Asia and Pacific
Managing the Next Phase of Growth
April 2011
Executive Summary also available in Korean and Vietnamese
Asia and Pacific Regional Economic Outlook focuses on the policy challenges of managing the next phase of growth after Asia's recovery from the global crisis. The analytical chapters discuss how capital flows to the region may affect the monetary policy transmission mechanism and the role of macroprudential measures in this context, the implications of the Asian supply chain for rebalancing growth across the region, and the policy challenges for Asian low-income and Pacific Island countries. Economic recovery in Asia as a whole has been rapid (8.3 percent in 2010) and fueled by both exports and domestic demand. Looking ahead, growth is expected to continue at a more moderate but also more sustainable pace in 2011 and 2012, led by China and India. Meanwhile, new risks to the outlook have emerged. The full human cost and impact on infrastructure of the mid-March earthquake and tsunami in Japan remain to be determined. The steady response of the Japanese government and people has helped to contain the effects of the disaster on production, but a risk remains of prolonged disruptions in production that could spill over to other Asian economies in the regional supply chain. Moreover, tensions in the Middle East and North Africa and related risk of further oil price spikes could disrupt global growth and affect Asian exports. Finally, pockets of overheating have emerged in Asia, as core inflation and credit growth have accelerated in several Asian economies. The need to tighten macroeconomic policy stances has become more pressing than it was six months ago.
Video: IMF on Asia: Robust Growth, But Inflation Causing Concern
Contents
| Definitions | |||
| Executive Summary | |||
| I. | Asia After the Recovery: Managing the Next Phase | ||
| A. Maturing Recovery and Good Near-Term Growth Prospects | |||
| B. Pockets of Overheating Across the Region Pose New Risks to the Outlook | |||
| C. Capital Inflows Are Expected to Continue, but at a More Moderate Pace | |||
| D. Policy Challenges: Tightening Macroeconomic Policy Stances to Contain Overheating Risks | |||
| E. The Economic Impact of Japan’s Earthquake-Related Tragedy | |||
| F. Making Growth Balanced and Inclusive Over the Medium Term | |||
| II. | Capital Flows to Asia: Comparison with Previous Experience and Monetary Policy Options | ||
| A. Introduction | |||
| B. How Does the Current Episode of Capital Inflows Compare with Previous Episodes? | |||
| C. How Effective Is Monetary Policy in the Face of Large Capital Flows? | |||
| D. What Role Can Macroprudential Measures Play? | |||
| E. Conclusions | |||
| Appendix 2.1. Econometric Methods: Global Dynamic Factor Model, Structural VAR, and Panel Regression | |||
| Appendix 2.2. DSGE Model | |||
| III. | Implications of Asia’s Regional Supply Chain for Rebalancing Growth | ||
| A. Introduction | |||
| B. Asian Exporters: Between Partnership and Competition | |||
| C. Evolving Trade Networks: Old and New | |||
| D. How Does Vertical Integration Affect External Competitiveness and Rebalancing? | |||
| E. Conclusion | |||
| Appendix 3.1 | |||
| IV. | Asian Low-Income and Pacific Island Countries: Policy Challenges After the Global Crisis | ||
| A. Capital Flows, Aid, and Remittances to Asian LICs | |||
| B. Impact of the Global Crisis on Asian LIC Banks | |||
| C. Timor-Leste: The Transition from Conflict to Development | |||
| D. Pacific Island Countries: Vulnerabilities to Commodity Price Shocks | |||
| References | |||
| Boxes | |||
| Chart | Data | 1.1 | Spillovers from Emerging Asia to Australia and New Zealand |
