Asia To Emerge in 2017: India & China remain most influential economies

Growth in emerging Asian economies continues on a slow trend. The region faces ongoing weak global economic conditions and struggles to find a sustainable growth path for the medium term after the rapid “catch-up” era of the 1990s and early 2000s.

Nonetheless, growth in emerging Asian economies is likely to remain relatively robust compared to other regions.

The Conference Board projects a growth rate of 4.7 percent for emerging Asia in 2017, slightly down from 4.9 percent in 2016. This compares favorably with the aggregate growth rate for all emerging and developing economies, which is projected to increase by 3.6 percent in 2017, up from 3.2 percent in 2016.

In the next decade:

• India, along with many Southeast Asian countries, will continue benefiting from a “demographic dividend,” in which a fast-growing, young working population will provide an ample labor force as well as potential for consumption growth.
• China and Thailand, where labor force growth will slow in the next decade, will see contribution to GDP growth from labor quantity turn negative, raising the pressure to improve the quality of investment and productivity.
• Productivity growth will likely accelerate in Malaysia and Vietnam, thanks partly to catch-up growth but also improved efficiency in investment as these countries integrate further into the global supply chain.
• In some emerging Asian economies, particularly the lower income ones, labor productivity will also improve because of continued urbanization, better education, and more formal training.

These trends suggest that despite short-term downside risks, market volatility, and more moderate longer-term economic growth in the region, companies and investors can still benefit from emerging Asia’s relatively resilient growth, productivity growth potential, and massive consumer market.

Leverage new regional integration initiatives

The ASEAN Economic Community (AEC), created at the end of 2015, is expected to support intraregional free trade in goods and services and greater mobility of capital and labor.

A stronger buildup of a consumer base, supported by the integration of product markets across ASEAN economies, can also release substantially larger consumer purchasing power than in the past.

Anticipate business opportunities brought by structural reforms

Most Asian economies are in need of reforms to sustain solid growth rates in the medium term. In the medium to long term, reform will lead to more balanced economies and sustainable growth.

• Despite its slow and painful progress in materializing structural reforms, China continues on its path to transitioning from a manufacturing to a consumption and services-driven economy. The rising cost of Chinese labor and the increasing competition from low-labor-cost economies will urge China’s industrial sectors to move up in the global value chain.
• Although India’s “Make in India” manufacturing campaign so far remains more rhetoric than reality, its prospective tax reforms in the medium term can potentially improve operating efficiency and reduce transaction costs for businesses.
• In Southeast Asia, many macroeconomic policies meant to diversify trade portfolios (particularly in services), improve infrastructure, reduce poverty and income inequality, as well as promote better education and healthcare will broaden the base for private investment.

Growth in the Association of Southeast Asian Nations (ASEAN) picked up moderately in 2016.

While the small and open economies in this association continue to suffer from weak global trade, fiscal stimulus and public investment expansion boosted growthin Indonesia, the Philippines, Thailand, and Vietnam. By contrast, Malaysia’s economy continues to suffer from rapid currency depreciation and weakening business confidence, while financial market volatility and uncertainty brought by the Brexit referendum weighed on investors’ sentiment in Singapore.

Short-term developments and risks

Market volatility and uncertainty remain elevated and challenge the path to sustained growth in 2017. The major trends observed in 2016 are likely to continue into 2017:

• Exports are unlikely to offer much upside to the region’s growth outlook.
• Public spending will continue expanding in most emerging Asian countries but likely at a slower rate than that seen in 2016.

• Household consumption growth is expected to remain solid, supported by resilient labor markets, steady wage increases, and low energy and commodity prices.
• Downside risks remain elevated. As the US Federal Reserve Bank continues to look at the possibility of raising interest rates, global financial and credit conditions are likely to continue tightening in 2017 and beyond, weighing on the region’s currency value and financial stability, and lowering investment and economic growth.
• The economic stagnation in Japan along with slower growth and ongoing economic rebalancing in China also affect emerging Asia’s economic outlook.

Going into 2017, emerging Asia will likely see growth continue to moderate in two of the region’s largest economies: China and India. Growth is projected to decelerate from 3.9 percent in 2016 to 3.8 percent in 2017 for China, and from 6.8 percent in 2016 to 6.5 percent in 2017 for India.

Growth in other developing Asian economies, however, is expected to remain steady at an average rate of 5 percent next year. The main driver of growth in emerging Asia will continue to come from domestic demand, particularly consumption, which remained resilient in 2016.

Expansionary fiscal policy will likely continue into 2017 in most emerging Asian countries, but eventually, widening fiscal deficits in those countries will likely put a cap on public spending. Monetary policy will remain accommodating for now, but most emerging Asian central banks remain on the sidelines. The US Federal Reserve Bank’s next interest rate increase, as well as China’s foreign exchange rate policy, will have a large influence on the decision making of central banks in the region.

Most Southeast Asian economies have strong trade ties with both Japan and especially with China and are extremely sensitive to the fluctuations in their foreign exchange rate and capital flows. Domestic and geopolitical uncertainties may also disrupt the region’s economic stability.

Southeast Asia: Enhancing Regional Integration

The other developing Asian economies (including Indonesia, Malaysia, Pakistan, Philippines, Thailand, and Vietnam) will grow at 4.9 percent from 2017–2021.

Against the backdrop of a subdued global growth environment and deteriorating domestic demand, many Southeast Asian economies have either implemented fiscal and monetary easing measures to support growth or rolled out economic reform plans to restore business confidence and attract foreign investment. Increased government infrastructural project spending, household consumption due to tax breaks, and business investment may start to take effect in these economies in the next five years.

In addition, regional integration efforts have intensified among the Southeast Asian economies. The creation of the AEC at the end of 2015 could be a modest step toward a strengthening of an open internal market in the region. A stronger buildup of a consumer base, supported by the integration of product markets across ASEAN economies, may also release substantially larger consumer purchasing power than in the past.

The China-led Asia Infrastructure Investment Bank (AIIB), which includes all the ASEAN countries—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam—opened its doors in January 2016. In the long run, if it proves to be successful, it may provide support for much-needed infrastructural financing for Southeast Asian economies, particularly the lower income ones.

The region’s commitment to invest in green growth and renewable energy may also boost Southeast Asia’s dynamic growth potential. As most regional economies are net importers of energy, improving renewable energy infrastructure and efficiency will help the countries meet growing domestic demand and provide a promising source of exports throughout the region.

To continue advancing and moving up in the global value chain, a stronger orientation toward innovation, more deep-seated reforms in the labor market, and development of human capital will be key for Southeast Asian economies to sustain growth into the 2020s.

CREDIT SOURCE: THE CONFERENCE BOARD (Global Economic Outlook 2017)