 Selected Asia: Real Neutral Interest Rates
- 2.16 Selected Asia: Demographic Profile
- 2.17 Selected Asia: Impact of Demographics on 10-Year Real Interest Rates
- 2.18 Selected Asia: Impact of Demographics on 10-Year Real Interest Rates
- 2.1.1 Labor Force Participation Rates for Female and Older Workers in Japan and the United States
- 2.2.1 Projected Age-Related Spending Increases
- Annex Figure 2.1.1 Old-Age Dependency Relative to World Average
- Annex Figure 2.1.2 Aging Speed Relative to World Average
- 3.1 Real GDP Growth and Total Factor Productivity Growth
- 3.2 Real GDP Growth after the Global Financial Crisis
- 3.3 Total Factor Productivity Gaps
- 3.4 Sector-Level Labor Productivity Growth
- 3.5 Contribution of “Within” and “Structural Change” Effects on Sectoral Labor Productivity Growth
- 3.6 Estimated Impact on Sectoral Labor Productivity Growth
- 3.7 Expenditures on Research and Development
- 3.8 Average Annual Registration of Patents
- 3.9 Gross Fixed Capital Formation
- 3.10 Developments in Trade Openness
- 3.11 Foreign Direct Investment
- 3.12 Public Capital Stocks and Investment
- 3.1.1 Technical Biases in Major Sectors
In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:
“ASEAN” refers to Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, unless otherwise specified.
“ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
“Advanced Asia” refers to Australia, Hong Kong SAR, Japan, Korea, New Zealand, Singapore, and Taiwan Province of China.
“Emerging Asia” refers to China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
“Frontier and Developing Asia” refers to Bangladesh, Cambodia, Lao People’s Democratic Republic, Mongolia, Myanmar, Nepal, and Sri Lanka.
“Asia” refers to ASEAN, East Asia, Advanced Asia, South Asia, and other Asian economies.
“EU” refers to the European Union
“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, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.
The following abbreviations are used:
automatic adjustment mechanism
Association of Southeast Asian Nations
Bank for International Settlements
Coordinated Direct Investment Survey
consumer price index
Coordinated Portfolio Investment Survey
dynamic stochastic general equilibrium
domestic value added
External Balance Approach
economic complexity index
financial conditions index
foreign direct investment
Financial Soundness Indicators
gross domestic product
gross fixed capital formation
generalized method of moments
global value chain
labor force participation rate
North American Free Trade Agreement
Organisation for Economic Co-operation and Development
Pacific island countries
quantitative and qualitative easing
research and development
real effective exchange rate
rapid financing investment
total factor productivity
United Nations Conference on Trade and Development
Chicago Board Options Exchange Market Volatility Index
World Economic Outlook
World Trade Organization
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.
In figures and tables, shaded areas show IMF projections.
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.
This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Ranil Salgado of the IMF’s Asia and Pacific Department, under the overall direction of Changyong Rhee and Kenneth Kang. Contributors include Serkan Arslanalp, Sergei Dodzin, Xinhao Han, Thomas F. Helbling, Minsuk Kim, Tidiane Kinda, Dongyeol Lee, Jaewoo Lee, Dirk Muir, Ryota Nakatani, Shanaka J. Peiris, Umang Rawat, Jacqueline Pia Rothfels, Sandra Valentina Lizarazo Ruiz, Jochen Markus Schmittmann, Tahsin Saadi Sedik, Marina Mendes Tavares, Volodymyr Tulin, Niklas Westelius, and Yiqun Wu. Xinhao Han, Ananya Shukla, and Qianqian Zhang provided research assistance. Alessandra Balestieri and Socorro Santayana provided production assistance. Rosanne Heller, former IMF APD editor, and Linda Long of the IMF’s Communications Department edited the volume and coordinated its publication and release, with editing help from David Einhorn and Lucy Morales. The Grauel Group provided layout services. This report is based on data available as of April 3, 2017, and includes comments from other departments and some Executive Directors.
The outlook for the Asia-Pacific region remains robust—the strongest in the world, in fact—and recent data point to a pickup in momentum. The near-term outlook, however, is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside. Medium-term growth faces secular headwinds, including from population aging and sluggish productivity. Macroeconomic policies should continue to support growth while boosting resilience, external rebalancing, and inclusiveness. The region needs structural reforms to address its demographic challenges and to boost productivity.
