The International Monetary Fund strikes a cautiously upbeat note in its newly published annual report on Asia. It forecasts 5.7% growth in the region this year, up from 5.3% in 2012, with growth in emerging Asia — which includes China and the rest of East Asia excluding Japan, India, and the six largest economies of Southeast Asia — reaching 7.2%, up from last year’s 6.7%.
The Fund sees that growth accelerating next year, to 6% and 7.4% respectively. The region, it says, repeating its new favorite metaphor, will lead the global three-speed recovery, driven largely by continued robust domestic demand.
But the IMF cautions that policymakers will have to walk a fine line between promoting growth and guarding against the potential build-up of financial imbalances. It particularly warns that strong capital inflows into the region have increased the risks stemming from rapid credit growth and rising asset prices. It advises policy makers to “stand ready to respond early and decisively to any prospective risks of overheating.”
This could include imposing “macroprudential measures” — to all intents and purposes, capital controls. The Fund says these could have an important role to play in emerging economies where credit growth remains too rapid and conventional monetary management proves insufficient in the face of potential financial stability.
Any such measures, the IMF says, should be clearly targeted and communicated and generally be temporary: “They can only buy time but cannot substitute for longer-term macroeconomic and financial sector policies.”
The report in summary:
Growth in the Asia-Pacific region shows signs of improving as extreme risks emanating from advanced economies have receded and domestic demand remains resilient, supported by relatively easy financial conditions and robust labor markets. A small and gradual pick-up in growth to over 5¾ percent is projected in the course of 2013.
Risks to the outlook from within the region, such as rising financial imbalances and asset prices in some economies, are coming clearer into focus. Although Asia’s banking and corporate sectors have solid buffers, monetary policymakers should stand ready to respond early and decisively to shifting risks, and macroprudential measures will also have a role to play.
In many Asian economies, some fiscal consolidation could also rebuild the space needed to respond to future shocks and preempt potential overheating pressures from capital inflows. In particular, there is a growing need to make tax and spending policies more efficient.
To sustain high growth rates and alleviate the “middle-income trap” across Emerging Asia, the policy agenda will vary by jurisdiction but will also often include strengthening infrastructure investment and reforming goods and labor markets.