Asia now preparing for choppy seas
Even though the economic outlook for Asia and the Pacific is the strongest in the world, it is shrouded by challenges at home and abroad. The latest International Monetary Fund (IMF) report, “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 in 2016, regional growth is forecast to speed up in 2017. Growth in the region decelerated to 5.3% in 2016 from 5.6% in 2015 despite broad improvement in economic activity in the second half of 2016. Net exports continued to pull down growth while domestic demand remained strong supported by robust private consumption.
GDP growth is forecast to reach 5.5% in 2017, revised up by 0.1 percentage point compared to the estimate in the IMF’s October 2016 World Economic Outlook, and 5.4% in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. The acceleration in 2017 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 2017 was revised up because of continued policy support and strong data toward the end of 2016. China’s GDP growth is expected to stay strong but continue to slow gradually to 6.6% in 2017, as recent tightening measures take effect, and to 6.2% in 2018. Japan’s growth is projected at 1.2%, with momentum set to continue into 2017, but will probably then weaken along with fiscal policy consolidation and the planned consumption tax increase.
In India, temporary disruptions caused by cash shortages accompanying the currency exchange initiative are expected to gradually dissipate in 2017, with growth projected at 7.2% in 2017/2018 fiscal year and 7.7% in 2018/2019 fiscal year. In Korea, growth is expected to remain subdued at 2.7% in 2017, owing to geopolitical uncertainty, and increase to 2.8% in 2018. Projected growth for Asia, excluding India and Korea, was revised up in 2017 by 0.3 percentage point compared to the estimate in the October 2016 World Economic Outlook.
In Thailand, the recovery is expected to advance at a moderate pace in the near-tomedium term. GDP growth is projected at 3% in 2017, slightly below growth in 2016 purely on account of the carryover from the temporary slowdown at the end of 2016. Growth is expected to pick up to 3.3% in 2018. Public investment would remain a key driver, rising in line with the government’s infrastructure plans, and crowding in private investment. Headline inflation is projected to remain below the 2.5% target for several years, amid subdued core inflation. The current account surplus is expected to decline gradually, as domestic demand improves.
Near-term growth is encouraging, but downside risks continue to dominate the economic landscape. Global growth could get a boost from economic stimulus in some large economies, particularly the United States. However, continued tightening in global financial conditions could trigger further capitalflow volatility. More inward-looking policies in major global economies would significantly impact Thailand and other countries in 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. Within Thailand, weaker crowding-in of private investment would reduce domestic demand and potential growth. Low inflation could become entrenched, while the household debt overhang could create stronger-than-expected headwinds to consumption and growth.
Medium-term growth faces challenges from population ageing and slowing productivity. As in other parts of Asia, Thailand faces the risk of growing old before becoming rich. This is because the pace of ageing is faster than that in Europe and the United States. 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 ageing cycle. Slowing productivity growth since the global financial crisis, which kept the region from catching up with the United States and other countries at the technological frontier, has added to the challenges. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid ageing becoming increasingly important.
Thailand’s policy space and ample buffers can be deployed to minimise the risk of a low-inflation, low-growth trap. A mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms and a flexible exchange rate, should support domestic demand in the short run and boost potential growth over the long run. Such a strategy would also help reduce the high current account surplus over the medium term, helping to ensure that the needed real-exchange-rate appreciation takes place through a growth-driven process, boosting real incomes. Promoting labour force participation, facilitating skilled migration, and improving the quality of education would help raise labour productivity and mitigate the drag from demographics. Better targeting of social assistance would help address any adverse impact of structural reforms on income distribution.
Ana Corbacho is IMF Mission Chief for Thailand.