Good but un­cer­tain: A time to pre­pare

Stay­ing the growth course, as well as stead­fast im­ple­men­ta­tion of new rules, will be the key

China Daily European Weekly - - Com­ment - By AL­FRED SCHIPKE and LONG­MEI ZHANG Al­fred Schipke is the In­ter­na­tional Mone­tary Fund’s se­nior res­i­dent rep­re­sen­ta­tive for China, and Long­mei Zhang is IMF deputy res­i­dent rep­re­sen­ta­tive for China.

The In­ter­na­tional Mone­tary Fund’s Re­gional Eco­nomic Out­look sug­gests strong global and re­gional growth mo­men­tum. But there are also clouds on the hori­zon for which all need to pre­pare, and now is the time to do so. China’s re­forms have sta­bi­lized the econ­omy, and progress has been made in fi­nan­cial delever­ag­ing. The key will be to stay the course.

As the IMF notes in its re­cently re­leased Re­gional Eco­nomic Out­look, the Asia-Pa­cific re­gion re­mains the main en­gine of the global econ­omy, and near-term prospects have im­proved since the IMF’s re­port in Oc­to­ber last year. But there are many risks on the hori­zon, in­clud­ing a tight­en­ing of global fi­nan­cial con­di­tions, a shift to­ward pro­tec­tion­ist poli­cies and an in­crease in geopo­lit­i­cal ten­sions. In ad­di­tion, over the longer run, Asian economies will face ma­jor chal­lenges from ag­ing pop­u­la­tions and slow­ing pro­duc­tiv­ity growth, as well as the rise of the dig­i­tal econ­omy, which could yield huge ben­e­fits but also bring ma­jor dis­rup­tions.

Given th­ese un­cer­tain­ties, macroe­co­nomic poli­cies in the re­gion should be con­ser­va­tive and aimed at build­ing buf­fers and rais­ing re­silience, while also tak­ing ad­van­tage of strong eco­nomic con­di­tions to im­ple­ment struc­tural re­forms to pro­mote sus­tain­able and in­clu­sive growth. Re­gional growth is ex­pected to re­main strong at 5.6 per­cent in 2018 and 2019 — up by about 0.1 per­cent­age point from our pre­vi­ous fore­cast — sup­ported by strong global de­mand and fa­vor­able fi­nan­cial con­di­tions.

As in other re­gions, in­fla­tion in Asia has largely re­mained sub­dued de­spite the pickup in growth. The IMF projects that in­fla­tion will re­main at 1.4 per­cent on av­er­age in ad­vanced economies and 3.3 per­cent on av­er­age in emerg­ing mar­kets. Among the larger economies, growth in Ja­pan has been above po­ten­tial for eight con­sec­u­tive quar­ters and is ex­pected to re­main strong this year at 1.2 per­cent. And in In­dia, af­ter tem­po­rary dis­rup­tions caused by the cur­rency exchange ini­tia­tive (called “de­mon­e­ti­za­tion” in In­dia) and the roll­out of the new Goods and Ser­vices Tax, growth is ex­pected to re­cover to 7.4 per­cent, mak­ing it once again the re­gion’s fastest-grow­ing econ­omy.

For China, 2018 is pro­jected to ease growth to 6.6 per­cent from 6.9 per­cent last year, as fi­nan­cial, hous­ing and fis­cal tight­en­ing mea­sures take ef­fect and net ex­ports con­trib­ute less. Such a slow­down is nec­es­sary and will ben­e­fit China in the long run, as it re­flects the econ­omy’s tran­si­tion from a fo­cus on quan­tity to qual­ity of growth. In­fla­tion is ex­pected to rise from 1.6 per­cent in 2017 to 2.5 per­cent in 2018, but re­main mod­er­ate and in line with the re­gional trend.

Com­plex fac­tors influence out­look

Risks to near-term growth are bal­anced, but down­side risks pre­vail over the medium term. On the up­side, the global re­cov­ery could again prove stronger than ex­pected. The new Com­pre­hen­sive and Pro­gres­sive Agree­ment for Trans-Pa­cific Part­ner­ship and the suc­cess­ful im­ple­men­ta­tion of the China-led Belt and Road Ini­tia­tive, as­sum­ing debt sus­tain­abil­ity and pro­ject qual­ity are main­tained, could sup­port trade, in­vest­ment and growth.

Asia, how­ever, re­mains vul­ner­a­ble to a sud­den and sharp tight­en­ing in global fi­nan­cial con­di­tions, while ex­tended pe­ri­ods of easy fi­nan­cial con­di­tions could risk a buildup of lever­age and fi­nan­cial vul­ner­a­bil­i­ties. More in­ward-look­ing poli­cies in ma­jor global economies, as high­lighted by re­cent tar­iff ac­tions and an­nounce­ments, could dis­rupt in­ter­na­tional trade and fi­nan­cial mar­kets and have a sub­stan­tial im­pact on Asia, which has ben­e­fited so much from eco­nomic in­te­gra­tion.

