Asia: Preparing for choppy seas
The outlook for Asia and the Pacific is the strongest in the world, but it is shrouded by challenges at home and abroad, according to the latest IMF report for the region. The April 2017 Regional Economic Outlook for Asia and Pacific: Preparing for Choppy Seas finds that policy stimulus continues to support healthy domestic demand in China and Japan in the near term, which is good for other economies in Asia as well. Broader global conditions are also favourable. Growth is accelerating in many major advanced and emerging market economies, notably the United States, and commodity exporters, and financial markets are still resilient for the most part. Nonetheless, there are challenges ahead. Particularly, over the medium term, there are fundamental headwinds to sustained strong growth, including from aging populations in some countries and a slower catch-up in productivity.
After a slowdown in 2016, regional growth is forecasted to speed up in 2017. Growth in the region decelerated to 5.3 percent in 2016 from 5.6 percent in 2015 despite broad improvement in economic activity in the second half of 2016. Net exports continued to pull down growth; domestic demand remained strong, supported by robust private consumption. GDP growth is forecast to reach 5.5 percent in 2017, revised up by 0.1 percentage point compared to the estimate in the IMF's October 2016 World Economic Outlook, and 5.4 percent in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. The acceleration in 2017 reflects expected recovery in Asian trade, resilient domestic demand, and continued policy support.
The aggregate outlook for the region, however, masks differences across countries. Among the larger economies, projected growth in China and Japan for 2017 was revised up because of continued policy support and strong data toward the end of 2016. China's GDP growth is expected to stay strong but continued to slow gradually to 6.6 percent in 2017 as recent tightening measures take effect — and to 6.2 percent in 2018. Japan's growth is projected at 1.2 percent, with momentum set to continue into 2017, but will probably then weaken along with fiscal policy consolidation and the planned consumption tax increase. Some of the upward revision in Japan reflects the comprehensive revision of the national accounts in 2016. In India, temporary disruptions (primarily to private consumption) caused by cash shortages accompanying the currency exchange initiative are expected to gradually dissipate in 2017. Thus, growth is projected to rebound to 7.2 percent in FY2017-18 and to 7.7 percent in FY2018-19.
Near-term growth is encouraging, but downside risks continue to dominate the economic landscape. Global growth could get a boost from economic stimulus in some large economies, particularly the United States. However, continued tightening in global financial conditions could trigger further capital flow volatility. Private debt has risen in many economies in the region over the past decade, and higher borrowing costs could tip some companies and households over the edge and constrain growth. More inward-looking policies in major global economies would significantly impact Asia, given that the region has benefited substantially from cross-border economic integration. A bumpier-than-expected transition in China would also have serious repercussions.
Medium-term regional growth faces challenges from population ageing and slowing productivity. Asia is a diverse region, and some areas risk growing old before becoming rich. This is because the pace of ageing is faster in Asia compared with the experience in Europe and the United States. For many countries in the region, on current trends, per capita income (benchmarked against the United States) will be much lower than that reached by advanced economies at a similar peak in their aging cycle. Slowing productivity growth since the global financial crisis, which kept the region from catching up with the United States and other countries at the technological frontier, has made matters worse. The slowdown has been most severe in the advanced economies of the region. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.
In Bangladesh, macroeconomic stability has strengthened, supported by steady monetary policy management and fiscal discipline. This has allowed the economy to benefit from favourable external demand, high remittances, and low commodity prices. The external position remains strong, with foreign exchange reserves steadily increasing. Output growth rose to over 7 percent in FY-16 from 6.5 percent in the preceding fiscal year, supported by robust domestic demand, particularly from government consumption, private investment, and external demand.
In the near term, this solid macroeconomic performance is set to continue, with growth projected to remain close to current levels and inflation broadly in line with Bangladesh Bank's target. Reflecting mainly lower remittances, the current account balance is projected to record small deficits. Risks to the growth outlook include a sustained real exchange rate appreciation which could undermine export competitiveness, and the continued weaknesses in the banking sector that could have fiscal and financial stability implications over the medium term and undermine growth.
In the medium term, the outlook for growth is conditional on continued prudent policy implementation and on the country's ability to upgrade policy practices and frameworks. Maintaining the current level of growth will require increased investment, both public and private, as well as reforms to support investment efficiency and capital market development. Presently, higher private investment rate is constrained by numerous impediments to the business environment, including the poor quality of infrastructure and the lack of access to long term financing. Bangladesh ranks near the bottom globally in commercial access to electricity, roads, and rail, all requiring a significant increase in public investment. To create fiscal space for higher public investment while maintaining fiscal sustainability requires improving domestic revenue collection.
Removing these constraints and related market failures will not only boost private sector investment, which is an important engine for growth, but should also encourage diversification in the economy. This, in turn, will bring additional productivity gains needed to support sustained high growth. In sum, despite Bangladesh's strong record of growth in the past, the underlying fundamentals for sustained growth on many fronts need to be significantly strengthened. Implementing reforms to improve infrastructure, improving the business environment, strengthening financial sector supervision and governance, and increasing the tax to GDP ratio, remain a priority.
The IMF, as a partner to Bangladesh, stands ready to continue working closely with the government in support of these policy priorities.
The writer is IMF Mission Chief for Bangladesh.
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