Asia on strong growth track, but faces risks of future derailment: IMF

Tokyo

ASIA'S economy is now enjoying strong overall growth and economic data suggests that the momentum will accelerate in the short term, the International Monetary Fund (IMF) said on Tuesday.

In the latest edition of its Asia-Pacific Regional Economic Outlook publication, it warned, however, that "geopolitical tensions and domestic political uncertainties cloud the outlook" in some areas. It added that the process of "de-globalisation" could hurt Asia's highly open economies. High levels of corporate and household debt also pose a threat.

The IMF also suggested that Asia's "productivity catchup" with the rest of the world is slowing, and that the rapid ageing of the region's populations could mean that some countries could "grow old before they grow rich".

"The outlook for the Asia-Pacific region remains the strongest in the world and recent data points to a pickup in momentum," the report said, referring to Asean, East Asia, South Asia and other Asian economies.

Recent growth momentum in the largest economies in the region remains particularly strong, the report noted, and added that the policy stimuli in China and Japan are benefiting other Asian economies.

Across the region, forward-looking indicators such as the Purchasing Managers' Index suggest continued strength in activity early this year; against this backdrop, growth is forecast to power ahead to 5.5 per cent, up from 5.3 per cent last year.

China's growth is projected at 6.6 per cent this year, and is expected to slow to 6.2 per cent next year. India's growth is put at 7.2 per cent this year and 7.7 per cent next year. Japan's economy is forecast to grow by 1.2 per cent this year, and to dip to 0.6 per cent next year because of a planned rise in its sales tax.

Meanwhile, Singapore's economy is projected by the IMF to grow by 2.2 per cent this year (up from 2 per cent last year), and by 2.6 per cent next year.

Growth in China and Japan has been revised upward for this year, up from the estimates of last October, "owing mainly to continued policy support and strong recent data". But growth has been revised down in India due to temporary effects from the currency-exchange initiative, and in South Korea, from its political uncertainty. The IMF expects growth in India to accelerate again in the medium term, however, underpinned by key structural reforms. Growth in China will slow down.

Generally in Asia, macroeconomic policies should continue to support growth while boosting resilience, external rebalancing and inclusiveness, said the IMF. "The region needs structural reforms to address its demographic challenges and to boost productivity."

In the near term, tighter global financial conditions could trigger capital flow volatility, which could interact with and exacerbate balance-sheet weaknesses in a number of economies. A bumpier-than-expected transition in China would also have large spillovers, said the IMF.

The report highlighted the demographic challenges facing Asia, where populations are greying notably faster than in Europe and in 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 most advanced economies at a similar peak in their ageing cycle."

Productivity growth in Asia has slowed since the global financial crisis, with limited convergence toward the US and other countries at the technological frontier, the report noted.

"The slowdown has been most severe in the advanced economies of the region and in China. The causes include sluggish investment, little impetus from trade, slowing human capital formation, reallocation of resources to less-productive sectors and ageing."

The report also warned of risks associated with high corporate and household leverage in Asia, along with rising interest rates.

Meanwhile, it added that de-globalisation poses a substantial downside risk to the region. Recent political developments in many advanced economies, notably in the US and in parts of Europe, highlight the disenchantment of a large portion of the population with cross-border integration.

"A disruption of global trade, capital, and labour flows resulting from an inward shift in policies, including toward protectionism, would deter investment, reduce productivity, and lower global growth.

"Asian economies are particularly vulnerable to trade shocks because they generally have high trade openness ratios, with significant participation in global value chains. Given the reliance of many Asian economies on exports, more protective trade policies would generate a significant negative impact on the region."

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