Majority of Asian economies are expected to see short-term gains

The Asian Development Bank on April 6 released the Asian Development Outlook (ADO) 2017. The ADB’s flagship annual report analyzes economic performance in the past year and offers forecasts for the next two years for the 45 economies in Asia and the Pacific that make up developing Asia. The following is a summary of the latest edition of the ADO, provided by the Manila-based bank.

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 percent, according to the ADO.

In the report, the ADB forecasts gross domestic product (GDP) growth in Asia and the Pacific to reach 5.7 percent in 2017 and 2018, a slight deceleration from the 5.8 percent registered in 2016.

“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,” ADB Chief Economist Yasuyuki Sawada noted. “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 U.S., euro area, and Japan expected to collectively grow by 1.9 percent in 2017 and 2018. Rising consumer and business confidence and a declining unemployment rate have fueled U.S. 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.

The PRC’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 percent in 2017 and 6.2 percent in 2018, down from 2016’s 6.7 percent. 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 percent in 2017 and 7.2 percent in 2018. In India, the subregion’s largest economy, growth is expected to pick up to 7.4 percent in fiscal 2017 and 7.6 percent in fiscal 2018, following the 7.1 percent registered last fiscal year. The impact of the demonetization of high-value banknotes is dissipating as 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 percent in 2017 and 5 percent in 2018, up from the 4.7 percent recorded last year. Commodity producers such as Malaysia, Vietnam and Indonesia will be boosted by the recovery of global food and fuel prices.

Growth in Central Asia is expected to reach 3.1 percent in 2017 and 3.5 percent 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 percent and 3.3 percent growth over the next two 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 percent in 2017 and 3.2 percent in 2018 from the 2.5 percent 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 percent.

Risks to the outlook include higher U.S. interest rates, which will accelerate capital outflows, although this risk is mitigated to some degree by abundant liquidity throughout the region. The effects of U.S. 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 good 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.

In the meantime, reforms to increase productivity on the basis of better innovation, education and infrastructure can help developing countries in Asia and the Pacific graduate to high-income status, the report said in its special theme chapter on transcending developing Asia’s middle-income challenge.

“Past development success in Asia and the Pacific means most citizens in the region now live in a middle-income environment,” said ADB Chief Economist Sawada. “Policymakers will need to change their approach to reach high income. It is no longer a question of them using more resources to sustain growth, economies must become more productive to clear the final hurdle.”

The report notes that in 1991 only 10 percent of the population in Asia and the Pacific lived in middle-income economies. By 2015, this had increased to over 95 percent of the region’s population, fueled by growth in the region’s most populous countries: the PRC, India and Indonesia.

To raise productivity, countries in developing Asia will need to focus on innovation. Middle-income countries that successfully moved up to high-income status have more than two and a half times as much stock of accumulated research and development as middle-income countries.

Innovation requires a skilled workforce, and hence an emphasis on improving education quality. The report estimates that a 20 percent increase in human capital spending per person can increase labor productivity by up to 3.1 percent. Sound educational policies can also promote equity and close the wide education gaps between developing Asia and high-income economies, while encouraging innovation and entrepreneurship.

Infrastructure investment, particularly in energy and information and communications technology, can contribute to innovation and human capital, thus sustaining growth in middle-income countries. A one-time public investment in infrastructure equal to 1 percent of gross domestic product can lift a country’s output by as much as 1.2 percent in seven years.

Asia’s dynamic track record suggests that the journey to high income, while challenging, can be completed. Supportive institutions and policies, underpinned by macroeconomic stability, can strengthen the pillars of productivity growth — innovation, human capital and infrastructure.

For further information, see www.adb.org/publications/asian-development-outlook-2017-middle-income-challenge and the ADO 2017 can be seen at www.adb.org/sites/default/files/publication/237761/ado-2017.pdf.

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