This year should be another good one for Asia, with growth for the region forecast at 7 percent, the same as in 2005. This favorable view comes from the International Monetary Fund (IMF), in its May 2006 Asia-Pacific Regional Economic Outlook (REO) report, and derives mainly from the momentum that Asia has gathered in recent quarters.
Economies in emerging Asia are benefiting from a surge in external demand for the region's products, particularly electronics. And while domestic demand had long been tepid—China and India excepted—it has been gaining traction since early 2005. This is true even in long-stagnant Japan, where domestic demand is finally strengthening on the back of robust corporate investment and a firming labor market, which in turn is stimulating household incomes and consumption.
While inflation remains subdued, projected to average around 3 percent in 2006, the situation varies across the region, with price pressures being stronger in Indonesia, Malaysia, the Philippines and Thailand. Even there, the IMF is projecting inflation to slow over the course of the year, as the influence of domestic oil price adjustments wanes and recent monetary tightening takes hold.
Despite the generally favorable outlook, the report stresses that significant risks remain. These include the risk of higher oil prices, the tightening of global financial conditions and a possible avian flu pandemic.
In emerging Asia (excluding China), invigorating demand requires reviving investment, which fell by nearly 10 percent of gross domestic product (GDP) in the aftermath of the 1997 financial crisis, and it has not recovered since. But there is some evidence that corporations are responding to an increase in risk, as export and output volatility have increased with the region's shift in production toward advanced industries such as electronics.
This evidence suggests that boosting investment would require reforms on two fronts: the financial sector, which needs to be developed further to promote its ability to transfer risk from the corporate sector to the wider investing public; and the investment climate, which needs to be improved to reduce uncertainty and increase the rate of return on investment.
In China, meanwhile, investment has grown as a share of GDP while consumption's share has fallen by more than 10 percentage points since 1980 to around 40 percent of GDP—much lower than in other countries. Rebalancing growth in China toward greater reliance on consumption will require a combination of macroeconomic policy changes and structural reforms, says the IMF. About the author
Bob Gill, firstname.lastname@example.org, is Editor in Chief of Industrial Automation magazine in Singapore.