In the past decade, developing Asia – Asia ex-Japan – has been a reliable growth anchor even in the most turbulent global waters.
Although world trade collapsed in the wake of the global financial crisis, the region’s gross domestic product (GDP) expanded by 6.9% on average between 2009 and 2015. Yet Asia is also intimately linked to the cross-border production networks within global supply chains for a wide range of manufactured goods. Clearly, the region welcomed the rebound in world trade. The pickup of trade volumes, which supported the growth pace of 6.1% achieved in 2017, was broad-based across products and synchronized across economies. Will the specter of trade protectionism derail developing Asia’s momentum? In light of the region’s strong domestic demand, I remain optimistic. In the Asian Development Outlook 2018 published last April, we forecast that the region would maintain its relatively rapid expansion of output: 6.0% in 2018 and 5.9% in 2019. These forecasts already factored in the effects of the tariffs the United States administration placed on solar cells, washing machines, steel, and aluminum. While external demand was expected to be broadly supportive, the foundation for growth lies in strong consumption and investment expansion in the region. Data for the first half of 2018 support this view.
Developing Asia is incredibly diverse, geographically spanning the small island economies in the Pacific to the former Soviet economies in central and west Asia. By population, it encompasses the world’s largest and smallest economies. Despite this diversity, most economies in the region enjoyed a pickup in growth in 2017 from the previous year, and they are generally consolidating these gains over the forecast horizon. The two largest economies – the People’s Republic of China (PRC) and India – are expected to continue their relatively rapid expansions. Strong domestic demand and rapid expansion of the service sector propelled PRC’s growth to 6.9% in 2017. These factors are expected to remain buoyant in the coming years even as authorities guide the economy to a more moderate, but more sustainable, growth path. Ongoing reforms to strengthen financial sector regulation and supervision as well as efforts to address the buildup of debt should help achieve that goal. We predict the economy will expand by 6.6% in 2018 and 6.4% in 2019. Growth of 6.8% year- on-year in the first quarter of 2018 suggests the economy is on track to meet our forecasts.
Reforms in India temporarily slowed its growth pace, but the economy is poised to rebound. India slowed to 6.7% in the fiscal year 2017 (ended 31 March 2018), from 7.1% the year before, as the demonetization of large banknotes in late 2016 had lingering effects on small business and private credit while the introduction of the national goods and services tax in July 2017 slowed business activity. The strong growth of 7.7% in the final quarter of the fiscal year 2017 supports our view that the negative growth effects of reform are transitory. With the economy now set to reap the benefits of reform, we forecast growth will pick up to 7.3% in 2018 and 7.6% in 2019. The economies of the Association of Southeast Asian Nations (ASEAN) are likely to sustain a higher growth path. Collectively, the ASEAN economies expanded by 5.2% in 2017, supported by the strong pickup in technology exports. The region is poised to maintain this pace in the near term. Growth in Indonesia, the Philippines, and Thailand will accelerate thanks to strong investment and consumption, while Vietnam is benefiting from its expanding industrial base.
The region’s sustained expansion is seen to be coupled with relatively stable consumer prices. However, some pickup in inflation is expected in light of rising global commodity prices and stronger consumer demand. The rise in oil prices in particular will feed the uptick in inflation. While the price of Brent crude averaged $54 per barrel in 2017, the spot price has averaged $71 per barrel in the first half of 2018. From an average of 2.3% inflation between 2015 and 2017, consumer prices are expected to rise by 2.9% this year and the next. Only Central Asia will see some dip in inflation, supported by earlier price stabilization efforts implemented to tame inflation that reached double digits in 2016. Despite this rise, inflationary expectations are well anchored as the rate is still well below the 10-year average of 3.7%.
While the overall outlook is encouraging, the risks to developing Asia’s prospects are tilted to the downside. One risk is sudden capital flow reversal arising from faster-than-expected US interest rate hikes. However, we gauge this as relatively minor. The forecasts themselves assume the Federal Reserve will increase the federal funds rate 4 times in 2018 and twice more in 2019 so a surprise hike would only occur if US inflation were to spike higher. Continued timely forward guidance from the Federal Reserve should prevent the policy changes from unsettling financial markets. Another risk is the impact of rising private debt in the region, particularly in light of the increases in interest rates. Policymakers need to monitor debt trends closely while also building more efficient financial systems. However, when it comes to the risks to the outlook, the elephant in the room is the recent rise in trade tensions. The US tariffs on solar panels, washing machines, steel, and aluminum affected only a small portion of the region’s trade. More worrying is the impact that further actions – such as the recent US tariffs targeting $36 billion in imported goods from PRC and the PRC countermeasures on an equivalent amount of imported goods from the US – could have on business and consumer confidence. Stronger intraregional links may help mitigate the effects of rising global trade tensions.
Yet, despite these risks, I have reason to remain optimistic. By and large, the economies in the region have improved their fiscal and financial positions – particularly after the robust growth in 2017. While there is no room for complacency, we believe the region is well placed to absorb potential shocks and continue its robust expansion in the near term.