Purpose

This roundtable raises the need for macroeconomic and structural policy action to address challenges from the “new normal”. This event and any publication stemming from the outcome will provide policy recommendations to national authorities and promote better public understanding.

Background

Following the financial crisis of 2007–2008 and the aftermath of the 2008–2012 global recession, Asian economies had to cope with the side effects of unconventional monetary policies in advanced economies, the slowdown in these economies, and a slump in commodity prices. This resulted in diminished current accounts and weak economic growth conditions in Asia. There is no clear ending in sight to these phenomena.

Global economies have been locked into an unusually prolonged period of slow growth. The global financial market has been turbulent. There has been excessive reliance on central banks’ monetary policy to stimulate economic growth, creating macroeconomic and structural policy challenges in emerging Asian economies. This trend has become a post-crisis “new normal” worldwide.

Macroeconomic policy challenges refer to a prolonged spell of slow and asynchronous global growth, sustained abnormally low interest rates worldwide, low inflation and low commodity prices, volatile capital flow, and higher financial fragility concerns. This creates higher uncertainty and risk in the global financial market and the global economy. Slow and asynchronous global growth relates to the United States (US) which has a more stable economic growth outlook than the rest of the world. The EU and Japan have negative output gaps, weak economic growth, and negligible inflation. Slow growth is also widespread across emerging Asia. Growth in the PRC is moderate. As a result, interest rates remain abnormally low worldwide. The EU and Japan still need to pursue unconventional monetary policies and have introduced negative interest rates to stimulate growth and to boost inflation. Emerging Asian economies also pursue additional accommodative monetary policies to support economic growth when inflation is subdued. Although the US has started to normalize its monetary policy with an interest rate hike, the pace of normalization has been slower than expected. Owing to the threat of negative spillover effects from a bumpy global economic recovery, the US Federal Reserve cannot hike rates aggressively. This could keep the target federal fund rate below “normal” levels for quite some time. Prolonged abnormally low interest rates worldwide also create greater financial vulnerability in Asia. This is evident in more volatile stock prices, a distorted yield curve, higher house prices, and rising nonbank corporate debt. In addition, the asynchronous economic growth recovery and monetary policy divergence also translate into uncertainty, causing an abrupt change of risk sentiment in the global financial market. This creates volatile capital flows and foreign exchange rates. Although the pace in the growth slowdown in emerging Asian economies has decelerated since the start of 2015, challenging growth conditions still persist against a backdrop of sluggish global trade activity (due to lower demand and a PRC slowdown driving commodity prices down) and slowing growth in domestic demand.

It is important for governments in the region to make the distinction between cyclical factors and long-term structural factors. In the short term, output can fall below potential levels when there is a cyclical disturbance, which affects inflation targets. Central banks focusing on inflation may reduce interest rates to move inflation back on track. The government may use expansionary fiscal policy to support the economy. Cyclical factors continued to persist even 7 years after the global financial crisis. Economists started to raise questions of whether a fall in economic output over the long term is as a result of a decline in the total factor productivity growth or due to demographic trends. Recently, Asian Development Outlook (2016) suggested that the potential growth in the region has fallen by 2 percentage points since the global financial crisis. In the absence of structural reform, many countries in the region will see a further decrease because of unfavorable demographics, convergence with advanced economies, and spillover from a growth slowdown in the PRC. Recommendations to invigorate potential growth include:

  • Promoting sound macroeconomic management
  • Offsetting the demographic impact through reform, by increasing female participation in the workforce, extending the working age, and raising labor productivity by reducing factor misallocation and increasing capital investment
  • Better access to finance for small and medium-sized enterprises

Objectives

The project raises the need for macroeconomic and structural policy action to address challenges from the new normal. This roundtable and any publication stemming from the outcome aim to provide policy recommendations to national authorities and promote better public understanding on this topic.

Participants

The conference will gather people from government and well-known scholars and experts on macroeconomics. The conference will actively promote a discussion on monetary policy issues, foreign exchange rate policies, and macroprudential policies, fiscal policy, and structural policy.

Output

This activity will generate research papers.

Language

English

Partners

Organisation for Economic Co-operation and Development (OECD), ASEAN+3 Macroeconomic Research Office (AMRO), Asian Development Bank (ADB), and Economic Research Institute for ASEAN and East Asia (ERIA)

Time of event

Day 1: 10:00 - 17:00
Day 2: 09:00 - 12:45

Event Contact

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