But IMF warns of ‘choppy sea’ at home and abroad

New Straits Times - - Business / News - The writer is In­ter­na­tional Mone­tary Fund’s mis­sion chief for Malaysia, and divi­sion chief of the Asia and Pa­cific depart­ment


THE out­look for Asia and the Pa­cific is the strong­est in the world, but it is shrouded by chal­lenges at home and abroad, ac­cord­ing to the lat­est In­ter­na­tional Mone­tary Fund (IMF) re­port for the re­gion.

The April 2017 Re­gional Eco­nomic Out­look for Asia and Pa­cific: Pre­par­ing for Choppy Seas finds that pol­icy stim­u­lus con­tin­ues to sup­port healthy do­mes­tic de­mand in China and Ja­pan in the near term, which is good for other economies in Asia as well.

Broader global con­di­tions are also favourable. Growth is ac­cel­er­at­ing in many ma­jor ad­vanced and emerg­ing mar­ket economies, no­tably the United States and com­mod­ity ex­porters, and fi­nan­cial mar­kets are still re­silient for the most part.

None­the­less, there are chal­lenges ahead. Par­tic­u­larly, over the medium term, there are fun­da­men­tal head­winds to sus­tained strong growth, in­clud­ing from age­ing pop­u­la­tions in some coun­tries and a slower catch-up in pro­duc­tiv­ity.

Af­ter a slow­down last year, re­gional growth is fore­cast to speed up this year. Growth in the re­gion de­cel­er­ated to 5.3 per cent last year from 5.6 per cent in 2015 de­spite broad im­prove­ment in eco­nomic ac­tiv­ity in the sec­ond half of last year.

Net ex­ports con­tin­ued to pull down growth; do­mes­tic de­mand re­mained strong, sup­ported by ro­bust pri­vate con­sump­tion. Gross do­mes­tic prod­uct growth is fore­cast to reach 5.5 per cent this year, re­vised up by 0.1 per­cent­age point com­pared to the es­ti­mate in the IMF’s Oc­to­ber 2016 World Eco­nomic Out­look, and 5.4 per cent next year.

Ac­com­moda­tive poli­cies will un­der­pin do­mes­tic de­mand, off­set­ting tighter global fi­nan­cial con­di­tions. The ac­cel­er­a­tion this year re­flects ex­pected re­cov­ery in Asian trade, re­silient do­mes­tic de­mand and con­tin­ued pol­icy sup­port. The ag­gre­gate out­look for the re­gion, how­ever, masks dif­fer­ences across coun­tries.

Among the larger economies, pro­jected growth in China and Ja­pan for this year is re­vised up be­cause of con­tin­ued pol­icy sup­port and strong data to­ward the end of last year.

China’s GDP growth is ex­pected to stay strong but con­tinue to slow grad­u­ally to 6.6 per cent this year and 6.2 per cent next year as tight­en­ing mea­sures take ef­fect.

Ja­pan’s growth is pro­jected at 1.2 per cent, but will prob­a­bly then weaken along with fis­cal pol­icy con­sol­i­da­tion and the planned con­sump­tion tax in­crease.

In In­dia, tem­po­rary dis­rup­tions (pri­mar­ily to pri­vate con­sump­tion) caused by cash short­ages ac­com­pa­ny­ing the cur­rency ex­change ini­tia­tive are ex­pected to grad­u­ally dis­si­pate this year. Thus, growth is pro­jected to re­bound to 7.2 per cent in the fi­nan­cial years (FY) 2017/2018 and to 7.7 per cent in FY2018/2019.

In South Korea, growth is ex­pected to re­main sub­dued at 2.7 per cent this year, ow­ing to geopo­lit­i­cal un­cer­tainty, and in­crease to 2.8 per cent next year.

Pro­jected growth for Asia, ex­clud­ing In­dia and South Korea, was re­vised up this year by 0.3 per­cent­age point, com­pared with the es­ti­mate in the Oc­to­ber 2016 World Eco­nomic Out­look.

De­spite a chal­leng­ing eco­nomic en­vi­ron­ment, the Malaysian econ­omy per­formed well over the past few years, re­flect­ing sound macroe­co­nomic pol­icy re­sponses. Its growth rate is ex­pected to rise mod­er­ately to 4.5 per cent this year and 4.7 per cent next year, led by pri­vate con­sump­tion.