Fi­nally, geopo­lit­i­cal ten­sions could have se­ri­ous fi­nan­cial and eco­nomic reper­cus­sions.

In the longer run, Asia’s growth prospects could be heav­ily af­fected by de­mo­graph­ics, slow­ing pro­duc­tiv­ity growth and the rise of the dig­i­tal econ­omy. Ag­ing pop­u­la­tions are an im­por­tant chal­lenge, as many economies face the risk of “grow­ing old be­fore they grow rich”, and the ad­verse ef­fect of ag­ing on growth and fis­cal po­si­tions could be sub­stan­tial. A sec­ond chal­lenge is slow­ing pro­duc­tiv­ity growth. In ad­di­tion, the global econ­omy is be­com­ing in­creas­ingly dig­i­tal­ized, and while some re­cent ad­vances could be truly trans­for­ma­tive, they also come with chal­lenges, in­clud­ing those re­lated to the fu­ture of work. Asia in ag­gre­gate is em­brac­ing the dig­i­tal rev­o­lu­tion, but the de­gree varies sig­nif­i­cantly across the re­gion.

Strong fore­casts help build buf­fers

The cur­rent strong eco­nomic out­look pro­vides a valu­able op­por­tu­nity to fo­cus macroe­co­nomic poli­cies on build­ing buf­fers, in­creas­ing re­silience and en­sur­ing sus­tain­abil­ity. In many coun­tries in the re­gion, con­tin­ued fis­cal sup­port is less ur­gent, given the strong eco­nomic per­for­mance, and pol­i­cy­mak­ers should fo­cus on en­sur­ing that debt re­mains un­der con­trol. Some coun­tries should also fo­cus on rev­enue mo­bi­liza­tion to cre­ate space for in­fra­struc­ture and so­cial spend­ing and to sup­port struc­tural re­forms.

As for mone­tary pol­icy, the pol­icy stance can re­main ac­com­moda­tive in much of the re­gion given that in­fla­tion is gen­er­ally still muted. Nonethe­less, cen­tral banks should be vig­i­lant, since IMF anal­y­sis sug­gests that much of the un­der-shoot­ing of in­fla­tion tar­gets in Asia has been ex­plained by tem­po­rary, global fac­tors, such as com­mod­ity prices and im­ported in­fla­tion, which could re­verse.

There­fore, tai­lored mea­sures are needed to boost pro­duc­tiv­ity and in­vest­ment, nar­row the gen­der gap in la­bor force par­tic­i­pa­tion, deal with the de­mo­graphic tran­si­tion, ad­dress cli­mate change and sup­port those af­fected by shifts in tech­nol­ogy and trade. And to reap the full ben­e­fits of the dig­i­tal rev­o­lu­tion, Asia will need a com­pre­hen­sive and in­te­grated pol­icy strat­egy cov­er­ing in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy, in­fra­struc­ture, trade, la­bor mar­kets and ed­u­ca­tion.

In China, re­forms in the past two years have con­trib­uted to a re­duc­tion of near-term risks and sta­bi­lized the econ­omy. In par­tic­u­lar, progress has been made in fi­nan­cial delever­ag­ing, which should con­tinue. Re­cently is­sued reg­u­la­tion on as­set man­age­ment prod­ucts and new liq­uid­ity rules are wel­come and should help fur­ther un­wind risks ac­cu­mu­lated in the fi­nan­cial sec­tor. The key, how­ever, will be stead­fast im­ple­men­ta­tion.

It will be im­por­tant to fur­ther slow credit growth and im­prove credit al­lo­ca­tion ef­fi­ciency, which should go hand-in-hand with Sta­te­owned en­ter­prise re­forms and more force­ful exit of zom­bie com­pa­nies. Fis­cal pol­icy that fos­ters con­sump­tion, while cur­tail­ing ex­ces­sive in­vest­ment, es­pe­cially at the lo­cal level, would fa­cil­i­tate re­bal­anc­ing and con­trib­ute to higher qual­ity of growth.

And th­ese re­forms should be ac­com­pa­nied by fur­ther strength­en­ing pol­icy frame­works — for ex­am­ple, giv­ing Peo­ple’s Bank of China more op­er­a­tional in­de­pen­dence to im­ple­ment mone­tary and exchange rate pol­icy — and al­low­ing the mar­ket to play a more de­ci­sive role.

In the longer run, Asia’s growth prospects could be heav­ily af­fected by de­mo­graph­ics, slow­ing pro­duc­tiv­ity growth and the rise of the dig­i­tal econ­omy.


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