The recent growth momentum in the largest economies in the region remains particularly strong, reflecting policy stimulus in China and Japan, which in turn is benefiting other economies in Asia. More broadly across the region, forward-looking indicators such as the Purchasing Managers’ Index suggest continued strength in activity into early 2017.
Against this backdrop, growth is forecast to accelerate to 5.5 percent in 2017 from 5.3 percent in 2016. Growth in China and Japan is revised upward for 2017 compared to the October 2016 World Economic Outlook, owing mainly to continued policy support and strong recent data. Growth is revised downward in India due to temporary effects from the currency exchange initiative and in Korea owing to political uncertainty. Over the medium term, slower growth in China is expected to be partially offset by an acceleration of growth in India, underpinned by key structural reforms.
While additional stimulus in the United States and stronger growth in China could provide short-run support, the risks to the outlook, on balance, are still tilted to the downside. In the near term, tighter global financial conditions could trigger capital flow volatility, which could interact with and exacerbate balance sheet weaknesses in a number of economies. More inward-looking policies in advanced economies would significantly impact Asia, given the region’s trade openness. A bumpier-than-expected transition in China would also have large spillovers. Geopolitical tensions and domestic political uncertainties could burden the outlook for various countries. Over the medium term, growth faces secular headwinds, including from population aging in some countries and slowing productivity catch-up, topics covered in Chapters 2 and 3.
Chapter 2 highlights the demographic challenges facing Asia—namely that parts of Asia risk “growing old before becoming rich.” The speed of aging is especially notable compared to the experience in Europe and the United States. For many countries in the region, on current trends, per capita income (benchmarked against the United States) will be much lower than that reached by advanced economies at a similar peak in their aging cycle. The drag on future growth from aging could be significant especially in relatively old Asian countries.
Chapter 3 finds that productivity growth has slowed since the global financial crisis, with limited catchup (“convergence”) toward the United States and other countries at the technological frontier. The slowdown has been most severe in the advanced economies of the region and in China. Many factors behind the productivity slowdown identified elsewhere apply to Asia as well, including sluggish investment, little impetus from trade, slowing human capital formation, reallocation of resources to less productive sectors, and the aging population. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.
On policies, appropriate demand support and structural reforms are needed to reinforce growth momentum where it is weak. Monetary policy should remain accommodative, given that inflation is below target and there is slack in most economies in the region. However, some central banks should stand ready to raise the policy rate if inflationary pressures gather pace. Some others need to tighten macroprudential settings and gradually raise interest rates to slow credit growth. Fiscal policy should support and complement structural reforms and external rebalancing, where needed and fiscal space is available. At the same time, countries with closed output gaps should start rebuilding fiscal space. Delivering on medium-term fiscal consolidation plans is also critical in some countries, especially where debt levels are high and fiscal credibility needs to be enhanced. Structural reforms are needed to help reduce external imbalances, mitigate domestic and external vulnerabilities, and promote faster and more inclusive growth. The appropriate policy mix varies across economies, depending on the output gap, policy space, and reform priorities, as well as the need for external rebalancing.
In addition, addressing vulnerabilities while safeguarding against external shocks will help preserve financial stability. Exchange rate flexibility should generally remain the main shock absorber against a sudden tightening in global financial conditions or a shift toward protectionism in major trading partners. Policymakers should continue to rely on macroprudential policies to mitigate systemic risks associated with high corporate and household leverage and rising interest rates, while over time addressing underlying balance sheet vulnerabilities. Macroprudential policies could also be used to increase the resilience to shocks, including shocks associated with reversal of capital flows.
To sustain long-term growth, structural reforms are needed to deal with challenges from demographic transition and to boost productivity. Given the rapid pace of demographic transition, policies aimed at protecting the vulnerable elderly, raising labor force participation (especially for women and the elderly), and boosting potential growth take on a particular urgency. Priority structural reforms to tackle these challenges include labor market and pension system reforms. Macroeconomic policies should adjust early on before aging sets in, particularly with a view to safeguarding debt sustainability. The other major policy challenge is to raise productivity when external factors might not be as supportive as in the past. Overall, the empirical results stress the importance of openness and foreign direct investment (FDI) in boosting productivity, particularly for emerging market and developing economies. In these economies, the priority should be to capitalize on recent achievements, including with respect to increased FDI inflows, through further increases in absorptive capacity and domestic investment. Advanced economies should focus on strengthening the effectiveness of research and development spending and taking measures to raise productivity in the services sectors, as well as supporting trade integration and liberalization in services.