Asia's enviable growth

Feature | 26 June 2017
Rainforest_Growth_Asia_World_Bank

The East Asia and Pacific region is expected to grow by 6.2% in 2017 and 6.1% in 2018, with the only threat to growth from within the region coming from an abrupt slowdown in China, says the World Bank

Regional growth continued to be robust and in line with expectations in the first half of 2017. Solid domestic demand growth reflected accommodative macroeconomic policies and tight labour markets. Export volumes firmed across the region, reflecting gradually strengthening global activity. Purchasing managers' indexes and consumer sentiment indicators point to solid activity across the region in the second quarter of the year.

Regional inflation is trending up, reflecting positive inflation in Thailand and increased price pressures in the rest of the region, particularly in Malaysia. Producer prices have recovered, particularly in China and commodity exporting economies, reflecting the stabilisation of commodity prices and a rebound in economic activity. Regional financial markets stabilised after a period of volatility in late 2016, net capital outflows declined, and regional currencies and asset prices firmed.

National breakdown

In China, following strong growth in 2016Q4 (6.8% year-on-year (yoy)), GDP expanded by 6.9% yoy in 2017Q1, helped by robust consumption and a recovery of exports. Rebalancing from investment to consumption resumed as state driven investment growth slowed and private sector investment growth recovered from a mid-2016 dip, but remained weak. House price growth declined in major cities and credit growth slowed on tighter regulations and less accommodative monetary policy.

Consumer price inflation has remained below target. Producer price inflation has moderated somewhat from its peak in February, reflecting higher commodity prices and reduced overcapacity in heavy industry. Export growth accelerated on stronger external demand. The pace of foreign reserve drawdowns slowed following a tightening of capital controls on capital outflows and measures to encourage foreign direct investment.

Growth continues to strengthen in commodity exporting economies. Domestic demand and imports are firming, reflecting improved confidence, higher corporate profits, and diminishing drag from macroeconomic adjustment. In Indonesia, investment climate reforms and recovering commodity prices have supported a private investment recovery.

In Malaysia, stabilising commodity prices have lifted business sentiment and investment. In Indonesia, export volumes, which had contracted through mid-2016, rebounded strongly in 2016Q4, and export values continued to accelerate in the first two months of 2017 on strong demand from China.

In Malaysia, export growth (especially in electrical and electronics goods) is being bolstered by a global pickup in manufacturing and trade, and a modest recovery of oil and gas shipments. Growth in commodity-importing economies remains robust, as accommodative policies continue to support solid growth of domestic demand.

In the Philippines, expansionary fiscal policy has boosted capital formation, while robust remittances, credit growth, and low inflation have supported private consumption. In Thailand, domestic demand is gradually recovering from several years of subdued performance, but policy uncertainty continues to weigh on growth. Overall, exports in commodity-importing economies are generally benefitting from strengthening global demand, although performance remains mixed.

After a period of financial market volatility in late 2016 (which contributed to capital outflows from the region and put pressure on regional exchange rates and equity prices) global financing conditions have improved in 2017. Sovereign bond spreads have narrowed, most notably in commodity exporters (for example Indonesia and Malaysia) and Vietnam.

Capital inflows to East Asia and Pacific bond and equity mutual funds have resumed (including in Malaysia and Thailand, which had experienced substantial outflows) and have been broadly stable in 2017. Most regional currencies have strengthened against the US dollar. Regional equity prices have generally recovered their earlier losses, reflecting improved confidence and a stabilisation of global bond yields.

Authorities are gradually moving to a less accommodating policy stance, with some exceptions. China raised its short-term interest rates in the first quarter of 2017 and continued to tighten macro-prudential regulations to address financial stability risks. Malaysia made some progress in renewing medium-term fiscal consolidation efforts. Indonesia is not planning to extend expenditure cuts into 2017 and has signalled a more accommodative stance for the medium term. Policies in the Philippines remain accommodative, despite rapid credit growth, accelerated inflation, widening fiscal deficits, and falling current account surpluses.

Figure 1: East Asia and Pacific GDP growth

Source: World Bank

Outlook for the region

The regional growth outlook for 2017-19 remains solid. Growth is projected to reach 6.2% in 2017 - just below the 6.3% rate of 2016. This reflects a gradual slowdown in China, which offsets a pickup of activity in the rest of the region led by a rebound in commodity exporters. The outlook is predicated on a modest recovery of commodity prices and stronger external demand. A rebound in global trade is expected to offset the negative effects on activity of a gradual tightening of global financing conditions.

