IMF's 2007 Asia Pacific Regional Economic Outlook

I would like to say that 2006 was another strong year for growth in Asia. The outlook is for continued solid economic performance in 2007, with only a slight moderation in overall growth expected for this year, from 7.6 percent last year to just over 7 percent this year. This forecast, this moderation reflects an easing of external demand, particularly from the United States, but also assumes an effective tightening of policies in China and India. With a moderation in export growth expected the regional current account surplus should stabilize this year to around 4 1/4 percent. But I think over the medium term a further rebalancing of growth away from net exports and toward greater reliance on domestic demand will be important for keeping growth on a sustainable footing.

"Asia's good economic prospects point to likely strong investor growth, and investor interest in the region."

Article by Dr. Zia-Ur-Rehman zia177@yahoo.com

Inflation pressures appear to be contained throughout much-though not necessarily all-of the region, and most ASEAN countries and in the newly industrialized economies relatively soft domestic demand growth. Some appreciation of currencies and, to a lesser extent, lower oil prices have all contributed to reduce price pressures. These factors have been supported by gradually rising real policy interest rates over the past two years in much of the region. In a few countries, though, high credit growth and, in some cases, asset price rises are some cause for concern, and the authorities in those cases will need to remain vigilant and ready to further tighten monetary conditions as needed. I think India and Vietnam are two such cases, and further monetary tightening may also be needed in China, where credit and investment growth continued to be rapid.

On the financial market side, Asian financial markets demonstrated their resilience in bouts of global market turbulence and the bouts that we saw in mid-2006, and then again more recently in February/March of this year, I think generally faring as well or better than emerging markets in other regions. I think looking ahead, Asia's good economic prospects point to likely strong investor growth, and investor interest in the region. We will come back to that broad issue a little later. The risks to the outlook in Asia are broadly the same as those for the global economy, which you have heard about earlier this week. They include a larger-than-envisaged slowdown in the U.S., and also the possibility of an upward spike in oil prices. With markets generally tight, indeed we have seen oil prices on something of a rising trend in recent weeks. The region could also be buffeted as well by further bouts of financial turbulence, especially if either of the first two risks were to materialize. But for the region, an upside risk is that the near-term growth outlook in both India and China could be stronger than we forecasted if the measures that are being taken to try to restrain growth do not gain as much traction as we expect.

While economic prospects for the region generally remain strong, I think policymakers still face a number of challenges, and these include ones related to ongoing financial integration and deepening, and also developments in global terms of trade. Of course, those are not the only challenges they face; they also include aging populations, growing income inequality, rebalancing growth more toward domestic demand, as I mentioned.

But with the first group of challenges in mind this time our latest regional outlook examines a number of issues, including the evolution of capital flows in Asia, housing price developments, and the effects of commodity price booms, especially on low-income countries. On the capital flows issue, our review finds that net capital flows to Asia remain close to their long-term average of about 2 percent of GDP, and have in fact declined slightly since their recent peak in 2004. So, while currencies in the region have continued to see some upward pressure and reserves have continued to accumulate, it is really current account surpluses rather than net capital inflows that have been the major cause, although capital inflows have contributed. At the same time, gross inflows and gross outflows have risen sharply and are now, after all, close to historic highs in terms of GDP. Of particular interest is that capital flows have increased nearly fivefold over the last 10 years, and I think this increase in outflows reflects ongoing portfolio diversification in the region, supported in some cases by the removal or easing of restrictions and outflows, and I think to some extent-well, to a large extent, this is a natural part of ongoing integration into the global financial system and regional financial integration. Another thing we found is that the volatility of growth flows has risen quite markedly; although the volatility of net flows has been largely unchanged, the volatility of gross flows has risen quite substantially, with surges in inflows at times associated with strong pressures on exchange rates or asset prices. So, this volatility can pose challenges for policy.

I think the increase in the size and volatility of gross flows points, in particular, to the need for further enhancing the development and resilience of financial systems, including in the context of the various initiatives under way at regional financial integration. I think this process would continue to go hand in hand with a further gradual liberalization of capital accounts where restrictions remain. However, also in the near term, I think there is also some scope perhaps for limited sterilized intervention to help cope with smoothing volatile capital inflows and, of course, generally robust monetary frameworks are important for anchoring inflation expectations in the face of these sorts of inflows.

Turning to housing prices, briefly, we find that while they have arisen around the region somewhat faster than inflation in recent years, and there are certainly pockets of rapidly rising prices in Asia, however on the whole, we do not find a marked deterioration in affordability, perhaps except in Australia and New Zealand, as real incomes have tended to outpace real house price increases. Although, obviously, judgments in this area are very difficult, we do not find any clear evidence for the region as a whole that house prices are significantly out of line with fundamentals, although, as I say, there are pockets where that may not be true.

Lastly, and very briefly, on the commodity price issue, the global commodity price >> has amounted to effectively a positive fiscal and balance of payments shock for a number of lower income countries in Asia. That does have the potential to improve living standards and reduce poverty. Of course, with these sorts of positive shocks, it is also possible for them to be handled in such a way that they end up doing less good than they should or even more harm than good in some instances. So, our advice to governments in these countries has been to formulate transparent and forward-looking strategies to manage and spend these resources in a way that takes into account long-term development needs and also intergenerational equity.