[Courtesy of KIEP]
The International Monetary Fund (IMF) recommends a fresh push for infrastructure development and structural reforms with prudent macroeconomic policies across Asia to maintain sustained growth and reduce downside risks, especially from China's sharp adjustment.
The IMF outlook remains strong, with Asia's growth projected at 5.6 percent in 2017 and 5.5 percent in 2018, driven by strong consumption and investment. In particular, growth in China, Japan, South Korea, and ASEAN have been revised up, more than offsetting downward revisions for India and Australia.
Asia accounted for over 63 percent of global growth. China alone contributed 34 percent, compared to India's 14 percent.
"Asia remains the world's fastest-growing region and continues to be the main global growth engine," Tahsin Saadi Sedik, a senior economist in the IMF's Asia and Pacific Department, said in an interview with Aju News.
However, there are two important medium-term headwinds to growth, related to demographics and productivity, as many parts of Asia have reaped a "demographic dividend" in recent decades, with the number of workers growing faster than the number of dependents, he said.
"Along with strong policies, this has helped propel growth. But this dividend is now coming to an end in many Asian economies because of their rapidly aging populations," the economist said, adding productivity growth has slowed since the global financial crisis.
The favorable economy provides a window of opportunity for Asia to pursue structural reforms to boost medium-term growth and make it more inclusive while addressing potential risks, Saadi Sedik said.
With fiscal space, he called for structural reforms to improve unemployment insurance, strengthen pension systems to address aging pressures, and expand childcare to boost the participation of women's s labor force.
Asia has made remarkable progress in lifting millions out of poverty, improving living standards, and more recently contributing to the global recovery, the economist said.
"With continued prudent macroeconomic policies and a renewed push for infrastructure development and structural reforms, we are confident that Asia can overcome the obstacles to growth, pursue inclusive growth over the medium term, and continue to play its important role in the global economy."
In its latest outlook, the IMF highlighted key downside risks including geopolitical tensions, sudden capital outflows, a shift toward inward-looking policies, policy uncertainty, and a sharp adjustment in China.
Asia also faces serious longer-term challenges such as population aging and lagging productivity, but the favorable combination of circumstances provides a window of opportunity to pursue structural reforms, according to the IMF report.
South Korea's growth was projected at 3.0 percent in 2017–18, supported by investment, while consumption growth will likely pickup reflecting fiscal support and a higher minimum wage. However, the IMF warned of headwinds to medium-term growth that included demographics, labor market distortions, and lagging productivity.
The report said risks to growth in China are balanced in the near term but tilted to the downside over the medium term. If a sharp adjustment occurs, domestic demand would take a hit, which in turn would roil global financial markets, lower commodity prices, and reduce global and regional growth.
The IMF suggests Asia's robust recovery provides an opportunity to pursue fiscal, financial, and structural reforms to lift long-term growth, make it more inclusive, and build resilience.
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