Asia’s Growth Gap: India Versus The Rest


India has emerged as Asia’s leading light as China’s slowdown continues and other developing economies struggle to pick up speed, according to the latest economic indicators.

On Wednesday, China released data showing the world’s second-biggest economy expanded at its weakest pace since 2009 in the March quarter, slowing to an annualized gross domestic product (GDP) growth rate of 7 percent on lower investment growth and a weak property sector.

While in line with Beijing’s official target and the median estimate of economists surveyed by Bloomberg, industrial production slowed to its lowest level since 2008 and fixed asset investment hit a record low, causing Asian stocks and market interest rates to fall.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

For the quarter, China’s economy grew by 1.3 percent, down from 1.5 percent growth in the previous quarter, with analysts urging further monetary easing to counter deflationary pressures.

“Economic momentum down-shifted more significantly in March,” Andrew Polk, a Beijing-based economist at the Conference Board research group, told Bloomberg News. “The implications are for further sluggishness in the second quarter, without a more forceful policy response.”

While ANZ Research noted some “initial signs of recovery” following recent moves by Beijing to stimulate investment, it maintained its forecast of 6.8 percent GDP growth in 2015 since “the authorities are unlikely to engage [in] aggressive policy easing and policy actions will remain data dependent.”

“The changing economic incentives among local government officials on top of an anti-corruption campaign suggests that many local governments may choose to do less than more, which will further slow the implementation of infrastructure investment and reforms,” the Australian bank’s economists warned.

On Tuesday, the International Monetary Fund (IMF) maintained its January forecasts for Chinese GDP growth of 6.8 percent this year and 6.3 percent in 2016, stating in its latest “World Economic Outlook” that Beijing’s emphasis on reducing vulnerabilities from recent rapid credit and investment growth would likely cause a further investment slowdown, especially in real estate.

With property investment accounting for up to a fifth of China’s total fixed asset investment, the weak property sector has significantly weighed on the previously booming economy. According to the Australian Financial Review, around 6.5 million newly completed residential apartments lie vacant amid an “acute oversupply of property across the country.”

India, Japan Upgraded

The IMF cut its growth forecasts for most emerging and developing economies, down from 4.6 percent last year to 4.3 percent in 2015, amid lower commodity prices and the regional effects of China’s slowdown. Emerging and developing Asia is expected to slow from 6.8 percent growth in 2014 to 6.6 percent this year and 6.4 percent in 2016, with the region as a whole expected to post 5.6 percent and 5.5 percent growth in 2015 and 2016, respectively.

However, it reaffirmed that India would overtake China as the fastest growing major economy in 2015, expanding by a predicted 7.5 percent both this year and next, up 1.2 percentage point and 1 percent from its January WEO update, respectively.

“[India’s] growth will benefit from recent policy reforms, a consequent pickup in investment, and lower oil prices…[which] will raise real disposable incomes, particularly among poorer households, and help drive down inflation,” the Washington-based organization said.

Indonesia, Malaysia, the Philippines, Thailand and Vietnam are expected to post growth of 5.2 percent this year and 5.3 percent in 2016, unchanged from the IMF’s previous forecasts and up slightly from the 4.6 percent growth achieved in 2014. However, the brighter forecast masks expected divergence among the ASEAN members, with Malaysia seen slowing markedly this year while the Philippines and Thailand pick up speed and Indonesia remains steady.

While the IMF noted Japan’s disappointing performance in 2014 following its consumption tax hike, it revised upwards its forecasts for the world’s third-biggest economy to 1 percent growth this year and 1.2 percent in 2016, up 0.4 percentage point on its January forecasts.

“The gradual pickup reflects support from the weaker yen, higher real wages, and higher equity prices due to the Bank of Japan’s additional quantitative and qualitative easing, as well as lower oil and commodity prices,” it said.

Improved conditions in Japan reflect a general rebound in advanced economies, which are forecast to increase from 1.8 percent GDP growth in 2014 to 2.4 percent in 2015, supported by cheaper oil. However, the IMF cut its forecasts for the U.S. economy to 3.1 percent growth this year and next, down 0.5 percentage point and 0.2 percentage point, respectively.

While the IMF said the Asia-Pacific region would “continue outperforming the rest of the world over the medium term,” it noted the risk of “elevated household and corporate debt amid higher real interest rates and a strong U.S. dollar.” Although lower oil prices will deliver a windfall gain of 1.7 percent to regional GDP in 2015, commodity exporters including Australia, Indonesia and Malaysia will see a fall in foreign earnings that is set to batter government coffers.

The fund said South Korea’s growth momentum had stalled, with its forecast 3.3 percent growth in 2015 dependent on supportive monetary policy and improved terms of trade. Despite the end of the mining boom, Australia is predicted to see a slight improvement to 2.8 percent growth in 2015 and 3.2 percent in 2016, aided by lower interest rates and a weaker currency.

Risks for Asia include further weakness in the region’s two heavyweights, China and Japan, along with persistent U.S. dollar strength and higher debt-servicing costs. Australia, Japan, South Korea and Thailand have been identified as growing slower than their potential speed, requiring policy action to combat declining inflation expectations.

Overall, the IMF said the global economy would expand by 3.5 percent this year and 3.8 percent in 2016, although it warned of challenges including lower potential growth resulting from the global financial crisis, and the effects of movements in oil prices and currencies that were creating “winners and losers.”

“A further sharp dollar appreciation could trigger financial tensions elsewhere, particularly in emerging markets,” it said, noting the potential for surprises from “disruptive asset price shifts.” Events in Ukraine, the Middle East and West Africa “could generate regional and global spillovers,” while stagnation and low inflation in advanced economies could further hamper the recovery, it said.

Adding to the softer picture for emerging Asia, on Monday the World Bank said East Asia’s developing economies would slow to 6.7 percent growth in 2015 and 2016, down from 6.9 percent in 2014. It said in its “East Asia and Pacific Economic Update” that China would moderate to 7 percent growth in the next two years, with Beijing facing a “delicate balancing act” of reforming the economy and cutting local government debt while preventing a sharp slowdown.

Excluding China, the region is expected to see growth improve by 0.5 percentage point in 2015 and 0.3 point next year, helped by stronger ASEAN economies, with the exception of Malaysia.

Yet despite the gloomier outlook, the Washington-based financial institution said Asia would still remain the center of global economic activity.

“Despite slightly slower growth in East Asia, the region will still account for one-third of global growth, twice the combined contribution of all other developing regions,” said Axel van Trotsenburg, World Bank East Asia and Pacific Regional Vice President.

“Lower oil prices will boost domestic demand in most countries in the region and provide policymakers a unique opportunity to push fiscal reforms that will raise revenues and reorient public spending toward infrastructure and other productive uses. These reforms can improve East Asia’s competitiveness and help the region retain its status as the world’s economic growth engine.”

In the meantime though, Asia will be hoping India continues its newfound mission as the regional growth leader, while China and Japan grapple with much-needed reforms.

Sign up for our weekly newsletter
The Diplomat Brief