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Macroeconomic Prospects and Challenges

1. The ASEAN+3 region remains resilient, anchored by sustained domestic demand. Regional growth is expected to moderate slightly to 5.1 percent this year, and 5.0 in 2020, reflecting mostly the drag from exports, given the cyclical slowdown in the tech/capex cycle and lingering uncertainties from the U.S.-China trade negotiations.

2. In the near term, the risks confronting the region are mainly external. According to AMRO’s Global Risk Map, the biggest risk is still the escalation of global trade tensions from the imposition of additional tariffs by the U.S., which is characterized as medium likelihood-high impact. The specter of such an event could weigh on global growth, which could see a sharper deceleration, potentially exacerbated by a slowdown in the capex and tech cycle. The region could also be hit by volatility shocks from turbulent financial markets given that expectations can change suddenly.

3. The region is well-positioned to weather the headwinds from the slowdown in external demand. To address near term risks and sustain growth, regional policymakers should calibrate a policy mix corresponding to their respective economies’ cyclical positions in the business and credit cycles, as well as their external positions and financial vulnerabilities. AMRO’s analysis shows that most regional economies have adequate reserves and fiscal buffers. They are also mostly in the mid-phase of the business cycle, where growth is near their respective long-term trends with output gaps close to zero and inflation within policy targets or around the long-term trends. Credit cycles in the region are mostly in either the recovery or slowing phase and credit growths are close to trends.

4. Current policy stances are appropriate but authorities in the region should be ready to recalibrate the policy mix to support growth while preserving financial stability. These include some easing of monetary policy stance where appropriate; sustaining supportive fiscal policy, while combining targeted fiscal measures and structural policies to incentivize structural adjustments; and maintaining tight macroprudential policy to guard against the build-up of financial vulnerabilities. Notwithstanding the softer outlook, the region’s long term fundamentals remain intact, supported by robust consumption and growing intra-regional trade amid a rising middle class, rapid urbanization, and adoption of digital technology. Longer-term policy priorities, such as building productive capacity and connectivity and deepening domestic capital markets, should press ahead.

Theme: Building Capacity and Connectivity for the New Economy

5. After two decades of prospering from the “manufacturing for exports” strategy as the main pillar, the region needs to embrace technology, integration and multilateralization to transition successfully to the “new economy”. For the next phase of economic development, the region needs to redouble its efforts to enhance capacity and cross-border connectivity.

6. Three key drivers will shape capacity and connectivity priorities in the region for the medium to long term. These are: new demands arising from the global transition to the Fourth Industrial Revolution or more broadly the new economy, East Asia’s maturing and increasingly affluent populations with an expanding middle class, and the tension between burgeoning intra-regional demand and headwinds from protectionist tendencies in the trade and technology space.

7. Developing economies in the region continue to face three key challenges to growth: the funding, foreign exchange, and factors gaps. The funding gap captures the shortfalls between the low domestic savings and large investment needs of lower-income economies while the foreign exchange gap has to do with the financing constraint on emerging economies arising from the need to accumulate foreign reserves to mitigate risks related to sudden capital outflows. The factors gap captures non-financial constraints, including the need to develop human capital, expertise, technological capacity, and governance frameworks.

8. To address these challenges, there is a strong need for ASEAN+3 economies to leverage on intra-regional savings and investments; strengthen regional financial safety nets, including the Chiang Mai Initiative Multilateralisation (CMIM); and redouble efforts to develop ASEAN+3’s technological capacity, professional expertise in various fields, and further strengthen institutions for growth and governance.