Growth in China is projected to slow from a projected 6.5% in 2017 to 6.3% on average in 2018-19. Fiscal support will continue to offset monetary tightening. Policies will continue to support growth and contain financial risks and encourage rebalancing. A moderate recovery in Chinese imports reflects robust domestic demand. Improving global demand supports export, but rising cost pressures will limit export growth. The baseline forecast assumes no material change in trade or political relations between China and the US, notwithstanding policy efforts to reduce China's trade surplus with the US.

Growth in the rest of the region is projected to pick up from an estimated 5.1% in 2017 to 5.2% on average in 2018-19, reflecting a continued recovery in commodity exporters and Thailand. Growth in commodity exporters will continue to accelerate, from an estimated 5.1% in 2017 to its long-term average of 5.3% in 2019. This assumes that the adjustment to low commodity prices runs its course over the forecast horizon, exports rebound, and investment growth stabilises around its long-term trend.

In Indonesia, growth is projected to firm up from an estimated 5.2% in 2017 to 5.4% in 2019. The impact of fiscal consolidation is expected to gradually dissipate. Private activity will pick up, helped by modestly rising commodity prices, improving external demand, and increased confidence bolstered by reform measures and recent upgrades of Indonesia's sovereign ratings by major credit rating agencies. These include streamlining business regulations, liberalising the foreign direct investment regime, and a stable rupiah.

In Malaysia, income support measures, higher infrastructure spending, and improved exports are forecast to raise growth. In Mongolia, growth is projected to stagnate in 2017, partly reflecting efforts to reduce public debt to sustainable levels, before staging a modest recovery in 2018. A solid rebound is expected starting in 2019, reflecting macroeconomic stabilisation, structural reforms, large new investments into coal and gold mines, and a rebound of production in the Oyu Tolgoi copper mine.

Growth in commodity importers is projected to accelerate from 5% in 2017 to 5.2% on average in 2018-19, slightly above the long-term average of 4.8%. In the Philippines, growth led by accelerated public and private investment is expected to remain at just under 7% in 2017-19 - significantly higher than the long-term average of 4.3%. Accelerated public investment spending and recovering private consumption are expected to support slightly stronger growth in Thailand in 2018-19.

Nevertheless, growth in Thailand will remain below the long-term trend of 4.5%, as policy uncertainty and slowing productivity growth dampen private investment. In Vietnam, growth is projected to remain solid, at slightly below 6.5% throughout the forecast period, helped by strong exports. The outlook for Pacific Island countries is benign, reflecting favourable conditions for fisheries, tourism, and migration, conditional on proper domestic policies.

Risks and spillovers

Risks to the outlook remain tilted to the downside and are mainly external. They include heightened policy uncertainty in the US and Europe, increased protectionism, and the risk of an abrupt tightening of financing conditions. In addition, a steeper-than-expected slowdown in China would have sizable regional spillovers.

Global economic policy uncertainty has been particularly elevated since the start of 2017, the sources of which are extensive. In the US, the new administration has suggested major shifts in fiscal, trade, and immigration policies. In Europe, the rising influence of populist parties could reorient policies and affect economic integration in the EU. Negotiations around the exit of the UK from the EU also carry risks. If the uncertainty persists, it could weigh on investor confidence and derail the ongoing recovery in growth.

Rising protectionist sentiments in advanced economies are creating uncertainty about the future of established trading relationships. The new US administration has started reassessing a number of existing trade agreements. Some recent related actions, including the withdrawal of the US from the Trans-Pacific Partnership (TPP), are already in effect. These could remove significant opportunities from Vietnam, and, to a lesser extent, Malaysia.  

Changing trade policies would disproportionately affect the more open economies in the East Asia and Pacific region, especially those with sizable exports to advanced economies (such as Cambodia, China, Malaysia, Thailand, Vietnam). Significant disruption to China's exports would undermine its growth, with large spillovers on the region. Furthermore, trade restricting measures in the US could trigger retaliatory measures.

A faster than expected tightening of global financing conditions could set back regional growth and exacerbate existing financial vulnerabilities. The shock would transmit to the region through reduced capital flows, high volatility, pressure on nominal exchange rates and asset prices, and increased risk premiums. This could result in increased debt-service burdens and rollover risks, especially for unhedged short-term, foreign currency-denominated debt.

Domestic vulnerabilities, related to elevated domestic debt (for example China, Malaysia and Thailand) and large external financing needs in some countries (Indonesia, Malaysia, Mongolia), would amplify the impact of external shocks. Meanwhile, shallow policy buffers are a concern in smaller countries such as Mongolia and Papua New Guinea especially, and to some extent in Lao PDR and Vietnam.

This is an extract from the Word Bank's Global Economic Prospects June 2017, East Asia and Pacific. It has been reproduced here with permission.

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