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IMF Says Asia Outlook Significantly Uncertain

Exchange rate flexibility should remain the main shock absorber against a sudden tightening in global financial conditions or shift toward protectionism
Continued tightening of global financial conditions could trigger volatility in capital flows.Continued tightening of global financial conditions could trigger volatility in capital flows.

The International Monetary Fund said Asia's economic outlook faces "significant" uncertainty and downside growth risks from any sudden tightening in global financial conditions or rise in protectionist trade policies.

The IMF, which in April raised its 2017 Asia-Pacific growth forecast to 5.5% from its previous October forecast of 5.4%, said loose monetary and fiscal policies across most of the region would underpin domestic demand, Reuters reported.

"However, the near-term outlook is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside," the IMF said in its Asia-Pacific regional economic outlook released on Tuesday.

In April, the IMF kept the region’s 2018 growth forecast unchanged at 5.4%. Asia-Pacific recorded 5.3% growth in 2016. The report comes at a time when policymakers around the region are wrestling with the challenge of how to navigate rising risks of protectionism under US President Donald Trump, and a potential increase in funding costs as the Federal Reserve steps up the pace of rate hikes.

Continued tightening of global financial conditions could trigger volatility in capital flows, and the region could see large spillovers if China’s shift to a more consumption-driven economy proves bumpier than expected, the IMF said.

“A possible shift towards protectionism in major trading partners also represents a substantial risk to the region. Asia is particularly vulnerable to a decline in global trade because the region has a high trade openness ratio, with significant participation in global supply chains,” it said. 

The IMF said exchange rate flexibility should remain the “main shock absorber” against a sudden tightening in global financial conditions or shift toward protectionism.

It added, however, that “judicious” foreign exchange intervention might be called for in certain cases, such as when disorderly market conditions or rapid exchange rate movements threaten financial or corporate stability. The IMF emphasized that foreign exchange intervention should not be

used to resist currency moves that reflect changes in fundamentals including in the global trade environment or as a substitute for macroeconomic policy adjustments.

Ageing demographics and a slowdown in productivity growth since the global financial crisis pose medium-term headwinds to the region’s economic growth, the IMF said, adding that parts of Asia risk “becoming old before becoming rich”.

“Adapting to aging could be especially challenging for Asia, as populations living at relatively low per capita income levels in many parts of the region are rapidly becoming old,” it said. The IMF said monetary policy should generally remain accommodative in the region since inflation is below target and there is slack in most Asian economies.

 

Issue of Interest Rates

If growth weakens further, some regional central banks such as those in Malaysia and Thailand, may have room to cut interest rates as long as external stability is not compromised, while others in India, Indonesia, and Vietnam should be ready to raise interest rates if inflationary pressures strengthen, the IMF said.

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% in 2017 and 6.2% 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% 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% 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% in FY 2017-18 as the cash shortages accompanying the currency exchange initiative ease.

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