Sustaining Asia’s Momentum: Time for Vigilance and Reform

Asia well positioned to remain the most dynamic region of the global economy

Receding external risks in emerging Asia, reflecting stronger macroeconomic fundamentals

Vigilance and further reforms needed to sustain Asia’s leadership in global growth

Asia’s momentum is set to continue…

While economic developments in Asia remain uneven, the region will continue to be among the global growth leaders.

The main growth drivers are improving external demand, particularly from advanced economies, robust labor markets, and strong credit growth. Despite the rise in long-term interest rates in many economies, financial conditions across Asia have remained relatively accommodative.

In several economies, action taken by policy makers to address vulnerabilities in the aftermath of the “tapering tantrum” in 2013 have also bolstered resilience, say the authors. Indeed, emerging Asian economies have weathered well the latest bouts of volatility in the global financial markets.

But risks lie ahead…

Risks to the outlook have become more balanced. Global growth has strengthened and overall global prospects have improved (especially in advanced economies). But Asia still faces new and old risks (geopolitical uncertainty, exit from unconventional monetary policy in the United States and low inflation in the euro area).

The main external risk remains an unexpected or sharp tightening of global liquidity. Rapid movements in global interest rates could lead to further bouts of capital flow and asset price volatility. Pockets of high corporate leverage in some Asian economies could magnify the effects of higher interest rates and lower growth on balance sheets, and weaken domestic demand.

Asia is also facing various risks emanating from within the region. Growth in China and Japan could also fall below expectations, with negative spillovers for the rest of the region. In China, a gradual slowdown as a result of reforms would be welcome as it would put growth on a more sustainable path. However, a sharp fall in growth—which remains a low risk—would adversely affect those regional trading partners that are most dependent on Chinese final demand.

In Japan, Abenomics could be less effective than envisaged, resulting in lower inflation and weaker growth, with spillovers to economies that have strong trade and foreign direct investment linkages with Japan.

Strong intra-regional trade integration, which is shown to have contributed to greater business cycle...