Asia’s near-term growth prospects remain solid amid downward revisions for other regions, according to the October ‘Regional Economic Outlook Update’ (www.imf.org/asia). Despite a mild slowdown earlier this year, Asian economies are expected to grow at 5.5% in 2014 and 2015, broadly in line with the pace of the last couple of years. With some exceptions (such as India), the inflation outlook should remain benign across most of the region.
Downside risks have increased, but so has resilience, including in countries that had been most affected by the period of heightened volatility that followed the market’s reaction to taper talk by the United States Fed last year. India is one country that has taken concrete steps to reduce its vulnerability. Nevertheless, further action is needed in most Asian economies to strengthen policy buffers and address medium-term challenges to stability and growth.
What is driving Asia’s solid growth outlook? First, stronger global growth should help propel exports across most of the Asia and Pacific region. In fact, after a weak first quarter, export growth has started to gather steam, and with the strengthening of growth in the US and expected recovery in the euro area, the export momentum should remain relatively strong. Second, global financial markets have rallied, helped by expectations of higher growth and increased risk appetite. This environment has also contributed to greater capital flows into Asia. Policies in Asian economies have also been generally supportive — in particular, real short-term interest rates remain typically below their pre-global financial crisis levels. These factors should help support robust domestic demand growth going forward.
The favourable outlook for the Asia and Pacific region masks important sub-regional differences. In China, growth should remain strong in the near term, helped by the recent stimulus measures. We expect some gradual moderation to a more sustainable growth path throughout next year, as the ongoing slowdown in the real estate sector and efforts to curb credit growth and rebalance the economy slow investment growth. In India, activity has picked up, helped by lower political uncertainty, improved business confidence, and reduced external vulnerabilities. This momentum should continue to strengthen, with growth forecast to rise to 5.5% in fiscal year 2014/15, accelerating to 6.33% in 2015/16 driven by a rebound in manufacturing and investment. Asean economies should also see robust growth in 2014 and a slight acceleration in 2015, partly reflecting their exposure to the stronger global economy.
Despite the solid outlook, Asia continues to face significant risks to stability and growth. In the near term, investors could overreact to rising US interest rates and pull money out of the region, leading to sudden spikes in financial market volatility, higher borrowing costs and lower growth. Higher corporate leverage and rising household debt could also amplify the adverse effects of higher interest rates on investment and growth.
What is the role for policies? Recent actions taken by Asian policymakers have boosted confidence and improved resilience in several economies, including India, Indonesia and Malaysia. But addressing medium-term risks calls for a renewed push for structural reforms, which has seen a steady deterioration of its long-term growth outlook in the past few years. Such reforms would not only make Asia’s growth stronger and more sustainable, but would also lower its vulnerability to further growth disappointments and financial market shocks coming from the rest of the world. In India, continued tight monetary policy combined with further structural measures — particularly in the mining and power sectors, allocation of natural resources, labour market and comprehensive fiscal reforms — would help to durably tackle elevated inflation and raise potential growth.
P Cashin is assistant director, T Richardson is senior resident representative, and S Jain-Chandra is senior economist in the IMF’s Asia Pacific Department
The views expressed by the authors are personal