Asia continues to boost global growth, but economic momentum is slowing

Asia continues to boost global growth, but economic momentum is slowing

Strong consumer spending has supported growth in Asia’s three largest economies this year, but there are already signs that the region’s recovery may be running out of steam.

We expect growth in Asia and the Pacific to accelerate from 3.9% in 2022 to 4.6% this year, unchanged from last April’s forecast. This is largely due to China’s post-reopening recovery and stronger-than-expected growth in the first half of the year in Japan and India. As pandemic restrictions were lifted, demand in these economies was boosted by consumers consuming their savings accumulated during the pandemic, leading to notable strength in the services sector.

While Asia is still poised to contribute about two-thirds of total global growth this year, it is important to note that growth is much lower than expected before the pandemic and that output has been held back by a series of global shocks.

We have lowered our estimate for next year’s growth to 4.2 percent, from 4.4 percent expected in April. Our less optimistic assessment is based on signs of slowing growth and investment in the third quarter, partly reflecting weak external demand as the global economy slows, such as in Southeast Asia and Japan, and real estate investment falters in China.

The economic support that China enjoyed after its reopening is now losing momentum earlier than previously expected. While we expect this recovery to support growth accelerating to 5 percent this year, the economy will slow to 4.2 percent next year amid a deepening slump in the real estate sector, down from the 4.5 percent we forecast in April.

Historically, a decline by China would have been offset by faster growth prospects in the US and Japan, but the resulting support is likely to be more subdued this time around. The strength of the US economy has been concentrated in the services sector, not in goods, which does not lead to increased demand in Asia. US policies, such as the Low Inflation Act and the CHIPS and Science Act, redirect demand towards domestic rather than foreign sources, providing a smaller boost to imports from Asia.

In the near term, the sharp adjustment in China’s debt-laden real estate sector and the resulting slowdown in economic activity will likely spread to the region, especially to commodity exporters with close trade links with China. Moreover, an aging population and slowing productivity growth would exacerbate medium-term growth in China, amid rising risks of geo-economic fragmentation, and weigh on the outlook in the rest of Asia and beyond. In a downside scenario, where “de-risking” and “reshoring” strategies take hold, output could decline by up to 10 percent over five years in the Asian economies most closely linked to China’s.

It is a welcome development that the decline in inflation is on track in Asia, with inflation now expected to return to central banks’ target ranges next year in most countries. This process is far ahead of most other regions, as inflation remains high and is expected to fall within target only in 2025.

As we explained in a 2021 blog post, the post-pandemic rise in inflation has had mixed impacts across Asia – a topic we revisit in depth in our upcoming Regional Economic Outlook. Some countries, such as Indonesia, have already managed to bring overall and core inflation back on target after significant increases last year. In contrast, inflation in China is below target, and with demand slowing amid increasing pressures from the real estate sector, it is expected to rise only gradually due to policy stimulus.

Inflation rose in Japan, as the central bank twice adjusted its yield curve control policy settings to manage risks to the outlook. Given the large participation of Japanese investors in global markets, we find that these policy measures led to spillover effects in other bond markets. These could become larger if greater normalization of monetary policy occurs in the region’s second-largest economy.

The global environment remains highly uncertain, and although risks to the outlook are more balanced than they were six months ago, policymakers in Asia must stay the course to ensure continued growth and stability. On the downside, a longer continuation of the real estate crisis and a limited policy response in China would deepen the regional slowdown. A sudden tightening of global financial conditions could lead to capital outflows and pressure on exchange rates in Asia, which would threaten the disinflation process.

Countries where inflation remains above targets, such as Australia, New Zealand and the Philippines, should continue to signal their commitment to lowering inflation. This will entail maintaining restrictive monetary policy until inflation falls permanently to the target level and expectations are firmly reestablished.

In many emerging market and developing economies in the region, including Indonesia and Thailand, financial conditions have remained relatively loose and real interest rates have remained close to neutral levels, reducing the need for early monetary policy easing.

Where tight monetary conditions strain financial stability – including through the real estate sector and highly indebted companies – supervisors must closely monitor systemic risks. As public debt continues to rise in much of the region, the ongoing gradual fiscal consolidation process should continue to build room for maneuver and ensure debt sustainability. For those emerging market and developing economies like Sri Lanka that are experiencing financing pressures on external markets, faster and more efficient coordination on debt resolution is required.

With long-term prospects dimming, countries must redouble their efforts to advance growth-enhancing reforms. Raising government revenue ratios from low levels would allow additional spending on important needs such as education and infrastructure, while keeping public debt under control. Finally, strengthening multilateral and regional cooperation and mitigating the effects of geo-economic fragmentation are increasingly important for Asia’s economic outlook in the coming years. To this end, reforms that lower non-tariff trade barriers, enhance connectivity, and improve business environments are essential to attract more foreign and domestic investment across the region.

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *