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East Asia Pacific Economic Update : Sustaining Resilience

The outlook for developing East Asia is expected to remain broadly positive in the next three years, with growth driven by robust domestic demand and a gradual recovery in the global economy and commodity prices.

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In its latest East Asia Pacific Economic Update, the World Bank expressed optimism in the region’s growth. Robust domestic demand and a recovering global economy, boosted by rising commodity prices, provide a positive outlook despite a slowing Chinese economy that will grow 6.5 percent in 2017 compared to 6.7 in 2016.

“Compared to the last time we did this update six months ago, we are a bit more optimistic because of some of the things we’ve seen in the last three to four months,” explains Sudhir Shetty, the World Bank’s East Asia and Pacific Chief Economist.

“2016 saw the slowest growth since the GFC. Once reason for that was what you might call a ‘synchronised’ slowdown between the advanced economies as well as the emerging and developed economies.

“A big part of that was what was happening to commodity exporters – Brazil, Russia etc. – that were seeing negative growth or very sluggish growth. However, when you look at more recent indicators – PMI, industrial production growth – these are quick snapshots of economies.”

He concludes: “What you see is a nice recovery towards the latter part of 2016 and early 2017. So in that sense, there’s a little bit of optimism in terms of where the global economy is headed.”

Speaking at a recent SMU School of Social Sciences seminar on the launch of its April update, Dr. Shetty outlined two more reasons for the region’s expected growth.

“The second part has to do with global trade. This is particularly important for this region given how open it is. There was a collapse of global trade during the Global Financial Crisis, a nice recovery right after that, and then a continued slowdown.

Now, what you are beginning to see is a pickup in the value of global trade. The volume of global trade is still somewhat flat but there are some signs that it is beginning to pick up.

“Finally, commodity prices. The big story of 2015 and early 2016 was collapsing commodity prices, particularly energy prices and now you’re beginning to see energy prices, led by coal and also oil and gas, picking up a little bit.

You also see gradual improvement in metals prices, and the beginning of perhaps an uptick in agricultural commodity prices.”

The World Bank expects recovering global trade and commodity prices to buoy regional prospects

The World Bank expects recovering global trade and commodity prices to buoy regional prospects

Key findings

  • The outlook for developing East Asia is expected to remain broadly positive in the next three years, with growth driven by robust domestic demand and a gradual recovery in the global economy and commodity prices.
  • China’s economy will grow 6.5 percent in 2017 and 6.3 percent in 2018, compared with 6.7 percent in 2016, as the government rebalances toward consumption and services.
  • In the rest of the region, including the large economies in Southeast Asia, growth is expected to pick up slightly to 5 percent in 2017 and 5.1 percent in 2018, up from 4.9 percent in 2016.
  • As a whole, the economies of developing East Asia and Pacific are projected to expand at 6.2 percent in 2017 and 6.1 percent in 2018.
  • Poverty in the region is likely to continue to fall, driven by sustained growth and rising labor incomes.
  • The global environment and domestic vulnerabilities still pose risks to the region’s prospects. These include: faster-than-expected interest rate hikes in the U.S.; protectionist sentiments in some advanced economies; and rapid credit expansion and high levels of debt in several East Asian countries.
  • To address these risks, the report recommends that policy makers continue to focus on prudent macroeconomic management and ensuring sustainable fiscal balances in the medium term.
  • Growth in the region will continue to be driven by strong domestic demand, including public, and increasingly private, investment. This trend will also be supported by gradually rising demand for exports, as emerging markets and developing economies recover.
  • The slow pace of recovery in commodity prices will benefit commodity exporters in the region, but won’t unduly hurt the economies of commodity importers in East Asia.
  • In China, growth will continue to moderate, reflecting the impact of the government’s measures to reduce excess capacity and credit expansion. As a result, the report expects activity in the real estate sector to slow down.
  • In the short term, policy makers should prioritize measures that counteract global risks threatening the availability and cost of external finance, as well as export growth.
  • Across the region’s large economies, increasing fiscal revenues can help governments finance programs that boost growth and foster inclusion while reducing risks to fiscal sustainability.
  • Some smaller commodity-exporting economies will need to take steps to increase their fiscal solvency.
  • In China, the government can sustain its efforts to reduce corporate debt and restructure state-owned enterprises, tighten the regulation of shadow banking and address rising household mortgage debt. Reforms to reduce excess industrial capacity could be complemented with improved social transfers and labor policies.
  •  With credit growth remaining high across much of the region, including Vietnam, the Philippines and Lao PDR, the report suggests an emphasis on strengthening regulation and enhancing supervision.
  • The longer-term challenge for the region lies in sustaining rapid growth while ensuring greater inclusion. Governments can address these challenges by increasing productivity and investment, which have slowed recently in several economies, as well as by improving the quality of public spending.
  • In the face of rising protectionism outside the region, East Asia can seize opportunities to advance regional integration, including by deepening ongoing initiatives, lowering barriers to labor mobility and expanding cross-border flows of goods and services within the ASEAN Economic Community.
  • Policy makers can put future economic prospects on a more sustainable path if they take steps to reduce pollution caused by farming, a rising threat amid the intensification of agriculture in the region.

 

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