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2018 Asia and Pacific Regional Economic Outlook
Good Times, Uncertain Times: A Time to Prepare
Asia and Pacific Department
May 9, 2018
PoliciesOutlook Uncertainties
1. The short-term outlook for Asia is strong, in line with expectations.
2. But the outlook is subject to considerable uncertainty.
3. In such a moment, policymaking should be conservative and aimed at building buffers and
increasing resilience.
2
Key Messages
Outlook
4
Asia remains the world’s fastest growing region...
Growth Projections: Selected Asia(Percent change from a year earlier)
Source: IMF staff.
Note: Figures for India are on a fiscal year basis.
World Asia China Japan India Korea
Australia
and New
Zealand ASEAN
APD
Small
States
2017 3.8 5.7 6.9 1.7 6.7 3.1 2.4 5.3 3.0
2018 3.9 5.6 6.6 1.2 7.4 3.0 3.0 5.3 3.7
Revision from
Oct. 20170.2 0.1 0.1 0.6 0.0 0.1 0.1 0.1 -0.7
2019 3.9 5.6 6.4 0.9 7.8 2.9 3.1 5.3 3.9
Revision from
Oct. 20170.2 0.1 0.1 0.1 0.0 0.0 0.2 0.1 -0.8
5
…and inflation has been rising but subdued.
-1
0
1
2
3
4
5
6
7
Japa
n
Kor
ea
New
Zea
land
Aus
tral
ia
AE
s
Tha
iland
Chi
na
Phi
lippi
nes
Indo
nesi
a
Indi
a
Vie
tnam
EM
DE
s
Advanced Economies Emerging Markets
Target range
Headline inflation 2017
Inflation target
Headline inflation 2016
2017 Inflation Target versus Headline Inflation(Percent)
Sources: Haver Analytics; and IMF staff calculations. Note: Australia and New Zealand are based on quarterly data as of 2017:Q3.
Uncertainties
1. Monetary policy normalization
2. Prospects for trade
3. Spillovers from US tax reform
4. Other risks
7
A moment of considerable uncertainty
Monetary Policies
9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Jan-
17
Jul-1
7
Jan-
18
Jul-1
8
Federal funds rate
Federal funds rate: market expectation (current)
Federal funds rate: market expectation (March 2016)
Federal funds rate: market expectation (March 2017)
FOMC December Median Projections
United States: Interest Rates
Forecast horizon
Source: Bloomberg L.P.
Note: FOMC = Federal Open Market Committee.
Mar 2017 gap: 0.2
Current gap: 0.0
Mar 2016 gap: 0.3
The market is catching up to the dot plot, suggesting less risk of surprises…
10
Latin
American
debt crisis
Scandinavian
banking crises
1997 AFC
1998
RussiaDot-com
bubble 2007-08
GFC
…but historically, market turmoil has often followed monetary normalization…
11
…and Asia could be materially affected given its high household and corporate leverage…
0
50
100
150
200
250
Hon
g K
ong
SA
R
Irel
and
Chi
na
Sw
eden
Fra
nce
Sin
gapo
re
Can
ada
Por
tuga
l
Japa
n
Kor
ea
Spa
in
Uni
ted
Kin
gdom
New
Zea
land
Aus
tral
ia
Uni
ted
Sta
tes
Hun
gary
Tur
key
Mal
aysi
a
Ger
man
y
Rus
sia
Tha
iland
Indi
a
Bra
zil
Col
ombi
a
Indo
nesi
a
Arg
entin
a
2017Q3 2007Q4
Source: Bank of International Settlements.
Non-Financial Corporate Debt(Percent of GDP)
0
20
40
60
80
100
120
140
Sw
itzer
land
Aus
tral
ia
Den
mar
k
Can
ada
Kor
ea
New
Zea
land
Uni
ted
Kin
gdom
Uni
ted
Sta
tes
Hon
g K
ong
SA
R
Tha
iland
Mal
aysi
a
Fin
land
Spa
in
Fra
nce
Sin
gapo
re
Japa
n
Ger
man
y
Chi
na
Chi
le
Col
ombi
a
Bra
zil
Indo
nesi
a
Rus
sia
Indi
a
Arg
entin
a
2017Q3 2007Q4
Source: Bank of International Settlements.
