Asia remains the engine of the global economy, but keeping the region’s economic vibrancy will require more than good luck, according to the latest forecasts.
The International Monetary Fund’s latest “Regional Economic Outlook: Asia and the Pacific” sees the region expanding by 5.6 percent this year and 5.4 percent in 2019, with next year’s projection cut by 0.2 percentage point from its April forecast.
Despite the slight downgrade, which the IMF attributed to financial market stress and resultant policy tightening, along with recent tariff hikes, the region still accounts for some 60 percent of global growth.
Across the region, China, the world’s second-largest economy, is still expected to expand by a healthy 6.6 percent this year, but next year’s gross domestic product (GDP) growth projection was cut from 6.4 percent to 6.2 percent, amid increased medium term risks.
Japan, the world’s third-largest economy, is seen expanding by 1.1 percent this year, down 0.1 percentage point from the April forecast, before slowing to 0.9 percent in 2019 with a consumption tax hike looming.
India, the world’s fastest growing major economy, is still expected to see a pickup from 7.3 percent GDP growth this year to 7.4 percent next year; however, its projections were cut by 0.1 percentage point and 0.4 percentage point, respectively, due to higher oil prices and monetary tightening.
The ASEAN-5 economies of Indonesia, Malaysia, the Philippines, Singapore, and Thailand also saw a slight downgrade, with GDP growth expected to fall from 5 percent this year to 4.8 percent in 2019, the latter down 0.3 percentage point on the earlier forecast.
Other Asia-Pacific economies to suffer a downgrade on next year’s outlook included Australia (down 0.3 percentage point to 2.8 percent), Hong Kong (down 0.3 percentage point to 2.9 percent), South Korea (down 0.3 percentage point to 2.6 percent), and Singapore (0.2 percentage point fall to 2.5 percent).
However, Taiwan enjoyed an upgrade from the IMF, with its economy expected to expand by 2.7 percent this year and 2.4 percent in 2019 (up 0.8 and 0.4 percentage point, respectively).
Others projected to see improved prospects included New Zealand, with forecast GDP growth of 3.1 percent this year and 3 percent in 2019 (up 0.2 and 0.1 percentage point, respectively) and Thailand, with projected growth of 4.6 percent in 2018 and 3.9 percent in 2019 (up 0.7 and 0.1 percentage point, respectively).
Yet despite the relatively healthy picture, the Washington-based institution pointed to considerable downside risks. Notably, continued trade tensions such as seen recently between Washington and Beijing could “further undermine business confidence, hurt financial markets, disrupt supply chains, and discourage investment and trade in the region.”
“If all of these effects materialize and all proposed tariffs are implemented, Asian GDP could fall by 0.9 percent over the next couple of years,” the IMF said.
Greater protectionism could also make tradable consumer goods — such as electronics — less affordable, hurting consumers and adding to inflationary pressures, with inflation seen rising across Asia to reach 2.7 percent this year and 2.9 percent in 2019.
The Asia-Pacific is also vulnerable to higher U.S. interest rates, particularly if the U.S. Federal Reserve adopts a faster pace of tightening in response to rising inflation. Other risks include “a sudden deterioration of risk appetite, rising trade tensions, and political and policy uncertainty,” the IMF said.
For the region, negative spillovers in the form of reduced capital flows and higher funding costs could cut Asia’s GDP by as much as three-quarters of a percentage point.
Along with external threats, the Asia-Pacific also faces homegrown issues, stemming from high household and corporate debt in South Korea, Singapore, and elsewhere; inflated real estate markets in Australia and Hong Kong; and the risk of slowing reform implementation in India.
A shift from China toward prioritizing growth over addressing its financial vulnerabilities such as its high debt levels could mean slower progress on deleveraging and “heightened medium-term risks for China and the entire region,” the IMF warned.
With the region’s economic dynamism under threat, the IMF urged policymakers to be proactive with policies that strengthen resilience.
These include allowing for flexible exchange rates, keeping monetary policy generally accommodative, ensuring financial stability through both macro- and micro-prudential measures, reducing excessive external imbalances, and adopting structural reforms that boost labor force participation and enhance productivity.
“Efforts at trade liberalization, measures to boost firm dynamism, and policies to harness the benefits of digitalization while addressing its financial and labor market disruptions will be particularly important structural reform priorities,” the IMF said.
Significantly, regional trade and investment liberalization could potentially boost Asian GDP by up to 15 percent over the long run, it said.
“With continued sound policy making, Asia should have good prospects for staying at the forefront of global growth over the coming decade and beyond,” the IMF concluded.
The global institution’s latest projections add to the recent gloomier tone from the Paris-based OECD, as noted by Pacific Money, which downgraded its previous forecasts on the back of escalating trade tensions, tightening financial conditions and political risks.
Asia’s moves to advance negotiations for liberalizing trade agreements including the completed Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership are seen as particularly significant amid growing protectionist sentiment.
Recent financial market volatility also should serve as a reminder to policymakers of the potentially swift market reaction to any financial shocks, and the impact particularly on emerging market currencies.
London-based Capital Economics has warned that the outlook for emerging Asia has weakened, even if the current U.S.-China trade tensions are alleviated.
“Even if the current drift toward an all-out trade war between the U.S. and China is halted (which we doubt), weaker global demand will drag on regional exports. With domestic demand also likely to struggle in many places, we think GDP growth across the region will continue to weaken over the next couple of years,” it said in an October 9 report.
“Currencies and equity markets look set for further falls if we are right that slower growth in the U.S. and China leads to a further deterioration in sentiment toward emerging markets,” it added.
For the Asia-Pacific, remaining the world’s economic growth engine appears a tougher challenge than ever, unless skilled policy and diplomacy can regain the ascendancy.