Sharp fluctuations of capital flows and possible stringent lending conditions, against the backdrop of an unstable economic recovery, requires appropriate policy measures to stabilize growth in the region, recommends the APEC Policy Support Unit in a report issued on the eve of this week’s meetings of APEC Leaders and Ministers in Bali.
The discussion by the U.S. Federal Reserve about the possibility of reducing the pace of its asset purchase program occurred at a time of weaker than expected economic activity in some APEC emerging and developing economies. This resulted in an outflow of capital in some economies in the APEC region.
Video of the APEC news conference, during which the latest APEC Economic Trends Analysis was launched, is available at this link.
“Equity prices, asset prices, housing prices and the cost of borrowing were all affected by quantitative easing and then by a reversal in investor sentiment in mid-year,” said Dr Alan Bollard, Executive Director of the APEC Secretariat. “This is in response to announcements on monetary conditions, which is part of a return to a new normal in markets.”
Moreover, the reassessment of the market on the future path of US monetary policy resulted in large depreciations in almost all APEC currencies against the US dollar. The depreciation was largest among commodity exporters, including Australia; Chile; Malaysia; Peru; Papau New Guinea and Russia; partly due to recent declines in commodity prices.
In July, the IMF revised downwards its growth forecasts for global output. World GDP is expected to grow at 3.1 percent in 2013 and 3.8 percent in 2014. In the APEC region, growth is expected to moderate from 4.1 percent in 2012 to 3.9 percent this year, before growing slightly at 4.4 percent in 2014.
Against this uncertain background, the APEC region showed uneven growth dynamics.
“Among industrialized and newly industrialized economies, there are signs of a turnaround in economic growth, although at a moderate pace. However, growth in APEC emerging and developing economies is trending downwards,” said Dr Denis Hew, Director of the APEC Policy Support Unit.
APEC emerging and developing economies have also been affected by the slowdown in global demand. Malaysia and the Philippines recorded a contraction in their export earnings this year. In Thailand, after a strong recovery of 19.8 percent growth, the increase in exports fell to 2.7 percent in the second quarter of this year. In China, net exports contributed to only 1.3 percent of the total GDP growth in the second quarter, a sharp slowdown from the 14.3 percent contribution the previous quarter.
Obstacles to APEC’s economic recovery remain. “One of the key areas that require attention by APEC policy makers is the impact that more costly capital will have on growth prospects,” said Dr Bollard.
“Rising domestic lending rates could constitute a risk to the economic recovery of many APEC economies. In particular, an ultra-accommodative monetary policy stance has fueled a rapid rise in credit growth. Currently, domestic credit to the private sector exceeds 100 percent of GDP in more than half of APEC economies,” explained Dr Bollard.
“On the one hand, the normalization of monetary stance in large economies can help to relieve the burden from asset price inflation in some APEC economies,” he added. “However, if investment and consumption are reduced, appropriate policy response will need to be taken.
A normalization of monetary policy in large economies will eventually need to take place and this may potentially lead to a re-emergence of financial market disturbances, the report cautioned.
“Rising international and domestic interest rates may complicate the task of many APEC economies to re-engineer the economy towards stronger domestic demand,” said Dr Hew. “However, with appropriate policy measures, the shift in monetary stance in advanced economies should not constrain domestic demand.”
The report calls for APEC policymakers to focus on a broad agenda of ensuring macroeconomic and financial stability. In tandem, APEC should pursue specific policies to improve the investment climate through structural reform and enhancing infrastructure as well other fiscal policies to promote greater consumer spending.
To download the APEC Economic Trends Analysis for October 2013, please click here.
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