The outlook for the Asia-Pacific region remains robust—the strongest in the world, in fact—and recent data point to a pickup in momentum. The near-term outlook, however, is clouded with significant uncertainty, and risks, on balance, remain slanted to the downside. Medium-term growth faces secular headwinds, including from population aging and sluggish productivity. Macroeconomic policies should continue to support growth while boosting resilience, external rebalancing, and inclusiveness. The region needs structural reforms to address its demographic challenges and to boost productivity.
The main findings by IMF are:
Trends. Asia is aging fast. The speed of aging is especially remarkable compared to the historical experience in Europe and the United States. As such, parts of Asia risk becoming old before becoming rich. The region’s per capita income relative to the United States stands at much lower levels than those reached by mature advanced economies in the past. In a global context, Asia is shifting from being the biggest contributor to the global working-age population to subtracting hundreds of millions of people from it.
Growth. Asia has enjoyed a substantial demographic dividend in past decades, but rapid aging is now set to create a demographic tax on growth. Demographic trends could subtract ½ to 1 percentage point from annual GDP growth over the next three decades in post-dividend countries such as China and Japan. In contrast, they could add 1 percentage point to annual GDP growth in early-dividend countries, such as India and Indonesia, if the transition is well managed. Overall, however, demographics are likely to be slightly negative for Asian growth and could subtract 0.1 of a percentage point from annual global growth over the next three decades (or 0.2 of a percentage point if early-dividend countries are unable to reap the demographic dividend). In several Asian economies, immigration—if past trends continue—could play an important role in softening the impact of aging or prolonging the demographic dividend (Australia, Hong Kong SAR, New Zealand, and Singapore).
Inflation. In cases in which structural excess savings and low investment due to demographics lead to such a low real neutral interest rate that monetary policy may no longer stimulate the economy, the economy may operate below potential, keeping inflation under the central bank’s target (see Box 2.1 for the case of Japan). This raises the risk of Asia falling into a period of “secular stagnation” at a lower income level compared to advanced economies and smaller policy buffers.
External flow balance. The diversity of demographic trends in the region creates opportunities for capital flows and crossborder risk sharing—that is, savings from surplus countries can be used to fulfill capital needs in younger economies. Projections based on the IMF’s External Balance Approach (EBA) model suggest that, over the next decade, surpluses of some Asian economies are projected to increase due to demographics. However, the impact is material only for a small set of countries, and the overall effect on global imbalances is likely to be limited (about 0.1 of a percentage point of global GDP over the next decade).
Financial markets. Finally, demographic trends are likely to put downward pressure on real interest rates and asset returns for most major countries in Asia. These domestic effects are likely to be less important for countries that are financially open. For those, changes in the world interest rate—which may in turn be driven by global aging trends—will likely matter more.
