JAKARTA (TheInsiderStories) -The Asia and Pacific region continues to deliver strong growth, in the face of widespread concerns about growing protectionism, a rapidly aging society, and slow productivity growth, according to the International Monetary Fund (IMF) latest regional report.
The IMF estimates growth for the Asia and the Pacific region to increase this year to 5.5 percent or better than 5.3 percent in 2016. Growth also will remain strong at 5.4 percent in 2018, as the region continues to be the leader of global growth.
The report also cites the more favorable global environment with growth accelerating in many major advanced and emerging market economies, notably the United States and commodity exporters, as supporting Asia’s positive outlook. Risk appetite remains strong in global financial markets despite some bouts of capital flow volatility in late 2016.
“The signs of growth in the region are encouraging so far. The policy challenge now is to strengthen and sustain this momentum,” said Changyong Rhee, Director of the IMF’s Asia and Pacific Department.
In China, the region’s biggest and the world’s second largest economy, policy stimulus is expected to keep supporting demand. Although still robust with 2017 first quarter growth slightly stronger than expected, growth is projected to decelerate to 6.6 percent in 2017 and 6.2 percent in 2018.
This slowdown is predicated on a cooling housing market, partly reflecting recent tightening measures, weaker wage and consumption growth, and a stable fiscal deficit.
Japan’s growth forecast for 2017 has been raised to 1.2 percent 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 percent in 2018 as the boost from the fiscal stimulus wears off.
The outlook for other Asian economies is also positive, but with some exceptions. India’s growth is expected to rebound to 7.2 percent in FY 2017-18 as the cash shortages accompanying the currency exchange initiative ease.
In most of the Southeast Asian economies, growth is expected to accelerate somewhat, supported by robust domestic demand—an important driver of growth in these countries. Meanwhile, growth in South Korea is projected to remain subdued at 2.7 percent this year despite the recent pick up in exports, mainly owing to weak consumption.
Uncertain outlook: downside risks
The region’s outlook, however, is clouded with uncertainty. On the plus side, larger-than-expected fiscal stimulus in the United States or stronger business and consumer confidence in advanced economies could provide a further boost to Asia’s exports and growth. Reforms, such as productive public investment in infrastructure in ASEAN and South Asian economies, could help prolong the positive momentum.
But if the U.S. fiscal stimulus leads to higher-than-expected inflation pressures, the Federal Reserve could accelerate the pace of interest rate increases in response, leading to a stronger U.S. dollar.
A sudden tightening of global financial conditions could adversely impact Asian economies with high external financing needs and weak private sector balance sheets, including by triggering capital outflows and unwinding of productive investment projects.
Asian economies are especially vulnerable to protectionism because of their trade openness and integration to global value chains. A global shift toward inward-looking policies could suppress Asia’s exports and reduce foreign direct investment to Asia. Furthermore, a bumpier-than-expected transition in China or geopolitical tensions in the region could also weaken near-term growth. (RF)