Household Debt(Percent of GDP)
12
…as well as the large capital flows it has attracted.
(15.6)(23.5)
(27.6)
(14.9)(22.5)
(27.7)
(18.1)(27.2)
(28.6)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Emerging Europe, theMiddle East, & Africa
Latin America & theCaribbean
Asia
Bill
ions
of U
SD
Total Portfolio Investment Liabilities(Percent of GDP in parentheses)
2010 2013 2016
Sources: IMF IFS database, and staff calculations.
Recent yield and dollar movements underscore the uncertainty.
13
2.7
2.75
2.8
2.85
2.9
2.95
3
3.05
US 10-Year Bond Yield (Percent)
Source: Thomson Reuters Datastream.
April 2 April 9 April 16 April 23 April 300.80
0.80
0.81
0.81
0.82
0.82
0.83
0.83
89
89.5
90
90.5
91
91.5
92
92.5
93
April 2 April 9 April 16 April 23 April 30
DXY US Dollar Currency Index
Euro per USD
US dollar and Euro Exchange Rate
Source: Thomson Reuters Datastream, and Haver Analytics..
Recent yield and dollar movements underscore the uncertainty.
14
0.80
0.82
0.84
0.86
0.88
0.90
0.92
0.94
0.96
0.98
88
90
92
94
96
98
100
102
104
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Apr
-18
DXY US Dollar Currency Index
Euro per USD (RHS)
US dollar and Euro Exchange Rate
Source: Thomson Reuters Datastream, and Haver Analytics..
2
2.2
2.4
2.6
2.8
3
3.2
Jan-
17
Feb
-17
Mar
-17
Apr
-17
May
-17
Jun-
17
Jul-1
7
Aug
-17
Sep
-17
Oct
-17
Nov
-17
Dec
-17
Jan-
18
Feb
-18
Mar
-18
Apr
-18
US 10-Year Bond Yield(Percent)
Source: Haver Analytics.
Trade
16
The US has made several recent tariff announcements.
17
China, in turn, has announced new tariffs…
0
100
200
300
400
500
600
USA China
Total imports from the other country
Imports from the other country affected by recentannouncements
Source: PIIE.
(Billions of US dollars)
0
20
40
60
80
100
0
50
100
150
200
250
Agr
icul
ture
Min
ing
Foo
d
Tex
tile
Lea
ther
Woo
d
Pap
er
Pet
role
um
Che
mic
als
Pla
stic
Min
eral
s
Bas
ic m
etal
s
Mac
hine
ry n
ec
Ele
ctric
al e
q.
Tra
nspo
rt
Oth
er
Total imports
Imports affected by 301 actions
Share affected (RHS, in percent)
US Imports from China(Billions of US dollars)
Sources: PIIE, Staff estimates.
0
20
40
60
80
100
0
50
100
150
200
250
Agr
icul
ture
Min
ing
Foo
d
Tex
tile
Lea
ther
Woo
d
Pap
er
Pet
role
um
Che
mic
als
Pla
stic
Min
eral
s
Bas
ic m
etal
s
Mac
hine
ry n
ec
Ele
ctric
al e
q.
Tra
nspo
rt
Oth
er
Total exports
Exports affected by China response
Share affected (RHS, in percent)
US Exports to China(Billions of US dollars)
Sources: PIIE, Staff estimates.
18
…which are concentrated in a few sectors.
19
Other countries are also exposed given their supply chain linkages to China.
69.2
30.8China Other countries
Value Added by Origins in China's Exports to the US(Percent, in 2011)
Sources: WIOD, and IMF staff calculations.
A move toward protectionism would be damaging.
20
-2.0
-1.5
-1.0
-0.5
0.0
0 1 2 3 4 5
Long-term outcome Short-term effects
-5
-4
-3
-2
-1
0
0 1 2 3 4 5-18
-16
-14
-12
-10
-8
-6
-4
-2
0
0 1 2 3 4 5
Sources: IMF, World Economic Outlook; and IMF staff calculations.
