Asia Faces Shifting Risks, New Foundations for Growth

Asia to lead three-speed global recovery on robust internal demand

Rising financial imbalances, but corporate and banking sector balance sheets sound

Policymakers need to stand ready to respond decisively to shifting risks

As a result, the region is expected to lead the global three-speed recovery.

Consumption and private investment will be supported by favorable labor market conditions—unemployment is at multiyear lows in several economies—and relatively easy financial conditions, notes the report.

Asia should also benefit from intraregional demand spillovers mainly reflecting growing Chinese demand and policy stimulus in Japan but also, in the case of the Association of Southeast Asian Nations, growing integration in final consumer goods trade.

Favorable outlook, with risks

The report says the favorable outlook is accompanied by some risks. While the external risk of severe economic fallout from an acute euro area crisis has diminished, regional risks are coming into clearer focus.

Financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several Asian economies.

A number of other regional risks are more difficult to anticipate but could prove disruptive given Asia’s highly integrated supply-chain network and growing dependence on regional demand and finance.

These include trade disruptions from a natural disaster or geopolitical tensions, a loss of confidence in Japan’s efforts to restore economic health, or an unexpected slowdown in China.

Policymakers should stand ready to respond

The report’s authors say policymakers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.

With inflation remaining low and stable, the current accommodative stance has generally served the region well. But financial imbalances are often persistent and cannot be easily unwound, says the report. It adds that output levels are close to or slightly above trend in most economies.

Monetary policymakers should stand ready to respond early and decisively to shifting risks, although the need and direction for future monetary policy action differs substantially across economies, adds the report.

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