| Chart | Data | 1.2 | Vietnam: Restoring Macroeconomic Stability |
| Chart | Data | 1.3 | Is China Overheating? |
| Chart | Data | 1.4 | Channeling Capital Inflows to Its Most Productive Uses: Developing Corporate Bond Markets In Asia |
| Chart | Data | 1.5 | How Effective Are the Bank of Japan’s Monetary Easing Measures? |
| Chart | Data | 2.1 | Do Nonresident Bond Holdings Affect Long-Term Interest Rates in Emerging Markets? |
| Chart | Data | 2.2 | Macroprudential Policy––An International Perspective |
| Chart | Data | 3.1 | Horizontal Competition and the Real Effective Exchange Rate |
| Tables | |||
| 1.1 | Asia: Real GDP Growth | ||
| 1.2 | Capital Flow Management Measures in Asian Economies | ||
| 2.1 | Episodes of Large Net Private Capital Flows to Emerging Asia: Summary Statistics | ||
| 2.2 | Financial Indicators Across Episodes of Large Net Capital Flows to Emerging Asia | ||
| 2.3 | Parameters of the Policy Rules | ||
| 2.4 | Performance of Policies in Reaction to a Financial Shock | ||
| 2.5 | Selected Asia: Impact of Macroprudential Measures | ||
| 3A.1 | Share in Intermediate Goods Exports | ||
| 3A.2 | Share in Capital Goods Exports | ||
| 3A.3 | Share in Consumer Goods Exports | ||
| Figures | |||
| Chart | Data | 1.1 | Asia: Changes in Real GDP at Market Prices |
| Chart | Data | 1.2 | Asia: Exports of Goods |
| Chart | Data | 1.3 | United States: Real Private Fixed Investment in Equipment and Software during Business Cycle Recoveries |
| Chart | Data | 1.4 | Asia’s Exports to China and Retail Sales in China |
| Chart | Data | 1.5 | Asia: Industrial Activity |
| Chart | Data | 1.6 | Selected Asia: Credit to Private Sector |
| Chart | Data | 1.7 | Emerging Asia: New Capital Raised by Corporations |
| Chart | Data | 1.8 | Selected Asia: Effective Exchange Rates |
| Chart | Data | 1.9 | Asia: Fiscal Impulse |
| Chart | Data | 1.10 | Global Investment |
| Chart | Data | 1.11 | Export-Oriented Asia: Private Domestic Demand and Exports |
| Chart | Data | 1.12 | Selected Emerging Asia: Private Investment |
| 1.13 | Asia: GDP Growth | ||
| Chart | Data | 1.14 | Selected Asia: Exports of Goods to the United States and Europe |
| Chart | Data | 1.15 | Asia: Changes in Headline Inflation since 2009 |
| Chart | Data | 1.16 | Emerging Asia: Changes in Expectations of Annual 2011 Inflation since October 2010 |
| Chart | Data | 1.17 | Selected Asia: Purchasing Managers’ Index (PMI)—Input Costs for Manufacturing Industries |
| Chart | Data | 1.18 | Asia: Consumer Prices |
| Chart | Data | 1.19 | Asia: Headline Consumer Price Inflation |
| Chart | Data | 1.20 | Asia: Pass-Through from Global Food and Energy Prices to Domestic Food and Energy Prices |
| Chart | Data | 1.21 | Asia: Pass-Through from Domestic Food and Energy Prices to Core Inflation |
| Chart | Data | 1.22 | Asia: Impact of 10 Percent Increase in Commodity Prices on Headline Inflation |
| Chart | Data | 1.23 | Asia: Deviation of the Cyclical Component of Credit-to-GDP Ratios from Long-Term Averages |
| Chart | Data | 1.24 | Selected Asia: Contribution to Growth in Credit to Private Sector |
| Chart | Data | 1.25 | Selected Asia: Comparing Changes in Current Real Property Prices with Previous Boom-Bust Cycles |
| Chart | Data | 1.26 | Asia: Government Bond and Stock Markets |
| Chart | Data | 1.27 | Selected Asia: 12-Month Forward P/E Ratios |
| Chart | Data | 1.28 | Emerging Asia: Net Capital Inflows |
| Chart | Data | 1.29 | Emerging Asia: Equity and Bond Funds––Weekly Net Flows during 2010–11 |
| Chart | Data | 1.30 | Emerging Asia (excl. Hong Kong SAR and Singapore): Net Portfolio Capital Inflows |
| Chart | Data | 1.31 | Selected Asia: Policy Interest Rates |
