Growth is picking up in two-thirds of economies in developing Asia, supported by higher external demand, rebounding global commodity prices, and domestic reforms, making the region the largest single contributor to global growth at 60%, says a new Asian Development Bank (ADB) report.
In its new Asian Development Outlook (ADO) 2017, ADB forecasts gross domestic product (GDP) growth in Asia and the Pacific to reach 5.7% in 2017 and 2018, a slight deceleration from the 5.8% registered in 2016. ADO is ADB’s flagship annual economic publication.
“Developing Asia continues to drive the global economy even as the region adjusts to a more consumption-driven economy in the People’s Republic of China (PRC) and looming global risks,” said Yasuyuki Sawada, ADB’s Chief Economist. “While uncertain policy changes in advanced economies do pose a risk to the outlook, we feel that most economies are well positioned to weather potential short-term shocks.”
Industrial economies are gathering growth momentum, with the US, euro area, and Japan expected to collectively grow by 1.9% in 2017 and 2018.
Rising consumer and business confidence and a declining unemployment rate have fueled US growth, but uncertainty over future economic policies may test confidence.
The euro area continues to strengthen, but its outlook is somewhat clouded by uncertainties such as Brexit. Meanwhile, Japan remains dependent on its ability to maintain export growth to continue its expansion.
Moderate China growth
China’s growth continues to moderate as the government implements measures to transition the economy to a more consumption-driven model. Overall output is expected to slow to 6.5% in 2017 and 6.2% in 2018, down from 2016’s 6.7%.
Efforts to maintain financial and fiscal stability will continue to be a modest drag on growth going forward, but continued structural reform will help to maintain growth in the government’s target range.
South Asia remains the fastest growing of all subregions, with growth reaching 7% in 2017 and 7.2% in 2018. In India, the subregion’s largest economy, growth is expected to pick up to 7.4% in fiscal year (FY) 2017 and 7.6% in FY2018, following the 7.1% registered last FY.
Impact of demonetization
The impact of the demonetization of high-value banknotes is dissipating as the replacement banknotes enter circulation. Stronger consumption and fiscal reforms are also expected to improve business confidence and investment prospects in the country.
Overall growth in Southeast Asia is forecast to accelerate further with nearly all economies in the region showing an upward trend. The region will grow 4.8% in 2017 and 5% in 2018, from the 4.7% recorded last year. Commodity producers such as Malaysia, Viet Nam, and Indonesia will be boosted by the recovery of global food and fuel prices.
Growth in Central Asia is expected to reach 3.1% in 2017 and 3.5% in 2018, on the back of rising commodity prices and increased exports, albeit with large heterogeneity among countries in the region.
Meanwhile, countries in the Pacific will reach 2.9% and 3.3% growth over the next 2 years as the region’s largest economy, Papua New Guinea, stabilizes following a fiscal crunch and Fiji and Vanuatu recover from natural disasters.
Regional consumer price inflation is projected to accelerate to 3% in 2017 and 3.2% in 2018 from the 2.5% registered in 2016 on the back of stronger consumer demand and increasingly rising global commodity prices. Inflation projections for the next 2 years, however, are well below the 10-year regional average of 3.9%.
Risks to outlook
Risks to the outlook include higher US interest rates, which will accelerate capital outflows, although this risk is mitigated to some degree by abundant liquidity throughout the region.
The effects of US monetary policy tightening are likely to materialize only gradually, giving governments in Asia and the Pacific time to prepare adequately. Economies with flexible exchange rates may experience deeper currency depreciation and subsequent higher inflation, while managed currencies will tend to forfeit export price competitiveness.
On the domestic front, rising household debt in some Asian economies is a rising risk. Authorities can counter this risk through prudent macroprudential policies, such as requiring tighter debt-to-income ratios for loans. Authorities may also have to intervene more decisively in housing markets to cool speculative demand and head off asset bubbles.