Transcript Slide 1 - Asia Economic Forum (AEF)

Economic Recovery and Policy Challenges in Asia
Asia Economic Forum
Phnom Penh, July 31, 2011
Faisal Ahmed
IMF Resident Representative, Cambodia
The views expressed in this presentation are those of the author, and not necessarily those of the IMF, its Executive Board or Management
On the theme of the 2011 Asia Economic Forum:
Is it the “rise” or “resurgence” of Asia?
(During the Khmer empire era, Asia produced three-fourths of world GDP)
Asian Share of World GDP during the Past 2000 Years
(In percent)
100
80
60
40
20
0
0
1000
Source: Angus Maddison
1500
1600
1700
1820
1870
1913
1950
1973
2000
2
Plan of the presentation
Global Recovery
APEC: Growth
Outlook
• The global recovery has continued in 2011-Q1
• The slowdown in Q2 is only a bump on the road
• But downside risks have intensified since April
• Strong growth outlook in Asia
• Concerns on quality of growth
• Main risks are from volatile capital inflows and global
slowdown
Overheating: How
Serious Are the
Risks?
• Inflationary pressures in many APEC EMs have extended
from food and energy prices to other prices, and expectations
• A few signs of overheating in asset markets
Policy Challenges:
Engineering a
Smooth Landing
• Macro policy stances should be tightened further in APEC
EMs facing inflationary pressures
• Macro prudential measures a useful complement, not a
substitute
• Beyond the short-term: need to rebalance demand, and make
growth more inclusive
3
Global Recovery
4
Global Recovery
The global economy has continued to advance in Q1
despite some negative surprises
Global GDP Growth
Selected Economies: GDP Growth in
2011:Q1
(q/q, in percent; SAAR)
April 2011 WEO
8
0
2
-2
0
-4
-2
-6
-4
2011:Q1
2010:Q3
2010:Q1
2009:Q3
2009:Q1
2008:Q3
2008:Q1
2007:Q3
2007:Q1
2006:Q3
2006:Q1
-8
EM Europe
4
EM Asia
2
Latin America
6
U.S.
4
Actual
Japan
6
10
U.K.
April 2011 WEO
forecast
Euro area
8
(q/q, in percent; SAAR)
5
Global Recovery
A sluggish recovery so far, as expected
AE recessions following financial crises
Output
Other AE recessions
Current U.S. path
House Prices
105
106
104
100
102
95
100
90
98
85
96
80
94
0
1
2
3
4
5
6
7
8
Unemployment Rate
5
0
9 10 11 12
1
2
3
4
5
6
7
8
9 10 11 12
4
5
6
7
8
9
Equity Prices
(normalized at 0)
120
110
4
100
3
90
80
2
70
1
60
0
50
0
1
2
3
4
5
6
Source: IMF staff calculations.
7
8
9
10 11 12
0
1
2
(indices; quarters after peak in real GDP on x-axis)
3
10 11 12
6
Global Recovery
Risks remain from slow progress in reducing unemployment
and insufficient fiscal and financial adjustment in AE
Unemployment Rate
Required Fiscal Adjustment
(Percent)
(In percent of GDP)
U.S.
U.K.
Germany
Euro area
G-20 advanced
12
EU Banks: Core Tier-1 Ratios
14
(In percent; end-2010)
Projected Adjustments
2010–15
12
20
18
16
11
10
10
8
9
6
10
4
8
6
2
6
5
0
Germany
Italy
Canada
France
Spain
U.K.
May-11
2009:Q1
2007:Q1
2005:Q1
4
4
U.S.
7
12
Japan
8
14
Note: Cyclically adjusted primary balance
adjustment needed to bring the debt ratio
to 60 percent in 2030, except for Japan.
2
0
Source: GFSR, April 2011.
Note: Includes 84 EU banks.
7
Global Recovery
Commodity prices have declined since April
and supply disruptions from Japan should soon fade
Commodity Price Indices
Japan: Restoration of Capacity in
Different Sectors
(January 2010 = 100)
(Percent of firms with restored capacity)
260
Metals
Food
Material industry
Processing industry
Raw Materials
0
100
Dec
120
Nov
20
Oct
140
Sep
40
Aug
160
Jul
60
Mar
180
Jun
80
Crude Oil (APSP)
200
100
May
220
Auto industry
Apr
240
120
(After earthquake)
May-11
Jan-11
Sep-10
May-10
Jan-10
80
Source: METI and IHS Automotive.