Near-term growth is en­cour­ag­ing, but down­side risks con­tinue to dom­i­nate the eco­nomic land­scape.

Global growth could get a boost from stim­u­lus in some large economies, par­tic­u­larly the US.

How­ever, con­tin­ued tight­en­ing in global fi­nan­cial con­di­tions could trig­ger fur­ther cap­i­tal flow volatil­ity. Pri­vate debt has risen in many economies in the re­gion over the past decade, and higher bor­row­ing costs could tip some com­pa­nies and house­holds over the edge and con­strain growth.

More in­ward-look­ing poli­cies in ma­jor global economies would sig­nif­i­cantly im­pact Asia, given that the re­gion has ben­e­fited sub­stan­tially from cross-bor­der eco­nomic in­te­gra­tion. A bumpier-than-ex­pected tran­si­tion in China would also have se­ri­ous reper­cus­sions.

Medium-term re­gional growth faces chal­lenges from pop­u­la­tion ag­ing and slow­ing out­put . Asia is a di­verse re­gion and some ar­eas risk grow­ing old be­fore be­com­ing rich.

This is be­cause the pace of ag­ing is faster in Asia, com­pared with Europe and the US. For many coun­tries in the re­gion, on cur­rent trends, per capita in­come (bench­marked against the US) will be much lower than that reached by ad­vanced economies at a sim­i­lar peak in their ag­ing cy­cle.

Slow­ing pro­duc­tiv­ity growth since the global fi­nan­cial cri­sis, which kept the re­gion from catch­ing up with the US and other coun­tries at the tech­no­log­i­cal fron­tier, has made matters worse.

The slow­down has been most se­vere in the ad­vanced economies of the re­gion. With­out re­forms, pro­duc­tiv­ity growth will likely re­main low for some time, with head­winds from rapid ag­ing be­com­ing in­creas­ingly im­por­tant.

Growth can be re­in­forced by ap­pro­pri­ate de­mand sup­port and struc­tural re­forms. Buf­fers are needed, es­pe­cially for coun­tries near­ing full pro­duc­tive ca­pac­ity.

Pol­i­cy­mak­ers should de­ploy macroe­co­nomic poli­cies to sup­port and com­ple­ment struc­tural re­forms and ex­ter­nal re­bal­anc­ing and, if needed, to boost de­mand.

For Malaysia, an­chor­ing fis­cal pol­icy to the medium-term con­sol­i­da­tion ob­jec­tive and care­ful cal­i­bra­tion of mone­tary pol­icy will help to bal­ance sus­tain­ing growth and pre­serv­ing the re­silience of the econ­omy.

Ex­change rate flex­i­bil­ity should also gen­er­ally re­main the main shock ab­sorber against a sud­den tight­en­ing in global fi­nan­cial con­di­tions or a shift to­wards pro­tec­tion­ism in ma­jor trad­ing part­ners.

Pol­i­cy­mak­ers should con­tinue to rely on macro-pru­den­tial poli­cies to mit­i­gate fi­nan­cial sta­bil­ity risks.

But what is re­ally needed is struc­tural re­forms to meet chal­lenges of chang­ing de­mo­graph­ics to boost pro­duc­tiv­ity. At the top of the list are labour mar­ket and pen­sion sys­tem re­forms.

Ad­vanced economies should fo­cus on strength­en­ing the ef­fec­tive­ness of re­search and devel­op­ment spend­ing and tak­ing mea­sures to raise pro­duc­tiv­ity in the ser­vices sec­tors.

Emerg­ing and de­vel­op­ing economies must fo­cus on at­tract­ing for­eign di­rect in­vest­ment and ex­pand­ing the econ­omy’s ca­pac­ity to ab­sorb new tech­nol­ogy and boost do­mes­tic in­vest­ment.

For Malaysia, im­proved labour mar­ket par­tic­i­pa­tion, en­hanced ed­u­ca­tion qual­ity and poli­cies to sup­port in­no­va­tion are key to boost long-term eco­nomic po­ten­tial.


De­spite a chal­leng­ing eco­nomic en­vi­ron­ment, the Malaysian econ­omy per­formed well over the past few years, re­flect­ing sound macroe­co­nomic pol­icy re­sponses.

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