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Asia’s Global Future Growth and Aging Population

By Vahd Nabyl Mulachela

With few exceptional countries, Asia is aging fast. Compared to the similar historical experiences in the US or Europe, the speed of aging in Asia is remarkably quick. It means that Asians may risk becoming old before becoming rich. And since Asia’s population is the largest in the world – the quick aging of Asia is also impacting the global scene. Once being the biggest contributor of working age population; Asia will deduct hundreds of millions of working age, as they get older and retiring.

This trend will impact the growth of GDP in Asian countries. While in the past decades some countries in Asia have enjoyed substantial demographic dividend; now with the rapid aging sets in, these demographic treats could discount GDP growth in some of those countries, such as Japan and China. It ranged between ½ to 1 percentage point of growth for the next three decades. In other countries like India and Indonesia, where demographic dividend trend is relatively recent, the GDP growth can increase by 1 percentage point – if this process of transition is managed nicely.

Demographic trend is one of the keys to understand the future of Asia. Considering Asia’s rapid aging, it is important for the region to develop and implement policies that aim at protecting the elderly and maintaining growth. These policies should include aspects of crafting a good pension system, which otherwise, if not managed prudently, can be financially and socially burdensome. Measures to tackle this issue can involve strategies to promote women and the elderly in labor pension plans.

Some economies in Asia also have the option to tap the potential trend of immigration, which to some extent bring the benefit of easing the impact of population aging. Several economies, such as Singapore, Australia, New Zealand and Hong Kong SAR may soften the negative consequence of aging domestic populations through good management of immigration policy. Allowing working age population to come and fill in the labor may help increase productivity. In fact, other economies outside Asia has already reaped the benefits of this regular migration for decades to support their domestic need of labor force and maintaining economic growth.

Weighing Global Growth Projection

Global growth for 2017 was estimated at
 3.7 percent. There is projection by the IMF that momentum of growth in 2017 would to carry into 2018 and 2019, with global growth revised up to 3.9 percent for both years. Advanced economies are expected to grow exceeding 2 percent in 2018 and 2019. This forecast tells that there is expectation that favorable global financial conditions and strong sentiment will help maintain acceleration in demand, especially in investment, with a noticeable impact on growth in economies with large exports.

In the U.S., temporary raise may derive from tax reform and associated fiscal stimulus, with favorable demand spillovers for U.S. trading partners— especially Canada and Mexico—during this period. Reduction in corporate tax rates in the U.S. is combined with the temporary allowance for full expensing of investment. Reduction of tax may decline tax revenues, but if spending cuts in the near term would not offset it, the tax reform is anticipated to stimulate near-term activity in the U.S. Stronger domestic demand is projected to increase imports and widen the U.S. current account deficit. The policy changes are projected to add to growth through 2020. The U.S. growth forecast has been raised from 2.3 percent to 2.7 percent in 2018, and from 1.9 percent to 2.5 percent in 2019.

For many of the euro area economies, especially for Germany, Italy, and the Netherlands, growth rates have been marked up, reflecting the stronger momentum in domestic demand and higher external demand. In Spain, growth has been marked down slightly for 2018, reflecting the effects of increased political uncertainty on confidence and demand.

The growth forecast for 2018 and 2019 has also been revised up for other advanced economies, reflecting in particular stronger growth in advanced Asian economies, which are especially sensitive to the outlook for global trade and investment. The growth forecast for Japan has been revised up for 2018 and 2019, reflecting upward revisions to external demand, the supplementary budget for 2018, and carryover from stronger-than-expected recent activity.

The prediction for aggregate growth of the emerging markets and developing economies for 2018 and 2019 has several differences in the outlook across regions.

In Asia, emerging and developing economies are projected to grow at around 6.5 percent over 2018–19, broadly as similar pace as in 2017. The region continues to account for over half of world growth. In China growth is expected to moderate gradually, pick up in India, and remain broadly stable in some of ASEAN countries.

In emerging and developing Europe, where growth in 2017 was estimated to have exceeded 5 percent, activity in 2018 and 2019 is projected to remain stronger. Poland and Turkey may have higher growth. These predictions reflect a favorable external environment, with easy financial conditions and stronger export demand from the euro area, and, for Turkey, an accommodative policy stance.