Global GDP(percent difference from baseline)
Global investment(percent difference from baseline)
Global real exports(percent difference from baseline)
• Financial markets
• Business and consumer confidence
• FDI and domestic investment
• Other channels
21
Effects through non-trade channels could be even more damaging.
-5.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0
ThailandMalaysiaIndonesiaNew ZealandIndiaVietnamTaiwan Province of ChinaAustraliaPhilippinesSingaporeHong Kong SARKoreaChinaJapan
Dow JonesS&P 500
United KingdomBrazilEuro areaSouth AfricaMexico
Stock Market Index March 23, 2018(Percent change; in local currency)
Sources: Bloomberg L.P.; Haver Analytics; and IMF staff calculations.
Taxes
The Tax Cuts and Jobs Act could affect Asia in many different ways.
Key elements of the corporate tax reform:
1. Rate cut from 35 to 21 (or even 13) percent
2. Expensing for 5 years (investment fully deductible for income tax purposes)
3. Shift from Worldwide to Territorial taxation
Many possible spillover channels:
1. Higher US investment / growth positive spillovers to Asia
2. Tax competition loss of US investment in Asia? fiscal loss?
3. Deemed repatriation capital flows out of Asia?23
24
The direct spillovers from higher US growth are positive but likely to be modest.
Impact on Real GDP Growth(Deviation from scenario without U.S. Tax Reform; Cumulative 2018-2020)
Source: IMF staff calculations
Asia
Impact on Real GDP Growth
(2018-2020)
Cambodia 0.5
Vietnam 0.4
Pacific Islands 0.2
Thailand 0.2
Singapore 0.2
Hong Kong SAR 0.2
Malaysia 0.2
Sri Lanka 0.2
Philippines 0.2
Bangladesh 0.1
Korea 0.1
New Zealand 0.1
Mongolia 0.0
Japan 0.2
Indonesia 0.1
China 0.1
India 0.1
Australia 0.0
Other Countries & Regional Aggregates
Canada 0.5
Mexico 0.4
Asia (average) 0.2
Latin America 0.3
Euro Area 0.2
Other Advanced Economies 0.2
Other Countries 0.1
25
But how will Asia be affected by the international tax competition that may arise?
0
5
10
15
20
25
30
35
40
Hon
g K
ong
SA
R
Sin
gapo
re
Tai
wan
PO
C
Tha
iland
Vie
tnam
Mal
aysi
a
Indo
nesi
a
Chi
na
Kor
ea
New
Zea
land
Aus
tral
ia
Phi
lippi
nes
Japa
n
Indi
a
Former US statutory rate New US rate for certain activities New US statutory rate
Source: IMF Fiscal Affairs Department, Tax Policy Rates.
Selected Economies: Corporate Income Tax Rates(Percent)
26
Asian countries receive substantial FDI from the US…
Canada7%
Europe59%
Latin America and Other Western
Hemisphere16%
Africa1%
Middle East1% Asia and
Pacific16%
U.S. Direct Investment Position Abroad (Millions of dollars, 2016)
Note: On a historical cost basis; Source: Bureau of Economic Analysis
0
10
20
30
40
50
60
70
80
90
0
50,000
100,000
150,000
200,000
250,000
300,000
Sin
gapo
re
Aus
tral
ia
Japa
n
Chi
na
Hon
g K
ong
SA
R
Kor
ea
Indi
a
Tai
wan
Pro
vinc
e of
Chi
na
Indo
nesi
a
Mal
aysi
a
Tha
iland
New
Zea
land
Phi
lippi
nes
Vie
tnam
USD Millions
Percent of GDP
U.S. Direct Investment Position Abroad (USD Millions & Percent of GDP, 2016)
Note: On a historical cost basis; Source: Bureau of Economic Analysis
0
2
4
6
8
10
12
14
16
Sin
gapo
re
Hon
g K
ong
SA
R
Mal
aysi
a
Tha
iland
Aus
tral
ia
Indo
nesi
a
Phi
lippi
nes
Tai
wan
Pro
vinc
e of
Chi
na
New
Zea
land
Kor
ea
Indi
a
Japa
n
Chi
na
Foreign Pre-Tax Income Reported by US MNEs(Percent of domestic GDP; 2010–13)
Sources: US Bureau of Economic Analysis; IMF World Economic Outlook; and staff calculations.
