According to the International Monetary Fund’s recently released regional economic outlook, Asia’s dynamic economies continues to deliver strong growth leading to Global growth, in the face of prevalent concerns about growing protectionism, a rapidly aging society, and slow productivity growth. However,in India growth is projected to rebound to 7.2% in FY2017/18 as cash shortages are offset from a favourable monsoon and continued progress in resolving supply-side bottlenecks.
The IMF’s Regional Economic Outlook for Asia and the Pacific estimates growth to increase in 2017 to 5.5 % from 5.3 % in 2016. As the region continues to be the leader of global growth, growth will remain strong at 5.4 % in 2018.
The more favourable global environment with growth speeding up in many major advanced and emerging market economies has also been cited in the report, supporting Asia’s positive outlook. Risk appetite remains strong in global financial markets in spite of some bouts of capital flow volatility in late 2016.
Strong growth ahead
In China, the region’s biggest and the world’s second largest economy, policy incentive is likely to keep supporting demand. Although still vigorous with Q1,2017 growth to some extent stronger than anticipated, growth is expected to slow down to 6.6 % in 2017 and 6.2 % in 2018.
Japan’s growth forecast for the year 2017 has been raised to 1.2 % with support from expansionary fiscal policy and the postponement of the consumption tax hike (from April 2017 to October 2019). The expansion would slow down to 0.6 % in 2018 .
The outlook for other Asian economies is also positive, but with some exceptions. India’s growth is anticipated to rebound to 7.2 % in FY 2017-18 .
Supported by robust domestic demand, in most of the Southeast Asian economies, growth is expected to accelerate somewhat.
Meanwhile, despite the recent pick up in exports, mainly owing to weak consumption, growth in Korea is expected to remain passive at 2.7 % in 2017.
Uncertain outlook: Downside risks
However,there is uncertainity in the region’s outlook. On the plus side, larger-than- anticipated fiscal incentive in the United States or stronger business and consumer confidence in advanced economies could provide a further advancement to Asia’s exports and growth. Reforms, such as productive public investment in infrastructure in ASEAN and South Asian economies, could help lengthen the positive impetus.
But if the U.S. fiscal spur leads to higher-than- anticipated inflation pressures, the Federal Reserve could speed up the pace of increase in the interest rate in response, leading to a stronger U.S. dollar.
An unexpected tightening of global financial conditions could unfavorably have an impact on Asian economies with high external financing needs and weak private sector balance sheets, by triggering capital outflows and unwinding of projects with productive investment.
Especially, Asian economies are susceptible to protectionism because of their trade openness and integration to global value chains. A global shift toward inward-looking policies could hold back Asia’s exports and reduce foreign direct investment to Asia. Furthermore, a bumpier-than- anticipated evolution in China or geopolitical tensions in the region could also fade near-term growth.
Challenges to growth
Asia needs to embark upon two longer-term challenges: population aging and slow productivity catch-up. As per the report, Asia is aging outstandingly fast in comparison to the experience in Europe and the United States. As the population grows older, there will be smaller number of workers, and over a period of time, a dwindling workforce and aging population can mean a rise in healthcare costs and pension expenditure. This puts pressure on government budgets, and lead to translation into lower growth.
Slow productivity growth is a matter of another concern. At the global technology frontier, the region has not been able to catch up to the high productivity levels of countries.
Policies to reinforce growth
Given these challenges, macroeconomic policies should be focussed on supporting demand and structural reforms.
The monetary policy should stay accommodative in economies with economic slack and below-target inflation rates. However, if inflation pressures gathers pace ,central banks should stand ready to raise policy rates.
Structural reforms that are well-targeted would help strengthen the region’s resilience to external shocks and sustain strong and inclusive long-term growth. Taking into consideration Asia’s rapid aging, policies aimed at protecting the vulnerable elderly population and prolonged strong growth take on a particular urgency. These include measures involving promotion of labor force participation of women and the elderly, as well as strengthening of pension systems.
The policies should be supplemented by productivity- improving reforms. Advanced Asian economies should focus on making spending on research and development more effective and raising efficiency in the services sector.
In emerging and developing economies, it is vital to attract foreign direct investment and expand the economy’s ability to absorb new technology and enhance domestic investment. These steps will help the region to build on and continue with the growth drive.
Sagar Media Inc 