The global economy shows signs of improving as major tail risks coming from advanced economies have receded. Asia and the Pacific also face better prospects.
After a year of subdued economic performance, growth in Asia is set to pick up to more than 5.75% in 2013, on strengthening external demand and continued robust domestic demand. The region is expected to benefit from demand for products from China, the near-term fiscal stimulus in Japan, and growing trade integration in Asean countries. Without any shocks to global food and commodity prices, inflation is expected to remain broadly unchanged from 2012.
Risks to the outlook have become more balanced in recent months. The risk of an acute eurozone crisis has diminished and the US "fiscal cliff" has been averted. Yet, the potential impact of external shocks on Asia's open economies remains considerable.
In addition, risks from within the region have come into clearer focus in recent months. Asset prices and private sector debt have kept rising in many Asian economies on the back of very low real interest rates and strong credit growth. There is a risk that this trend, if prolonged, could lead to financial imbalances that could set back economies when the conditions of ample liquidity and easy credit changes. Other potential risks include trade disruptions from natural disasters or geopolitical tensions, a loss of confidence in Japan's efforts to restore economic health, or an unexpected further slowdown in China.
After the flood
The floods of late 2011 were one of the worst natural disasters in recent times in terms of the destruction of property and foregone production. Yet, in these difficult times, the economy showed impressive resilience, with growth recovering quickly and strongly on the back of strong consumption and investment eased by supportive monetary and fiscal policies. Indeed, real GDP growth is estimated at more than 6% in 2012, after being flat in the previous year, while inflation remained under control.
Going forward, it is likely that growth will moderate this year, toward its normal trend, as fiscal incentives for consumption expire and the reconstruction of factories destroyed by the floods is completed. Once the recovery is well-entrenched, the accommodative policies that have supported the recovery will need to be gradually withdrawn to avoid building up inflationary pressures and other forms of economic imbalances in the future. Moreover, the successful implementation of a number of infrastructure projects, the completion of which could boost potential growth in the coming years, will require the rebuilding of fiscal space.
Thailand's recovery from the floods was a remarkable achievement. The country now faces a delicate balancing act: maintaining appropriate support for growth while guarding against the rise of financial imbalances and gradually rebuilding policy space to cope with future shocks and to allow for priority infrastructure projects. Adapting to shifting risks is one way to ensure that the current favourable economic conditions are sustained and contribute to inclusive prosperity for the benefit of all Thai people.
Anoop Singh is Director of the Asia and Pacific Department for the International Monetary Fund.
About the author
Writer: Anoop Singh