0
10
20
30
40
50
60
Europe Latin America Asia Africa Middle East
Foreign Pre-Tax Income Reported by US MNEs (Percent of total foreign pre-tax income; 2010–13)
Sources: US Bureau of Economic Analysis; and IMF staff calculations.
US corporations earn substantial profits in some Asian countries.
27
Other Uncertainties
1. North Korea tensions
2. Many elections coming
up in 2018-19
29
Asia also faces geopolitical risks…
30
…and many economies—particularly the PICs—are highly vulnerable to natural disasters.
Note: The size of circle denotes the probability that each country is hit by a severe (above 75th percentile) natural disaster.
Probability of a severe natural disaster during a given year
Policies
1. Fiscal policy should generally
focus more on building buffers
2. Monetary policy should be vigilant
3. Macroprudential tools are part of
the toolkit
4. Structural policies: fix the roof
32
Policymaking—a premium on prudence
1. Global factors have kept inflation low this could reverse
2. Inflation has become more backward looking once it rises, it may persist
3. The Phillips Curve has flattened reducing inflation may imply large output costs
33
Monetary policymakers must be vigilant and decisive.
Global factors have kept inflation subdued, but could reverse.
60
75 75
55
41
60
0
10
20
30
40
50
60
70
80
90
100
AE
Asi
a av
erag
e
Eur
o A
rea
aver
age
Uni
ted
Sta
tes
EM
Asi
a av
erag
e
LAC
ave
rage
EE
ave
rage
Inflation Explained by Global Factors(Percent)
Source: IMF staff estimates. 34
The inflation process has also become more backward-looking.
35
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
AE Asia AE others EM Asia EM others
2017 2008
Inflation Expectations Coefficient(Percent)
Source: IMF staff estimates.
36
The Phillips Curve has flattened.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
AE Asia AE others EM Asia EM others
2017 2008
Unemployment Gap Coefficient(Percent)
Source: IMF staff estimates.
37
The Phillips Curve has flattened.
-2
-1
0
1
2
3
4
5
6
7
-1 -0.5 0 0.5 1 1.5 2
1990-99 2000-09 2010-17
Advanced Asia: Headline Inflation and Cyclical
Unemployment Gap(Percent; average across economies)
Source: IMF staff calculations.
Cyclical unemployment
Hea
dlin
e in
flatio
n
-4
-2
0
2
4
6
8
10
12
14
16
-1.5 -1 -0.5 0 0.5 1 1.5
1990-99 2000-09 2010-17
Emerging Asia: Headline Inflation and Cyclical
Unemployment Gap(Percent; average across economies)
Source: IMF staff calculations.
Cyclical unemployment
Hea
dlin
e in
flatio
n
A flatter Phillips curve means a larger sacrifice ratio.
38
0
1
2
3
4
5
6
7
8
0 0.5 1 1.5 2 2.5 3 3.5
Infl
atio
n
Unemployment gap
Slope of Phillips Curve and Disinflation
Sources: Staff estimates
Steeper PC1
Flatter PC2
cost in terms of unemployment
cost in terms of unemployment
Desired change in
inflation
Desired change in
inflation
Sacrifice ratio under
PC2
Sacrifice ratio under
PC1
>
39
Macroprudential policies appear to be effective in controlling credit without dampening output.
MPP impact on business cycle
MPP impact on financial cycle
Thank you!
Additional Slides
42
3439
5860 61 63
0
10
20
30
40
50
60
70
80
90
100
Japa
n
Indo
nesi
a
Mal
aysi
a
Phi
lippi
nes
Hon
g K
ong
SA
R
Tha
iland
Inflation Explained by Global Factors(Percent)
Source: IMF staff estimates.
0
0.2
0.4
0.6
0.8
1
1.2
Thailand Philippines Japan Indonesia Hong KongSAR
Malaysia
2017 2008
Inflation Expectations Coefficient(Percent)
Source: IMF staff estimates.
0
0.2
0.4
0.6
0.8
1
1.2
Thailand Malaysia Philippines Indonesia Japan Hong KongSAR
2017 2008
Unemployment Gap Coefficient(Percent)
Source: IMF staff estimates.
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