Global and Regional Economic Developments and Policy Priorities in the Pacific Chikahisa Sumi Director IMF Regional Office for Asia and the Pacific (OAP) Tokyo, Japan GLOBAL ACTIVITY STRENGTHENING, PFTAC Steering Committee Meeting WITH RISING DISPERSION AND UNCERTAINTY Honiara, Solomon Islands March 15-16, 217 1
Global activity strengthening, with rising dispersion and uncertainty Global growth: uneven pick up Advanced Economies (AE): improving performance primarily from the US, plus upward revision to Japan s growth rates, growth in other countries at sluggish rates Emerging Market and Developing Economies (EMDE): near-term growth prospects revised up, primarily from China, but substantial weakening in a few large economies Dispersion of outcomes is large, given uncertainty surrounding U.S policies and its global ramifications Policy priorities: differ across individual economies, but action relying on all levers is needed to reduce uncertainty and head off further growth disappointments 2
Multiple forces and realignments shaping the outlook Advanced economies Changing policy mix, U.S. Remaining post-crisis repair Fraying globalization consensus Emerging market and developing economies Rebalancing in China Tightening financial conditions Idiosyncratic shocks Firming of oil and some other commodity prices Multiple forces and realignments shaping the outlook 3
Growth projections: Advanced economies (percent change from a year earlier) World Advanced Economies U.S. U.K. Japan Euro Area Germany Canada Other Advanced Asia 216 3.1 1.6 1.6 2..9 1.7 1.7 1.3 2. 217 3.4 1.9 2.3 1.5.8 1.6 1.5 1.9 2.3 Revision from Oct. 216..1.1.4.2.1.1. -.2 218 3.6 2. 2.5 1.4.5 1.6 1.5 2. 2.6 Revision from Oct. 216..2.4 -.3...1.1 -.1 Sources: IMF, World Economic Outlook January 217 Update; and IMF, World Economic Outlook October 216. 4
Growth projections: Emerging markets and LIDCs (percent change from a year earlier) World Emerging Market and Developing Economies China India Brazil Russia Commodity Exporting Economies Low Income Developing Countries 216 3.1 4.1 6.7 6.6-3.5 -.6 1. 3.7 217 3.4 4.5 6.5 7.2.2 1.1 2.4 4.7 Revision from Oct. 216. -.1.3 -.4 -.3. -.1 -.2 218 3.6 4.8 6. 7.7 1.5 1.2 2.9 5.4 Revision from Oct. 216...... -.1.2 Sources: IMF, World Economic Outlook January 217 Update; and IMF, World Economic Outlook October 216. 5
Asia remains the global growth engine Growth Projections: Selected Asia and Pacific (percent change from a year earlier) World Asia China Japan India Australia and New Zealand ASEAN APD Small Pacific Islands 216 3.1 5.2 6.7.9 6.6 2.3 4.8 2.9 217 3.4 5.3 6.5.8 7.2 2.7 4.8 3.4 218 3.6 5.3 6..5 7.7 3. 5.1 3.2 Source: IMF staff. Note: Figures for India are on a fiscal year basis. 6
Signs of inflation bottoming out Inflation Swap Forward rate 5Y5 3.5 USD EUR JPY 3. 2.5 2. 1.5 1..5. -.5 1/3/214 9/3/214 5/3/215 1/3/216 9/3/216 1/13/217 Source: Bloomberg, L.P. 7
Near-term uptick on solid footing Global: Purchasing Managers' Index (SA, 5+=Expansion) 56 55 54 53 52 51 5 49 48 47 Composite Manufacturing Services Source: JP Morgan/ IHS Markit/ Haver Analytics. 8
Risks are two-sided, skewed to the downside Stronger growth. Support to activity from policy stimulus in the Unites States and China could turn out stronger than expected with possible positive confidence effects globally. Protectionism. Inward-looking policy approaches could harm trade and integration, leading firms to defer investment and hiring decisions. Stagnation in AEs. An extended period of weak demand could lead to persistently lower output and inflation in advanced economies. An unmooring of inflation expectations could raise real interest rates and weaken demand further. China s transition. China s rebalancing path could prove bumpier than expected. With continued reliance on credit and slow restructuring, the risk of an eventual disruptive adjustment is growing. Financial threats to EMs. Underlying vulnerabilities in some large EMs (high corporate debt, declining profitability, and weak balance sheets) together with the need to build policy buffers still leave EMDEs exposed to sudden shifts in investor confidence or surprises in U.S. monetary tightening. Non-economic shocks. Geopolitical risks and other factors ranging from droughts to terrorism could hurt sentiment 9
