The REO, which was released on April 29 in Shanghai, cautioned however that Asia still faces downside risks, as it remains highly vulnerable to a slower-than-expected recovery in the advanced economies, and because rapid and protracted capital inflows could disrupt financial and macroeconomic stability in some economies. Over the medium term, Asia’s main policy challenge will remain to achieve a rebalancing of growth from external to domestic sources. Doing so will require collective policy efforts across the region, the report said.

“Asia’s faster recovery seems to mark a break from the past,” the REO stated, noting that the current episode of the region’s recovery stands out in several respects. First, while Asia’s contribution in the past to global recoveries was lower than that of other regions, this time the region is leading the world recovery. Second, while Asia’s recovery from past recessions was generally export-driven, this time it has been reinforced by resilient domestic demand, including public stimulus but also household consumption. Finally, while in past recoveries capital was slow to return to Asia, this time net capital inflows to the region have surged, reflecting high levels of global liquidity as well as Asia’s improved resilience and economic framework.

In the near term, the REO projects Asia will continue leading the recovery, supported by the global and domestic inventory cycle that should continue to boost Asia’s industrial production and exports, particularly as demand recovers in advanced economies. Private domestic demand in the region is also expected to remain robust as it has developed substantial momentum even as public sector stimulus is being withdrawn in several economies. That said, the REO noted, “Asia’s fortune remains closely linked to the global economy.” The report further cautioned on uncertainties and challenges that the region will continue to face, principally in the form of an uneven pace of recovery across the region, with China, India, and a few other economies growing particularly rapidly.

The REO warned that Asia’s stronger cyclical position, ironically, may pose near-term risk through the acceleration of capital flows into the region. “Brighter economic growth prospects and widening interest rate differentials with advanced economies are likely to attract more capital to the region,” the report stated. “This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals.” While asset price increases in Asia so far “have been generally contained, with only a few local exceptions,” the report called on policymakers to “be attentive to safeguarding the macroeconomy and financial system against the buildup of imbalances in local asset and housing markets.”

In Chapter III of the report, entitled “Does Asia Need Rebalancing?”, the Outlook examined global rebalancing issues surrounding Asia. The analysis concludes that for Asia to be less dependent on external demand, all countries in the region, not just one or two, need to do their part collectively. “Simultaneous implementation across the region of a package of measures, including a combination of reforms in product and labor markets, fiscal and exchange rate policies and financial markets,” can shift the region’s growth pattern, it said. “When implemented on a stand-alone basis by individual economies, including China, rebalancing efforts will help increase growth in Asia but will not be sufficient to fill the void created by weaker external demand from advanced economies,” the chapter stressed.

Asia’s challenge in sustaining growth and maintaining its role as a global growth leader as well as other topical themes on the region will be further discussed at the upcoming high-level conference in Daejeon city, Korea, in July, co-hosted by the Korean government and the IMF.