Developing Asia’s gross domestic product is forecast to expand by 6.0% in 2018 and 5.8% in 2019. Consumer prices for 2018 and 2019 are projected to rise by 2.8%, says Asian Development Bank in its latest forecast. Growth in developing Asia has so far held up against external headwinds. The forecast for rising inflation is tempered despite higher global fuel and food prices. Downside risks to the outlook are intensifying. Any escalation of the trade conflict could disrupt cross-border production links.
While the region is expected to meet the Asian Development Outlook 2018 forecast of 6.0% growth in 2018, the projection for 2019 has been trimmed by 0.1 percentage points to 5.8%. Excluding Asia’s high-income newly industrialized economies, the region is expected to expand by 6.5% this year and 6.3% in 2019.
Safeguarding Asia against heightened uncertainty
Pockets of vulnerability are risks to macroeconomic and financial stability that require careful and constant monitoring. The application of different policy tools may entail tradeoffs and complementarities, both domestically and across borders.
Macroeconomic management requires close monitoring of vulnerability. Pockets of vulnerability—such as volatile capital flows, elevated debt levels, large and unexpected changes in exchange rates, sharp housing price increases, and contagion between economies—are risks to macroeconomic and financial stability that require careful and constant monitoring. Such vigilance facilitates preemptive measures to mitigate existing imbalances and new ones as they arise.
Policy tools are plentiful, but favourable results require coordination. The application of different policy tools may entail tradeoffs and complementarities, both domestically and across borders. Taking these factors into account may improve policy performance.
Domestic policy coordination to boost effectiveness and target conflicting objectives. Close links between business and financial cycles mean that effective responses depend critically on domestic policy coordination. Countercyclical fiscal policy, for instance, benefits from accommodative monetary policy to promote private investment and enhance growth. Similarly, macroprudential policy is more effective when coordinated with monetary policy. When lowering the interest rate to stimulate economic activity, for example, tighter macroprudential measures on housing can prevent overly rapid home price escalation. When, on the other hand, monetary policies are tightened to counter excessive borrowing or economic overheating, governments can consider measures for financial inclusion to avoid imposing onerous constraints on smaller borrowers.
Cross-border cooperation to avoid unwanted external spillover. One country implementing capital flow measures can alter net flows in other economies. With cross-border cooperation, the authorities can productively raise awareness of the unwanted consequences of policy spillover. Considering the cross-border effects of their own policies enables governments to help promote global stability. While monetary policy is generally understood to be oriented toward domestic objectives such as price stability and a sound financial system, the authorities, in particular, those in larger economies, should be mindful of cross-border spillover.
Stabilization policies work best where fundamentals are strong. To maintain stability under the current environment of heightened uncertainty, Asia may need to deploy the full range of policy tools at its disposal. These policies work best when fundamentals that support economic, social, and political stability are strong. Continued efforts are needed to promote sound fiscal policies, independent central banks, strong financial sectors, market-oriented structural reform, and adequate social safety nets. – ADB