Rising long term yields and US dollar strengthening Advanced Economies: 1-Year Government Bond Yields (In percent) 3.5 3. 2.5 2. 1.5 1..5. -.5 United States Germany Japan United Kingdom U.S. German bond yield spread 1/1/213 2/1/214 3/1/215 4/1/216 Source: Haver Analytics. 1/12/217 Bilateral Exchange Rate Movements against USD (Percent change; positive = local currency appreciation) 12 115 11 15 1 95 9 85 8 yen pound euro Swiss franc 1/1/216 3/16/216 5/3/216 8/13/216 1/27/216 Sources: Bloomberg L.P.; and IMF staff calculations. 1/9/217 1
Asia vulnerable to trade shocks: mind the global value chains Exports to the United States (In percent of GDP) 18 16 14 12 1 8 6 4 2 Trade in Value Added to the United States (In percent of GDP) 18 16 14 12 1 8 6 4 2 Sources: Haver Analytics, World Economic Outlook; and IMF staff calculations. Sources: OECD, World Economic Outlook; and IMF staff calculations. 11
Policies: reinvigorate growth, improve its distribution, and make it durable Comprehensive and consistent three-pronged approach to growth Accommodative monetary and fiscal policy is needed but not enough, with data dependent normalization and buffers and growth-friendly policies in EMDEs Fiscal support must be tailored to available space and focus on fostering structural reforms Structural reforms prioritized to maximize impact are essential Also need to enhance financial stability Complete and implement regulatory reform Continue to build systemic resilience, strengthen bank business models and reform industry structure For EMDEs, ensure buffers against vulnerabilities and address financial and corporate imbalances Reinvigorate multilateral cooperative efforts Sustainably higher and inclusive growth needs comprehensive, well-balanced and well-communicated policies Refocus the trade discussion towards the benefit of integration and policies to mitigate side effects Address cooperatively other public-good problems, including refugees, between-country inequality, and climate change 12 1
APD Small States and Pacific Island Countries: growth is moderate and inflation remains low 8 7 6 5 4 3 2 1-1 -2 PNG Bhutan Fiji Tuvalu Vanuatu Micronesia Kiribati Tonga Marshall Islands Maldives Solomon Islands Samoa Palau Timor-Leste 7 6 5 4 3 2 1-1 Real GDP Growth (in percent) Inflation 216 (In percent) Fiji Kiribati Micronesia Palau PNG Samoa Solomon Islands Timor-Leste Tonga Tuvalu Vanuatu Average (212-215) 216
External positions diverged (low oil prices and natural disasters) but reserves are generally comfortable Reserve Levels (In months of imports) 12 1 215 216 8 6 4 2 Bhutan Solomon Islands Vanuatu Tuvalu Tonga Fiji PNG Samoa Timor Leste Maldives Palau Micronesia Fiji Kiribati Micronesia Palau PNG Samoa Solomon Islands Timor-Leste Tonga Tuvalu Vanuatu 35 25 15 5-5 -15-25 Current Account Balance (in percent of GDP) Current Account Balance (Average 212-14) Average (215-16)
Monetary conditions remain accommodative and credit growth quite rapid 3 25 2 15 1 5 213-15 Average Broad Money Growth (annual percentage change) Growth of Domestic Credit to Private Sector (In percent, year-on-year) 25 2 15 1 5 215 216, latest available 1/ -5 PNG Fiji Tonga Samoa Timor-Leste Vanuatu Solomon Islands Sources: IMF World Economic Outlook and IMD Tonga Bhutan Samoa Solomon Islands Fiji Maldives Papua New Guinea Vanuatu 1/ December for Fiji and Maldives; November for Tonga; October for Bhutan, Samoa, Solomon Islands and Vanuatu; September for PNG. 15
Fiscal positions look to have deteriorated in 216 Overall Balance - APD small states and Pacific islands (In percent of GDP) 5 4 3 2 1 215 216 Total Public Debt - APD small states and Pacific islands (In percent of GDP) 12 1 8 6 4 213 216 Caribbean average, 216-1 2-2 Micronesia Marshall Islands Samoa Bhutan Tonga Solomon Islands Palau Tuvalu PNG Fiji Maldives Vanuatu Kiribati Timor-Leste Bhutan Maldives Tuvalu Samoa Fiji Tonga PNG Marshall Islands Vanuatu Kiribati Palau Micronesia Solomon Islands Timor-Leste
Volatile revenue led to procyclical policy Fiscal Impulse and Terms of Trade, 25-12 14 12 Countercyclical Procyclical Fiscal impulse (In percent of GDP) 1 8 6 4 PICs 2 Other small states -4-2 2 4 6 8 1 Change in terms of trade (in percent)
