Can Asia Overcome Lower Growth Speed Limits?


The slowdown from the global financial crisis could become the “new normal,” the International Monetary Fund (IMF) has warned. Can Asia defy the gloomy outlook?

On Thursday, the IMF’s managing director, Christine Lagarde, did not mince words when warning policymakers about the prospects for an extended downturn, should calls for reform go unheeded.

“Six months ago, I warned about the risk of a ‘new mediocre’ – low growth for a long time,” Lagarde told the Atlantic Council. “Today, we must prevent that new mediocre from becoming the ‘new reality’.”

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According to Lagarde, lower oil prices and improved growth in the United States have aided the global economic recovery, but it remains “moderate and uneven.” In 2014, the world economy expanded by 3.4 percent, around the average for the past three decades, but it was still “just not good enough,” she said.

According to the head of the Washington-based organization, advanced economies have picked up, including in the eurozone, but forecasts for most emerging and developing economies have worsened, mainly due to lower commodity prices. Lagarde pointed to significant challenges to the outlook, including the risk of stagflation and high debt and unemployment in advanced economies, as well as rising financial risks.

Lagarde highlighted IMF research showing that the 2008/09 global financial crisis (GFC) may have caused economic speed limits to have been reduced worldwide, with the risk that such lower potential growth targets could become permanent due to aging populations, weaker investment, and lower technology gains to productivity.

According to IMF researchers Patrick Blagrave and Davide Furceri, the decline in potential growth began as far back as the early 21st century in advanced economies and was worsened by the GFC, while emerging economies have suffered in the wake of the crisis.

Advanced economies are estimated to have lost around 0.5 percentage point of potential growth, owing to reduced capital growth particularly in the eurozone, and demographic factors such as aging, while emerging economies have lost 2 percentage points due entirely to poorer productivity.

Looking ahead, potential growth in advanced economies is seen rising only slightly, from an average of 1.3 percent from 2008-14 to 1.6 percent from 2015-20, well below pre-crisis rates of 2.25 percent. The picture is also worse for emerging economies, with potential growth expected to decline from an average of 6.5 percent during 2008-14 to 5.2 percent from 2015-20, due to population aging, structural constraints on capital growth, and lower productivity as such economies “get closer to the technological frontier.”

Both of Asia’s two biggest economies, China and Japan are expected to suffer from a significant decline in working-age population growth, with a potentially protracted period of weak demand in Japan further eroding labor supply and investment. China could see capital growth fall further “because of a rebalancing of growth away from investment and toward consumption,” along with a 0.75 percentage point drop in total factor productivity growth compared to pre-crisis rates.

For policymakers, lower potential growth will make it more difficult to improve public finances in both advanced and emerging economies, with advanced economies also facing the issue of continued low real interest rates.

While the IMF researchers said the future growth trajectory “is not set in stone,” policymakers need to encourage innovation, promote investment in productive capital, and counteract the negative effects of aging to raise the economic speed limits. They urged greater support for research and development, increased education quality, greater infrastructure spending to remove bottlenecks, improved labor-force participation and demand support where necessary through monetary and fiscal policies to boost investment and capital growth.

Lagarde stressed the “potentially huge global gains from further trade reform and integration,” also calling on the U.S. Congress to ratify the IMF’s 2010 governance reforms to give emerging and developing countries a greater “weight and voice.”

ADB: Asia To Maintain Growth

However, while Asia’s heavyweights assess the implications of the threatened growth limits, the region is still seen leading the pack among the world’s fastest-growing economies.

In its latest annual update, Asian Development Outlook 2015, the Asian Development Bank (ADB) has predicted that developing Asia will achieve growth in gross domestic product (GDP) of 6.3 percent in both 2015 and 2016, matching its performance of 2014 as stronger performances in India and ASEAN offset China’s slowdown.

“Developing Asia is making a strong contribution to global economic growth,” the ADB’s chief economist Shang-Jin Wei said. “Falling commodity prices are creating space for policymakers across the region to cut costly fuel subsidies or initiate other structural reforms. This is a key opportunity to build frameworks that will support more inclusive and sustainable growth in the longer term.”

According to the ADB, developing Asia (comprising the bank’s 45 members) has contributed 2.3 percentage points to global GDP growth since the trough of the GFC in 2009, or nearly 60 percent of the world’s annual 4 percent pace. In addition, eight economies in the region have posted annual growth exceeding 7 percent in nearly every year of the post-crisis period, including China, Laos and Sri Lanka.

South Asia is forecast to lead the way with a 7.2 percent GDP gain in 2015 and 7.6 percent next year, “reflecting the strong performance anticipated in India,” which is predicted to post 7.8 percent growth in fiscal 2015 and 8.2 percent the following year.

Southeast Asia is also set to improve with a 4.9 percent gain this year and 5.3 percent in 2016, aided by a recovery in Indonesia and Thailand.

However, East Asia is seen slowing to 6.5 percent growth in 2015 and 6.3 percent next year, reflecting a weaker Chinese economy, which will also weigh on Mongolia. Reduced investment will see China’s GDP growth drop to 7.2 percent this year and 7 percent in 2016, the ADB said, down from the average 8.5 percent expansion recorded in the period since the GFC.

On Friday, ANZ Research said “deflation risk remains elevated in China” with consumer and producer prices falling. It urged further monetary easing to increase GDP growth, which it has forecast at 6.8 percent for 2015.

The ADB also cited risks to its forecasts, including slower growth in China and India, as well as the impact of external threats including the Greek debt crisis and deepening recession in Russia.

“The impending rise in U.S. interest rates may reverse capital flows to the region, requiring monetary responses to maintain stability,” it added, noting also the risk of geopolitical tensions affecting oil prices.

Maintaining Asia’s generally rosy growth prospects in the face of structural barriers will be a challenge for policymakers. For now though, “mediocre” is far from the “new reality” in the world’s fastest-growing region.

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