Of course, as with any forecast, there is some meaningful chance that growth will be either weaker or stronger than the point forecast. While I believe that the risks around this consensus forecast are reasonably well balanced, I also believe that the likelihood that growth will be substantially stronger than the point forecast is probably relatively low. Several factors lead me to this conclusion. First, despite the fact that the household deleveraging process appears to be largely over and aggregate household net worth has been restored to pre-crisis levels, consumer spending is not as strong as one might expect given these conditions. As a result, the personal saving rate is currently significantly above what the historical relationship between household net worth and personal saving would suggest. There are several potential explanations for this development. Access to credit, while certainly improved, is probably still not fully restored, particularly for those with less than sterling credit histories. It is also quite likely that, in the wake of the deep recession and relatively sluggish growth of the past five years, households have higher than normal levels of precautionary saving. Another reason for seeing less than normal upside risk for consumer spending is that the growth stimulus from the consumer durable goods cycle is likely to weaken going forward. For example, sales of light-weight motor vehicles have steadily recovered from a low of 9.4 million units (annual rate) at the depths of the recession to an average of nearly 17 million units over the three months ending in September.

But interest rates and exchange rates cannot shoulder entirely the burden of adjustment to large and volatile capital flows. Asian countries have been experimenting the use of so-called macroprudential tools to complement the more traditional macroeconomic tools in dealing with capital flows and asset price inflation. These include the use of loan-to-value ratios, taxes and stamp duties on asset market transactions, and minimum holding periods for assets, all of which serve to dampen demand for domestic assets. Asia needs to continue refining these tools, learning from experience and adapting to different circumstances. Deepening and broadening financial markets Third, Asia must deepen and broaden its financial markets. Asia must do a better job in effectively intermediating its considerable savings pool as well as capital inflows towards  BIS central bankers’ speeches  3  more productive investment in the region. Deeper financial markets will help to absorb or redeploy more effectively capital from abroad. Broader financial markets will help minimise the flow of capital to unproductive investments by offering a wide range of investment instruments. The ADB has estimated that some $ trillion will be needed in Asia to finance infrastructure projects through 2020. Capital markets provide an efficient way to intermediate flows and can reduce the cost of borrowing. In fact, the financing needs of Asia – in infrastructure and other high fixed capital investments – are particularly amenable to capital market solutions, given the size of the financing tranche and the need for credit risk diversification.