| Chart | Data | 1.32 | Asia: Real Policy Rates |
| Chart | Data | 1.33 | Asia: Real Effective Exchange Rates |
| Chart | Data | 1.34 | Emerging Asia: Sources of Change in Stock of Foreign Exchange Reserves |
| Chart | Data | 1.35 | Asia: General Government Cyclically Adjusted Fiscal Balances |
| Chart | Data | 1.36 | Japan: Official Estimate of Damage to Capital Stock Following 1995 and 2011 Earthquakes |
| Chart | Data | 1.37 | Selected Asia: Demand and Supply Exposures to Japan |
| Chart | Data | 1.38 | Asia: Contributions to GDP Growth |
| Chart | Data | 1.39 | Asia: Current Account Balances |
| Chart | Data | 1.40 | Global Current Account Balances |
| Chart | Data | 1.41 | Vulnerable Employment |
| Chart | Data | 2.1 | Selected Emerging Asia: Real Policy Rates and Headline Inflation during Capital Inflow Surges |
| Chart | Data | 2.2 | Emerging Asia: Net Private Capital Flows |
| Chart | Data | 2.3 | Selected Asia: 10-Year Bond Spreads |
| Chart | Data | 2.4 | Secondary Market Yield of 10-Year Government Bond |
| Chart | Data | 2.5 | Contributions of U.S. 10-Year Yield and VIX to the Common Factor of Asian Bond Yields |
| Chart | Data | 2.6 | Selected Asia: Variance Decomposition of Domestic 10-Year Yield by Sources during 2005–10 |
| Chart | Data | 2.7 | Selected Asia: Contribution of U.S. Long-Term Interest Rates to Variance of Domestic Yields by Maturity |
| Chart | Data | 2.8 | Selected Asia: Importance of U.S. Interest Rates and Capital Account Openness |
| Chart | Data | 2.9 | Selected Asia: Variance Decomposition of Industrial Production in Response to Shocks to Domestic Interest Rates |
| Chart | Data | 2.10 | Selected Asia: Short-Term Corporate Debt |
| Chart | Data | 2.11 | Selected Asia: Effect of Capital Flows on Monetary Transmission Mechanism |
| Chart | Data | 2.12 | Selected Asia: Responses to a Financial Shock |
| Chart | Data | 3.1 | Asia: Export Trends |
| Chart | Data | 3.2 | Selected Asia: Contributions to Export Growth |
| Chart | Data | 3.3 | Asia: Exports of Intermediate Goods |
| Chart | Data | 3.4 | Asia (excl. China): Exports to G-2 and China |
| Chart | Data | 3.5 | Share in U.S. Imports: Consumer Goods |
| Chart | Data | 3.6 | Selected Asia: Export Similarity Index |
| Chart | Data | 3.7 | Selected Asia: Direct and Indirect Intermediate Goods Trade |
| Chart | Data | 3.8 | Japan and Korea: Export of Capital Goods |
| Chart | Data | 3.9 | Selected Asia: Change in Intermediate Goods Trade |
| Chart | Data | 3.10 | Japan: Trade Balance in Intermediate Goods |
| Chart | Data | 3.11 | Selected Asia: Standard and Integrated Real Effective Exchange Rates (REER) |
| Chart | Data | 3.12 | Asia: Real Effective Exchange Rates (REER) and Real Export Growth |
| Chart | Data | 3.13 | Net Exports to World Markets: Consumer Goods |
| Chart | Data | 3.14 | Selected Asia: Share in Trade Surplus vis-à-vis U.S.––Value Added and Gross Trade |
| Chart | Data | 4.1 | Asian LICs: Gross Total Inflows |
| Chart | Data | 4.2 | Selected Asia: Structure of Capital and Capital-Like Inflows, 2009 |
| Chart | Data | 4.3 | Selected Asia: Workers Moving Abroad, January 2006–January 2011 |
| Chart | Data | 4.4 | Selected Asia: Customer Deposit Growth |
| Chart | Data | 4.5 | Selected Asia: Gross Loan Growth |
| Chart | Data | 4.6 | Selected Asia: Customer Loan-to-Deposit Ratio |
| Chart | Data | 4.7 | Timor-Leste: Real Non-Oil GDP Growth |
| Chart | Data | 4.8 | Selected Asia: Consumer Price Inflation |
| Chart | Data | 4.9 | PICs: Pass-Through of Oil Prices to Inflation |
| Chart | Data | 4.10 | PICs: Pass-Through of Food Prices to Inflation |
IMF on Asia: Robust Growth, But Inflation Causing Concern
IMF on Asia: Robust Growth, But Inflation Causing Concern