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Asia Leads Global Growth

9 June 2017

 

According to the IMF latest forecasts, Asia continues to lead global growth with the region predicted to enjoy over 5% growth in 2017 and 2018 compared to just over 3.5% for the rest of the world. This means that Asia will contribute around two-thirds of global growth thus continuing a trend of several years. The reasons for this high growth include higher external and domestic demand, rebounding global commodity prices, and domestic reforms.

 

China Although there continues to be concerns about the Chinese economy (levels of debt, zombie banks and companies, over-heated housing market, etc) most analysts expect the CCP to keep a lid on things in the run up to the 9th party congress in the autumn. Party leaders are keen to do everything to avoid social instability even if it means printing more money. While GDP per person has increased notably in recent decades, it is still only about a quarter of what is seen in the US.

 

The task of “rebalancing” the Chinese economy weighs heavily on policymakers’ minds. The government is attempting to steer the economy away from investment- and export-led growth, to growth based on domestic consumption. However, it is proving difficult to convince Chinese households to save less and spend more. A full rebalancing will require economic restructuring. This includes trimming down or getting rid of state-owned enterprises in overcapacity sectors such as coal mining and steel processing where profits have been dropping.

 

Although China still runs a healthy trade surplus, the surplus of capital outflow over trade inflow has caused a fall in dollar reserves. The central bank has also sold off dollar reserves to support the price of the renminbi. At the same time, risks of protectionism (from the US) have eased after the Xi-Trump summit. China is apparently not the currency manipulator that Trump thought a few months ago.

 

Japan After two decades of economic stagnation, Japan’s return to growth is hampered by the twin challenges of an ageing population and the world’s largest public debt of 246% of GDP. Despite four years of economic stimulus, Japan’s economy remains only 2.2% bigger in real terms than when PM Shinzo Abe came to power promising massive structural reforms.

 

Unemployment in Japan is currently at a 20-year low but the sharp division between regular workers with jobs for life, and part-timers with no security, has muted the effect on wages. Japan’s fiscal forecasts are banking on the structural reforms of Abenomics generating acceleration in productivity growth to 2.2% a year by the 2020s — the level prevailing in the 1980s. But there are now seven pensioners for every 10 salaried workers — and the ratio is rising fast. Structural reforms are essential to boost productivity and bring more people, especially women, into employment. This would enhance social cohesion, and reduce Japan's high relative poverty rate.

 

For 30 years until 2010, Japan had recorded a trade surplus every year, and its persistent trade surpluses were once the subject of political battles with the US. But in 2014 Japan’s trade deficit was the worst on record, as the weaker yen has meant the country has been hit by a painful rise in the cost of imports. This came as the country was forced to import more fossil fuels after the Fukushima disaster.

 

Korea

The Korean economy has proved resilient despite Chinese sanctions following deployment of the THAAD missile system. GDP growth is expected to be around 3% this year fueled by a good export performance – up 24% in a year. On the domestic side, things look less upbeat with unemployment remaining high.

 

Moon Jae-in, the leader of the Democratic Party, was elected President on 9 May with a clear majority. One of the new government’s priorities will be to address mounting demographic pressures caused by low birth rates and rapid population aging. Moon hopes to change that with a three-prong strategy he calls “J-nomics.” Moon also promises stricter regulations to prevent chaebols from entering financial businesses and recklessly expanding into sectors better suited to smaller firms. He also wants to reform the education system as it is failing to prepare students for a rapidly evolving labor market.

 

South Korea will need a comprehensive plan for the continued development of its human resources, including expanded vocational education and training for young job seekers. It will also need a strategy for raising the birth rate, including by promoting more flexible working environments, affordable and quality childcare, and paid parental leave. As for the expansion of the social safety net, J-nomics is not very clear on how to finance it. The government plans to raise the top rate of personal income tax; reduce most deductions, especially for large enterprises; and perhaps even increase the corporate-tax rate. But such tax reforms are likely to face strong resistance: about half of all South Korean households and businesses paid no income or corporate tax in 2014.

 

India

 

India has become the star performer in Asia thanks to the reforms introduced by the Modi government. Growth is expected to reach 7.2% in 2017 and higher in 2018. Tax revenues and corporate earnings are rising while India has retained its position as the third largest startup base in the world. India's labour force is expected to touch 160-170 million by 2020.

 

According to The World Bank, the Indian economy demonetisation is expected to have a positive impact on the global economy, which will help foster a clean and digitised economy. India is expected to be the third largest consumer economy as its consumption may triple to US$ 4 trillion by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report by PricewaterhouseCoopers.

 

ASEAN

 

The countries in ASEAN have performed well in 2016 although there have been variations. Indonesia and Thailand did well while there were setbacks in Vietnam and Singapore. Overall, stronger external demand, a dynamic tourism sector and healthy macroeconomic fundamentals should support growth in the coming quarters. In 2018, the ASEAN economy is seen gaining steam and growing 4.9%. The outlook reflects stable projections for Cambodia, Indonesia, Malaysia and the Philippines but lower forecasts for Brunei, Laos and Myanmar. Singapore and Thailand.

 

The ASEAN Economic Community was established at the end of 2015, and a number of sector plans for the community have been set under the new AEC Blueprint 2025 to facilitate the free flow of goods, services, investments, capital and skilled labour. Recent achievements have been made in 12 key policy areas. But the overall progress of integration is relatively slow in ASEAN, with many regional initiatives delayed by domestic protectionism.