Japan has stalled, China’s growth engine is misfiring, and Asia’s emerging economies are choking on the fumes. Fortunately though, the region still has plenty of fuel to get back on track, should policymakers follow through on their latest international commitments.
In its latest “Economic Outlook” report, the OECD warned that a further sharp slowdown in both emerging economies and world trade has crimped global growth to just 2.9 percent this year, well below the long-run average, with increasing uncertainty about the near-term outlook.
While the Paris-based international economic organization expects the world economy to pick up speed to 3.3 percent and 3.6 percent growth in 2016 and 2017, increased momentum will require “a smooth rebalancing of activity in China and more robust investment in advanced economies,” it said.
For the advanced economies, the United States is leading the pack, with its gross domestic product (GDP) seen rising by 2.5 percent next year and 2.4 percent in 2017. The eurozone is also expected to continue its recovery, helped by accommodative monetary policy, cheaper oil, and reduced budget tightening, with GDP growth predicted at 1.8 percent in 2016 and 1.9 percent in 2017.
However, Japan recently slipped back into its fourth technical recession in five years, and the OECD expects only a 1 percent GDP gain for the world’s third-largest economy in 2016, slowing to 0.5 percent in 2017 given the impact of the planned consumption tax hike that year.
China, the world’s second-largest economy, is projected to slow to 6.8 percent GDP growth this year and decline further to 6.2 percent by 2017, although the OECD warns that Beijing’s attempted rebalancing toward consumption and services still presents “significant challenges.”
On the plus side, India is tipped to continue its robust growth, which is projected at around 7.25 percent, aided by increased public investment and higher wages, while Indonesia is expected to post a gradual pickup to 5.5 percent GDP growth in 2017. Australia and South Korea are also predicted to reach growth rates of around 3 percent by 2017, although New Zealand is tipped to slow to 1.9 percent next year on falling dairy prices.
For emerging Asia comprising China, India and Southeast Asia, the OECD predicts an average of 6.5 percent growth for 2015 and 6.2 percent annually from 2016 to 2020, with India, the Philippines and Vietnam leading the pack.
But with risks including even weaker growth in China, the effects of rising U.S. interest rates and further possible stumbles by the Eurozone and Japan, the OECD has urged policymakers to show “greater ambition” in supporting demand and pursuing pro-growth structural reforms.
Reform Wish List
While the tragic Paris terrorist attacks have cast a long shadow over recent summit meetings including the Group of Twenty (G20), the APEC Economic Leaders’ Meeting, and the East Asia Summit, Asia-Pacific leaders have still presented a range of reforms that collectively could help restart a sputtering global economy.
At the G20 summit in Turkey, China forecast GDP growth of “around 7 percent” in 2015, pledging to “comprehensively deepen reform” to stabilize near-term growth, boost consumption, improve market-based competition, promote urbanization, and reform the financial sector.
Among its policy pledges, Beijing said a three-year action plan would transform 18 million “shantytowns” and 10.6 million urban households of “rural dilapidated housing,” backed by a 300 billion yuan ($47 billion) China Insurance Investment Fund.
However, it noted that “some industries are heavily burdened by excess capacity, and macro-management is facing increasing difficulties,” noting an immature capital market, a lack of innovation capability, and the challenge of reducing emissions.
Asia’s second-biggest economy, Japan pledged a “revolution in productivity,” such as through corporate governance reform and enhanced use of female and elderly workers, and the promotion of “local Abenomics” to boost labor productivity in regional areas. It pointed to record corporate profits, higher wages, and the highest jobs-to-applicants ratio in 23 years as evidencing a “virtuous economic cycle,” although it pointed to the need to eliminate supply constraints imposed by a declining population.
Tokyo also noted a range of “Reform 2020” projects in such areas as automated driving technology, robotics, increased tourism, and expanded foreign direct investment, with the overall aim of “overcoming deflation” and raising productivity to ensure consumption is not the sole driver of future growth.
Yet with the government reaffirming its decision to hike the consumption tax rate “with absolute certainty in April 2017” as part of its fiscal consolidation plan, achieving “both economic revitalization and fiscal consolidation” will prove a tough task for Japan’s mandarins, particularly if China continues to slow.
Meanwhile, India pledged to increase infrastructure investment, introduce a consumption tax, cut corporate tax rates, and promote competition, among other measures to ensure it continues its recent improved performance.
Asia’s new star performer is seen growing real GDP by 8.5 percent in 2016 and 9 percent in 2017, helped by growing consumption and a steady acceleration in the services and manufacturing sectors.
However, New Delhi also warned of near-term risks including “increased financial market volatility and disruptive asset price shifts” due to the U.S. Federal Reserve’s anticipated interest rate hike. It also cited the spillover effects of China’s growth slowdown, along with geopolitical tensions in the Middle East and declining global trade growth.
Indonesia is also expected to register an improved economic performance, with GDP growth set to rise from 4.8 percent this year to 5.4 percent in 2016 and 6 percent in 2017.
Jakarta cited improved tax administration, significant reductions in fuel subsidies, increased infrastructure spending, social welfare reform, and structural reforms such as improved education and training as part of its new growth strategy.
Elsewhere, South Korea pledged additional government spending, increased infrastructure investment, structural reform based on the public, finance, labor and education sectors, and other measures including tax changes to help ensure its potential growth rate climbs from 3 percent to 4 percent by 2017.
Yet with Seoul having downgraded its GDP growth forecast for 2015 to 3.1 percent from 3.8 percent in June on weak investment, sluggish exports, and the MERS outbreak, it warned of further risks to its outlook including China, the depreciating Japanese yen and euro, and the household debt burden.
The Australian government also pledged new infrastructure spending through its A$50 billion ($36 billion) Infrastructure Investment Program, as well as action to aid small businesses, improved access to child care, and reduced red tape, along with touting the benefits of its recent free trade pacts with China, Japan and South Korea.
International Monetary Fund managing director Christine Lagarde urged the G20 nations to fully implement their pledges, amid the threat of the “normalization” of U.S. interest rates, China’s “rebalancing,” and the “end of the decade-long commodity super cycle.”
According to Lagarde, “about half of the promised measures [from the 2014 Brisbane G20 summit] have been implemented,” leaving policymakers with plenty of work ahead if they wish to achieve the promised targets.
Nevertheless, terrorism, the South China Sea dispute and Europe’s refugee crisis have dominated the agenda at recent summits, rather than economic policy. Asia’s leaders now have their hands full preventing the political crises from derailing vital economic reform and further damaging a sluggish global recovery.