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Macroeconomic Prospects and Challenges

1. GDP growth in the ASEAN+3 region is projected at 5.4 percent in 2018, underpinned by resilient domestic demand and export growth, with stable inflation. Growth in China and Japan, the region’s two largest economies, is robust.

2. Based on AMRO’s analysis, most regional economies are at mid-business cycle, where growth is picking up with small output gap close to zero and stable inflation. In the credit cycle, credit has started slowing in many regional economies after a period of above-trend growth, partly reflecting the result of pro-active policy action by authorities.

3. Improving external demand has allowed the region to build up further buffers against potential external shocks. Regional exchange rates have become more flexible in recent years, and have played a greater role as a shock absorber.

4. Based on AMRO’s Global Risk Map that analyzes the likelihood and imminence of risks, the two main near-term risks facing the region are a faster-than-expected tightening in global financial conditions, and an escalation of global trade tensions. If these risks materialize, spillovers to the region would be through capital outflows, higher borrowing costs and adverse impact on trade and investment flows.

5. To address risks and sustain growth, policymakers should continue to build policy space, particularly in monetary policy, for tighter global financial conditions ahead. Fiscal policy may have to play a greater role in supporting growth, subject to available fiscal space and to fiscal rules. In sectors where vulnerabilities have built up with credit growth in the past, tightening macroprudential policy can help safeguard financial stability.

Theme: Resilience and Growth in a Changing World

6. ASEAN+3 economies have pursued a “manufacturing for exports” strategy over the past few decades, which has created a strong and self-reinforcing dynamic to boost economic growth, employment, productivity, and wages.

7. This “manufacturing for exports” strategy is now put to the test by structural changes in the evolution of global value chains, which show signs of plateauing with enhanced domestic productive capacity that allows countries to produce instead of importing intermediate inputs. Balanced against these forces is growing intra-regional final demand, which is absorbing more regional exports and can help cushion the external shock of protectionism.

8. Technology has proven to be a double-edged sword in the “manufacturing for exports” growth dynamics. On the one hand, with technology and automation, manufacturing will no longer generate employment opportunities as in the past. On the other hand, technology has facilitated the emergence of the services sector as a potential new engine of economic growth and employment.

9. To respond to these challenges, the region as a whole should strengthen intra-regional connectivity and integration to meet growing intra-regional demand and improve the resilience of the region against external shocks. For individual economies, the key recommendation is to build resilience through multiple engines of growth, including through the growing services sector.

10. The ample resources and diversity in development within the ASEAN+3 region are sources of strength. Policy efforts should focus on improving connectivity through investment in domestic and intra-regional infrastructure, coupled with trade facilitation policies. Policies to build a vibrant services sector and human capital would be appropriate, including services sector liberalization and leveraging on the availability of human capital across the ASEAN+3 region through supportive workforce and immigration policies.