Note: The chart is from April and restoration plans have been
moved up by 1-2 months, but no new comprehensive survey
data are available.
8
Global Recovery
Overheating is a concern in many EMs
Output Gap and Inflation
Credit to Private Sector
(In percent)
(Year-on-year percent change)
10
IND
60
8
50
7
6
5
4
BRA
IDN
40
30
HK SAR
PHL
MEX
THA
PER
SGP
KOR
20
MYS
3
10
CLE
2
0
TWN
1
-10
0
-1
0
1
Estimated Output gap in 2011
2
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Headline inflation
(year-on-year, April 2011)
9
Emerging Asia (excl. China)
China
Latin America
Russia
9
APEC Growth Outlook
10
Outlook
APEC EMs started 2011 with strong momentum
2011:Q1 GDP Growth
(q/q, in percent; SAAR)
Actual
April 2011 WEO forecast
Exports of Goods
(In billions of U.S. dollars, seasonally adjusted)
800
EM Asia
Latin America
25
700
20
600
15
10
500
5
2002-07 trend
400
0
300
-5
AUS
JPN
MEX
IDN
PER
KOR
MYS
THA
PHL
CHN
HK SAR
CLE
TWN
SGP
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
200
-10
11
Outlook
Growth will be driven by exports in EM Asia and
domestic demand in LATAM
Domestic Demand and GDP
Emerging Asia: Exports of Goods and Global
Investment Cycle
(Year-on-year percent change)
(Year-on-year percent change)
Emerging Asia's export (volume)
12
Real fixed investment in advanced economies
URU
SGP
VEN
VNM
ARG
IDN
BRA
0
PHL
HKG
BOL
TWN
KOR
MYS
ECU
5
4
-10
MEX
3
THA
-20
2
2
4
6
8
10
Real GDP growth in 2011
12
2011:Q4
6
2010:Q1
COL
10
CLE
2008:Q1
7
IND
PER
2006:Q1
8
20
CHN
2004:Q1
9
2002:Q1
10
30
45 degree line
2000:Q1
Real domestic demand
growth in 2011
11
12
Outlook
Risks from capital inflows volatility…
Weekly Flows into EM Equity and Bond Funds
and Global Risk Aversion
Flows (12-week moving average, left scale)
Domestic Demand Growth in Episodes of Easy
External Financing
(Difference of growth rates relative to
non-episode years)
5
5
0.08
4
0.07
3
0.06
2
0.05
1
0.04
0
0.03
-1
0.02
-2
0.01
-3
0
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Trillions of U.S. dollars
CBOE VIX (inverted, right scale)
4
3
2
1
0
Latin
America
Asia
Emerging
Europe
MENA
13
Outlook
…further increases in oil prices, and a global slowdown
Impact of Oil Price Shock on 2011 Growth
(Deviation from baseline; in percentage points)
Impact of Slowdown in U.S. Growth
(In percentage points)
1.5
0
1.0
-0.1
-0.2
0.5
-0.3
0.0
-0.4
-0.5
-0.5
-0.6
NZL
TWN
HK SAR
CHN
KOR
VNM
PER
JPN
SGP
THA
MEX
PHL
CLE
IDN
AUS
MYS
RUS
-1.0
Note: Impact of a 40 percent rise in oil prices from April
2011 WEO baseline assumption.
-0.7
Asia
Latin America
Note: Impact of a 1 percentage point slowdown in U.S.
growth.
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Overheating: How Serious Are the Risks?
15
Overheating
A key risk for EMs is overheating: higher food and energy
prices have spilled over to generalized inflation…
Changes in Headline Inflation
Expectations of Annual Average Inflation
in 2011: Change since October 2010
(As of May 2011; change since minimum
inflation rate in 2009, in percentage points)
20
15
Contribution from other prices
Contribution from food and fuel prices
Change in headline inflation
(In percentage points; as of May 2011)
6
5
4
10
3
5
1
-5
0
MEX
RUS
AUS
KOR
NZL
PER
JPN
IDN
TWN
PHL
SGP
CLE
MYS
HK SAR
CHN
THA
VNM
0
Note: Data for Hong Kong SAR, Japan, Malaysia, and
Singapore are as of April 2011; and Australia and New
Zealand are as of March 2011.
