Asia Can Take Steps to Bolster Resilience Amid Economic Slowdown

Region faces more challenging external environment

Growth is moderating though still strong relative to rest of world

Policy accommodation should be considered where there is policy space

According to the October 2015 Asia and Pacific Regional Economic Outlook Update (REO Update), growth will moderate slightly to 5.4 percent in 2015–16, in line with global developments (see table). “Domestic consumption, supported by robust labor markets and lower energy prices, will be the main growth driver, and the recovery in advanced economies will provide further support,” said Changyong Rhee, Director of the IMF’s Asia and Pacific Department.

The report also notes that negative growth spillovers from China to the rest of the region are probably larger than previously anticipated, and exports continue to fall short of global growth. While the rebalancing in China’s import demand is one cause, a broad-based weakness in global import demand is also a major factor behind the trade slowdown in Asia.

Growth prospects within Asia will likely diverge once again, including among the largest economies. China’s economy will continue to rebalance toward domestic consumption and is expected to grow by 6.8 percent and 6.3 percent in 2015 and 2016, respectively (no change relative to the April 2015 World Economic Outlook). The recent equity market turmoil and the change in the exchange rate regime are not expected to have a significant impact on near-term growth. However, “the policies needed to address vulnerabilities and rebalance the economy are likely to reduce headline growth, while ensuring sustainability over the medium term,” said Rhee.

In Japan, growth is projected to recover to 0.6 percent in 2015 and 1 percent in 2016, supported by a wage-driven recovery in consumption, as well as a modest improvement in investment and exports. Domestic demand should also benefit from lower oil and commodity prices and the Bank of Japan’s accommodative policies.

In India, the ongoing economic recovery is expected to be underpinned by lower oil prices and robust domestic demand, and GDP is expected to grow 7.3 percent in 2015, rising to 7.5 percent in 2016.

Growth in major ASEAN economies is projected to moderate in 2015–16, owing to a number of factors, including lower commodity prices (Indonesia and Malaysia), political uncertainty (Malaysia), and weaker growth in China.

Downside risks continue to dominate

The REO Update points to downside risks to regional growth...