Large share of current spending and wage bill Current vs Capital Expenditure, Average 212-15 ( In percent of GDP) 1 9 8 7 6 5 4 3 2 1 Current Expenditure Capital Expenditure Wage Bill: Percent of GDP (214) 45 4 35 3 25 2 15 1 5 Source: IMF Staff Reports Sources: IMF Staff Estimates
Limited capital spending led to infrastructure gaps Pacific Island Countries: Structural Indicators (Percentile ranks) Priorities are 1 8 Living standards outcome (Life expectancy at birth) Infrastructure quality (Mobile cellular subscriptions for every 1 persons) Business climate (Ease of Doing Business Score) country-specific, but generally include: 6 4 2 Addressing the infrastructure bottleneck Samoa Tonga Vanuatu Fiji Palau Micronesia Kiribati Solomon Islands Timor-Leste Marshall Islands PNG Fiji Palau Vanuatu Solomon Islands Timor-Leste Tonga Samoa PNG Tuvalu Micronesia Kiribati Marshall Islands Samoa Tonga Vanuatu Fiji Solomon Islands Palau PNG Kiribati Marshall Islands Micronesia Timor-Leste Higher performance Increasing living standards Improving the business climate
Small States of the Pacific: Risks to the Outlook 2 Probability of Occurrence of Natural Disasters 1 (Percent) Fiji Vanuatu Solomon Islands Tonga Samoa Caribbean small states Micronesia Tuvalu Timor-Leste Kiribati Marshall Islands Palau Small Pacific island countries 1 2 3 4 5 1/ During 197-214. Sources: Center for Research on Epidemiology for Disasters, International Disaster Database; IMF staff estimates. Shocks related to climate change Natural disasters (cyclone, drought, floods, etc.) External economic spillovers Global and regional economic slowdown, including the spillovers through Australia and New Zealand Volatility in global financial condition De-risking Domestic specific factors
Macroeconomic challenges Fiscal: Volatile fiscal revenue led to procyclical policy; Large current spending created budget rigidities; Limited capital spending contributed to infrastructure bottleneck; Limited fiscal buffers reduced policy options. Monetary: Relatively fixed exchange rate and large bank s excess liquidity provide little room for monetary policy. In most countries, monetary policy has been accommodative. Growth: Limited sources of growth; infrastructure bottleneck; high cost of financing; other structural issues (such as land) that hamper private sector developments.
Policy Priorities Build economic resilience to natural disasters and climate change: build policy buffers Enhance fiscal framework: fiscal anchor to manage revenue volatility, strengthen medium-term fiscal framework Strengthen revenue (tax, nontax) policies and administration Reform public financial management to improve quality of spending and close infrastructure gap Build financial stability: strengthen supervision/regulation, manage risks from rapid credit growth. Raise growth potential: invest in infrastructure, strengthen business climate, promote private sector development Improve the quality of statistics to facilitate policy formulation and business decisions
23 Tanggio Tumas
Backup slides with more on risks 24
ADVANCED ECONOMIES UNEVEN PROGRESS WITH RECOVERY 25
Output still below potential Output Gap (In percent of potential GDP) 1-1 -2-3 -4-5 -6-7 -8 Maximum output gap (28-17) 217 Source: IMF World Economic Outlook. 26
Labor market scars still visible Unemployment Rate (Percent of the Labor Force) 25 2 27 216 15 1 5 Source: IMF World Economic Outlook. 27
EMERGING MARKET AND DEVELOPING ECONOMIES 28
Rebalancing in China The share of industry in GDP is shrinking Share of Gross Value Added (In percent of GDP) 16 14 12 1 8 6 4 2 Real GDP (YoY, percent) Industry (Including construction; RHS) Services(RHS) 27 28 29 21 211 212 213 214 215 Source: CEIC 52 5 48 46 44 42 4 38 as is the share of investment Share of Gross Value added by Expenditue (In percent of GDP) 55 53 51 49 47 45 43 41 39 Investment: Nominal Investment: Real 37 Consumption: Nominal Consumption: Real 35 26 27 28 29 21 211 212 213 214 215 216 217 Source: IMF World Economic Outlook. 29
With vulnerabilities from continued reliance on credit China: Rising Dependence on Credit (In percent) 4 Real Credit Growth (YoY) 35 Private Sector Credit to GDP Ratio (RHS) 3 25 2 15 1 5 8Q1 9Q1 1Q1 11Q1 12Q1 13Q1 14Q1 15Q1 16Q1 Sources: Haver Analycis; and IMF Staff Estimates. 18 17 16 15 14 13 12 11 1 9 8 16Q4 3