MEX
AUS
IDN
NZL
TWN
MYS
THA
RUS
JPN
PER
PHL
KOR
CLE
HK SAR
SGP
CHN
VNM
2
16
Overheating
…as output gaps have closed and macroeconomic
policies remained accommodative
Estimated Output Gap Closing Dates
TWN
SGP
PHL
KOR
THA
PER
MYS
IDN
HK SAR
CLE
AUS
MEX
RUS
NZL
JPN
(In percent)
2011:Q2
Average (2000-10)
10
9
8
7
6
5
4
3
2
1
0
2011
2013
2015
2017
TWN
RUS
HKG
MEX
JPN
PHL
KOR
CHN
SGP
MYS
THA
PER
AUS
CLE
IDN
NZL
VNM
2009
Real Lending Rates
17
Overheating
Inflation is expected to generally peak in 2011
but to remain high
Consumer Price Inflation
(Year –on-year; in percent)
18
2011 (Proj.)
16
2012 (Proj.)
Mid point of target (or average over 2005-10)
14
12
10
8
6
4
2
0
Note: Core inflation targets for Indonesia and Thailand.
VNM
RUS
IDN
HK SAR
PHL
CHN
KOR
NZL
THA
MEX
CLE
AUS
SGP
MYS
PER
TWN
JPN
-2
18
Policy Challenges: Engineering A Smooth Landing
19
Policy Challenges
Both monetary and fiscal policy tightening is warranted
in economies facing generalized inflationary pressures
Policy Interest Rates
Cyclically Adjusted Fiscal Balances
(In percent)
2002-07 (average)
Policy rate (as of June 14)
1
IDN
CLE
PER
PHL
THA
KOR
MYS
0
Russia
2
Peru
3
NZL
2012 (Proj.)
Mexico
4
Chile
5
China
6
ASEAN-5
7
AUS
2011 (Proj.)
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
Taylor rule implied rate (2011)
NIEs
8
Industrial Asia
9
(In percent of GDP)
20
Policy Challenges
There is also room for further exchange rates appreciation,
especially for a number of Asian economies
Real Effective Exchange Rates
(Percent change between peak during 2007-08 and April 2011; increase = appreciation)
15
10
5
0
-5
-10
-15
-20
AUS
SGP
RUS
IDN
MYS
THA
PHL
CHN
CLE
PER
TWN
NZL
JPN
MEX
HK SAR
VNM
KOR
-25
21
Policy Challenges
Asian economies have generally reacted to large capital
inflows by accumulating reserves
Stock of FX Reserves
Sources of Change in Stock of FX Reserves
(In billions of U.S. dollars)
6000
(In percent of GDP)
Other
Valuation effect
Financial account flows
Current account flows
Changes in stock of FX reserves
Sep-07
Apr-11
5000
10
8
4000
6
4
3000
2
0
2000
-2
Emerging
Asia
Latin
America
Emerging
Europe
Emerging
Asia
Latin
America
2010
2009
2008
2010
2009
2008
2010
2008
0
2009
-4
1000
Emerging
Europe
22
Policy Challenges
More exchange flexibility and fiscal prudence would also
provide a buffer against risks from volatile capital inflows
EM Asia: Response of Private Domestic Demand
to Non-FDI Net Capital Flows by Policy Regimes
(In percentage points, 4-quarter cumulative response)
1.0
Less flexible ER
More flexible ER
Exchange rate regime (ER, left scale)
Procyclical FP
Countercyclical FP
1.5
Fiscal policy regime (FP, right scale)
0.8
1.2
0.6
0.9
0.4
0.6
0.2
0.3
0.0
0.0
Private consumption Private gross fixed Private consumption Private gross fixed
expenditure
capital formation
expenditure
capital formation
Note: Average response of quarter-on-quarter seasonally adjusted growth rate to an increase in portfolio and other investment
flows by 1 percentage point of GDP. Emerging Asia includes ASEAN-4, India, Korea, and Chinese Taipei.
23
Conclusions




In many EM APEC economies growth outlook remains
strong but overheating pressures have surfaced. Need to
remain vigilant against the risk of credit/property prices
cycles in a few regional economies.
Dealing with these pressures requires tightening fiscal
stances and stronger currencies. Higher policy interest rates
should be part of the policy mix.
Macro-prudential measures are a useful complement, not a
substitute
In addition to dealing with overheating risks, policymakers
need to make sure that growth will be balanced and inclusive.
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Thank You.
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