Growth remains stable across most of developing Asia due to robust domestic demand, buoyant oil and gas prices, and a consolidation of India’s growth rebound, but escalating trade tensions will test the region’s resilience, a new Asian Development Bank (ADB) report said.
In an update of its flagship annual economic publication, Asian Development Outlook (ADO) 2018, ADB maintained its forecast that the region’s gross domestic product (GDP) will grow at 6.0% in 2018. It, however, trimmed the growth forecast for 2019 by 0.1 percentage points to 5.8%.
“Growth in the region has held up to external challenges, helped by strong domestic demand in the People’s Republic of China (PRC) and India,” said ADB Chief Economist Yasuyuki Sawada.
“The biggest risk to continued growth comes from the disruption of international production linkages caused by a further escalation of trade tensions, but Asia’s growth should remain resilient to the direct effects of the trade measures taken to date,” he added.
Strong domestic demand is driving the region’s largest economies, while buoyant prices for oil and gas are fueling growth at energy-exporting countries like Kazakhstan. However, emerging headwinds cast uncertainty on the region’s future growth trajectory. In addition to escalating trade tensions, tightening global liquidity could further cloud prospects over the coming year, the report said.
Industrial economies’ growth will reach 2.3% in 2018 and 2.0% in 2019, maintaining the April 2018 forecast. Consumer spending and job creation is driving strong growth in the United States. However, recovery in the euro area and Japan was sluggish early in the year, prompting slight downward revisions to their 2018 growth projections, it said, adding that the US is expected to normalise monetary conditions further to preempt inflation.
Solid domestic consumption and rapid expansion of services helped to deliver strong economic performance in the PRC over the first half of the year. The growth outlook for 2018 remains unchanged at 6.6% but is revised down to 6.3% for 2019, reflecting lower demand growth and the risk of escalating trade tensions. Supply-side reform supported by monetary and fiscal measures will help to keep growth on track, the report notes.
India’s robust growth
India’s economy continues on a robust growth path. Its growth forecasts are unchanged at 7.3% for 2018 and 7.6% for 2019 as the temporary effects of the demonetisation of large banknotes and the introduction of the national goods and services tax abate as expected. The impact of rising oil prices is offset by robust domestic demand and rising exports, particularly of manufactures.
Depreciation of the rupee and volatile external financial markets pose challenges, as does accelerating inflation though tighter fiscal policy will help quell inflationary pressures, the ADB report said.
Growth is moderating in 6 of the 10 countries of Southeast Asia, which is now expected to grow by 5.1% in 2018, a drop of 0.1 percentage points from the previous forecast. Net exports moderated growth in Indonesia, the Philippines, Thailand, and Viet Nam as imports surged to support government infrastructure investments. Growth should register 5.2% in 2019, consistent with the April 2018 forecast, though downside risks have intensified.
Risks to the region include financial shocks if the US Federal Reserve needs to raise interest rates faster than currently expected to stave off inflation. But the biggest risk is the impact of worsening trade conflict on cross-border production networks as business ties are severed and investment plans cancelled.
While some economies, particularly in Southeast Asia, could gain over the medium term as trade is redirected to them, indirect fallout could lower confidence and investment throughout the region. As such, ongoing efforts by Asian countries to forge trade agreements within the region and beyond provide an important counterpoint to rising protectionism, the ADB said.