In Latin America, growth is expected at 1.9 percent in 2018 and
2.6 percent in 2019. This reflects an improved outlook for Mexico, benefiting from stronger U.S. demand, a firmer recovery in Brazil. Favorable effects of stronger commodity prices and easier financing conditions also bring advantage to some commodity-exporting countries. These upward trends offset the downward growth prediction for Venezuela.

Growth in lesser scale is expected to take place in the Middle East, North Africa, Afghanistan, and Pakistan. The figure is around 31⁄2 percent. Stronger oil prices may increase domestic demand in oil exporters, including Saudi Arabia, but the fiscal adjustment may still be needed to weigh on growth prospects.

The growth pickup in Sub-Saharan Africa from 2.7 percent in 2017 to 3.3 percent in 2018 and 3.5 percent in 2019 is anticipated. Nigeria is predicted to experience modest growth; while in South Africa growth is likely to be lower due to political uncertainty weighs on confidence and investment.

In the Commonwealth of Independent States, growth is projected to remain above 2 percent - supported by growth prospects for Russia in 2018.

Preparing for Unwanted Probabilities

Risks to the global growth are often associated with a tightening of global financing terms from their current easy settings, either in the near term or later. The change in U.S. tax policy appears to have limited impact. A financial market correction may be triggered, for example, by signs of firmer inflation in the U.S., where the boost to demand will exert downward pressure on the already very low unemployment rate.

Higher inflation pressure, together with faster Fed policy rate tightening than anticipated in the baseline, could contribute to stronger U.S. dollar. The tightening of global financial conditions would have implications for global asset prices and capital flows. Economies with high gross debt would need refinancing.

Very low interest rates and other favorable conditions of financial market may lead investors seeking for yield to be exposed to risks of lending to lower-rated corporate and sovereign borrowers, which may hinder the worthiness of their credit investment.

In addition, a number of important long-standing commercial agreements, such as NAFTA and the economic arrangements between the U.K. and rest of the European Union, are under renegotiation. These trends may lead to an increase in trade barriers and regulatory realignments. It may weigh on global investment and reduce production efficiency. Potential growth in advanced, emerging market, and developing economies may be affected. Without inclusive growth and the widening of external imbalances in some countries, pressures for inward-looking policies may increase.

Policy Paths

Each stage of economies: advanced, emerging and developing has unique set for policy. Two common policy objectives that could be applicable for all deal with raising output and adjusting fiscal. First, the need to raise potential output growth— through structural reforms to lift productivity and, especially in advanced economies with aging populations, enhanced labor force participation rates—while making sure that the growth is inclusive. Second, the necessity to build up resilience, such as through proactive financial regulation and balance sheet repair and strengthening fiscal buffers.

In addition, the optimal policy mix differs across countries. In advanced economies, a faster pace of policy normalization may be required to deal with inflation. Fiscal policy should focus on medium-term objectives — including public investment to boost potential output and initiatives to raise labor force participation rates where gaps exist.

In emerging market economies, improved monetary policy frameworks have helped lower core inflation. Fiscal policy is generally less flexible because these economies may need to gradually rebuild buffers, especially in commodity-dependent emerging market and developing economies. Policymakers should guard against the temptation to defer reforms and budgetary adjustments for later. Exchange rate flexibility can complement domestic policy settings. Preventing sustained misalignments in relative prices, facilitating adjustment to shocks, and curtailing the buildup of financial and external imbalances.

The policy challenges for low-income economies are rather more complex. They may involve multiple, sometimes conflicting goals. In order to avoid undesirable effect of protectionism and growth imbalances, multilateral cooperation is vital. It spirit remains crucial to safeguard global economic activities and ensure the benefits from technological progress and global economic integration are shared more widely. Priority areas include continuing the financial regulatory reform agenda; modernizing the rules-based multilateral trade framework; strengthening the global financial safety net; avoiding competitive races to the bottom in taxes, labor, and environmental standards; preserving correspondent banking relationships; curbing cross-border money laundering, organized crime, and terrorism; and mitigating and adapting to climate change.

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 2018 Antevorta

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