MAS Staff Paper No. 57, February 2020 - By Joseph Goh, Heedon Kang, Zhi Xing Koh, Jin Way Lim, Cheng Wei Ng, Galen Sher, and Chris Yao
Medium-Term Growth in EMEAP Economies and some Implications for Monetary Policy
EMEAP economies have grown robustly over the last two decades, registering an average growth rate of about 5% per annum. The post-crisis environment, however, has posed new uncertainties over the sustainability of growth in the medium term, and brought to the fore important shifts in the supply-side determinants of potential growth. In the decade ahead, unfavourable demographics will pose a drag on growth in most EMEAP economies. Consequently, the steady expansion of the underlying working-age population can no longer be relied upon to deliver the trend growth rates seen in the past. Instead, sustainable growth has to come from productivity increases, which are, in turn, critically dependent on behavioural adaptations and policy responses.
This paper examines the factors affecting longer-term growth trends in the EMEAP economies and draws out several implications for the conduct of monetary policy. For economic restructuring to take place, it is critical that the macroeconomic environment remains conducive. Above all, price stability must be preserved to instil confidence in households to work and save, and to provide the assurance for firms to make longer-term investment decisions, change business processes, and engage in new lines of activity.