By Paul Gruenwald
IMF Survey
Growth in Asia has trended higher this year and the strong performance is forecast to continue into 2008. For the region as a whole, growth is expected to reach 8.0 percent in 2007 before moderating to 7.2 percent next year, according to the IMF's latest Regional Economic Outlook (REO) for Asia and the Pacific.
Growth continues to be driven by China (Proj. 2007: 11.5%; 2008: 10%) and India (Proj. 2007: 8.9%; 2008: 8.4%), while the newly industrialized economies and the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) have also done well, reflecting a pickup in domestic demand. Following a soft patch earlier this year, export growth, including in the important electronics sector, has increased sharply led by demand from Europe.
According to the REO, released on October 19, inflation pressures remain largely under control. While food prices have raised headline numbers in some countries, core inflation has been well behaved. This is particularly true in China, where prices for a handful of agricultural products have spiked owing to supply factors, sending headline inflation to a decade high of 6 1/2 percent. However, there has been little evidence thus far of second-round effects.
Big current account surpluses
The region has continued to experience large current account surpluses and continued capital inflows. However, exchange rates have appreciated only modestly in most countries as intervention by central banks has pushed regional reserves past the $4 trillion mark, with China continuing to account for the bulk of the increase.
Asia was not at the epicenter of the global financial market turmoil that broke out in July, and markets and financial institutions in the region have held up well. Direct exposure to U.S. subprime mortgages and, more broadly, to leveraged and complex structured credit was reportedly small, including for hedge funds. Most markets have recovered the losses experienced after the turbulence began, and in some cases have attained new highs.
The outlook for Asia assumes a slowing of external demand from the United States and Europe as well as an effective policy tightening in China. A pattern of somewhat slower export and investment growth across much of the region is expected, with only some delinking from the global cycle. The region's current account surplus is projected to rise to 5 percent of GDP owing largely to China, where the trade surplus continues to surge.
The risks to this outlook are balanced, although they are not uniform across countries. For China and India the risks are on the upside and relate to the pace of investment - to the extent that investment is currently growing too fast, higher-than expected growth would not necessarily be beneficial. For most of the rest of the region, the risks are on the downside, and relate mainly to sharply slower foreign demand growth in major export markets.
Regarding policies, in the event that growth slows more than expected, the IMF sees scope for easing monetary policy settings in much of the region, except for those few countries where inflation pressures remain relatively high. Most countries also have "fiscal space" available to counter any growth slowdown by letting the automatic stabilizers work.
It is not too early to draw preliminary policy lessons from the recent market turbulence, which will become increasingly important as Asia's financial institutions become more sophisticated. Actions could include strengthening reporting requirements to ensure greater transparency, enhancing pricing and provisioning to reduce liquidity and solvency risks, and improving disclosure requirements to better inform investors of their risk exposures.
Souce: Paul Gruenwald, IMF Asia and Pacific Department, IMF Survey, Washington, DC.
|
