Developing Asia s Short-Run Economic Outlook and Main Risks

Transcription

1 Developing Asia s Short-Run Economic Outlook and Main Risks Dr. Donghyun Park, Asian Development Bank Workshop on Bond Market Development in Emerging East Asia Raffles Hotel Le Royal Phnom Penh, Cambodia, August 21

2 Key messages Growth in developing Asia softens to 5. in 21 and 5.7 in 217, from 5.9 in 215 PRC growth moderating to.5 in 21 and.3 in 217 underscores the importance of supply-side reforms, from.9 in 215 India growth projected at 7.4 in 21 and 7.8 in 217, from 7. in 215 While CPI inflation remains subdued, many economies face possibly harmful PPI deflation 2

3 Asia s growth continues to moderate Developing Asia s growth f 217f f: forecast World GDP growth 3

4 Uneven recovery in industrial economies GDP growth () f 217f Major industrial economies United States Euro area Japan f= forecast 4

5 Divergence across subregions and economies () 5

6 Asia still accounts for of global growth in PPP terms Contributions to world growth (), 21 vs People's Rep. of China 2 India 1 United States ASEAN Euro area Indonesia Japan Average contributions, () Note: Uses PPP-adjusted weights

7 ...or 4 in market exchange rate terms Contributions to world growth (), 21 vs People's Rep. of China 2 United States 1 Euro area India ASEAN Indonesia Japan Average contributions, () Note: Uses market exchange rates 7

8 PRC growth still decelerating; projected at.5 in GDP Economic growth Retail sales Value-added by industry Jan 21 Feb Jan 214 Fixed asset investment growth,, ytd Manufacturing Real estate Apr Jul Oct Jan 215 Infrastructure Apr Jul Oct Jan Demand-side contributions to growth Investment GDP (rhs) Consumption Net exports Supply-side contributions to growth GDP (rhs) Services Agriculture Industry

9 India s growth slowing slightly to 7.4 in 21 before picking up Jan- 213 Export growth, USD,, year-on-year Jul- 213 Jan- 214 Oil exports Jul- 214 Non-oil exports Jan- 215 Jul- 215 Jan Foreign investment inflows, USD million -5 Portfolio investment Direct investment -1 Foreign investment inflows Jan-213 Sep-213 May-214 Jan-215 Sep Demand-side contributions to growth Gross fixed capital formation Others Net exports Government consumption GDP (rhs) 9 3 Private consumption Supply-side contributions to growth Services GDP (rhs) Agriculture Industry

10 ASEAN growth to edge up this year and next GDP growth, Southeast Asia () f 217f ASEAN INO THA PHI MAL SIN VIE BRU CAM LAO MYA f: forecast ASEAN=Association of Southeast Asian Nations; BRU=Brunei Darussalam; CAM=Cambodia; INO=Indonesia; LAO=Lao PDR; MAL=Malaysia; MYA=Myanmar; PHI=Philippines; SIN=Singapore; THA=Thailand; VIE=Viet Nam 1

11 Indonesia s growth to slightly rise to 5.2 in Growth in fixed investment and private consumption, Fixed investment 1 8 Policy and inflation rates, Bank Indonesia rate 1 Private consumption Q1-213 Q3-213 Q1-214 Q3-214 Q1-215 Q Jan- 213 Jul- 213 Jan- 214 Inflation Jul- 214 Jan- 215 Jul- 215 Jan Demand-side contributions to growth 8 GDP (rhs) Government consumption Net exports Supply-side contributions to growth GDP (rhs) Services Private Investment Statistical consumption discrepancy Agriculture Industry

12 Slow recovery in global commodity prices Commodity price indexes 21=1 Food Brent crude Futures Gold Natural gas Beverage Copper Sources: World Bank Pinksheets; Bloomberg 12

13 will keep CPI inflation low CPI inflation () 4 5-year average f 217f f: forecast 13

14 But there are risks 1. Rise in US interest rate and market volatility 2. PRC s growth moderation 3. Producer price deflation 14

15 1. Future path of US interest rate and market volatility The Fed raised interest rates in December 215 The Fed sees further gradual tightening going forward The Fed indicated that first stirrings of rising US inflation is present Changes to US monetary policy have implications on Trade Capital flows Foreign debt burden Actual Fed baseline (as of Mar 21) GPM Mar 21 ADO 21 baseline Roubini Global Economics 15

16 Strong dollar raises foreign debt burden LAO INO 4 Jan-13 Jan-14 Jan-15 Jan LAO PHI MAL INO VIE US dollar per Asian currency, 1 Jan 213=1 VIE PHI MAL 1-Jan 12-Jan 23-Jan 3-Feb 14-Feb25-Feb 7-Mar IND PRC SRI GEO ARM 4 Jan-13 Jan-14 Jan-15 Jan PRC SRI GEO ARM IND 1-Jan 12-Jan 23-Jan 3-Feb 14-Feb25-Feb 7-Mar Jan-13 Jan-14 Jan-15 Jan KGZ UZB TAJ UZB AZE KGZ AZE KAZ KAZ TAJ 3 1-Jan 12-Jan 23-Jan 3-Feb 14-Feb 25-Feb 7-Mar $ appreciation tends to increase domestic currency value of debt, posing a threat to economies with large foreign liabilities Lower index indicates depreciation of local currency 1

17 2. PRC s growth moderation has had global impact.4 Global Projection Model: PRC growth moderation scenario Assume PRC growth weaker by.85pp Then Rest of developing Asia s growth falls by.3pp Japan s growth drops by.2pp -1.2 PRC USA Euro area Japan EA ex PRC LA RC World Trade and policies Commodity prices Total effect EA = Emerging Asia; LA = Latin America; PRC = People s Rep. of China; RC = remaining countries. 17

18 Sharper fall is unlikely, but if it happens, it could generate a bigger impact Assume 4.pp fall in PRC growth Then Global growth to decline by 1.75pp Japan s growth to drop by 1.5pp Rest of developing Asia s growth to tumble by 1.8pp Global Projection Model: PRC sharp slowdown scenario PRC US Euro area Japan -1.5 EA ex PRC LA RC World EA = Emerging Asia; LA = Latin America; PRC = People s Rep. of China; RC = remaining countries. Trade and policies Global financial shock Commodity prices Total effect 18

19 PRC s structural change is transforming the structure of its imports 5 Share of parts and components in PRC's imports

20 but some countries could grow faster Cambodia Viet Nam Bangladesh Sri Lanka Pakistan Hong Kong, China Nepal Philippines Rep. of Korea Tonga Thailand Malaysia India Singapore Samoa Indonesia Fiji Index of Competition with PRC,

21 3. Many Asian economies experiencing producer price deflation Consumer and producer prices, 215 ( change) Singapore Philippines People's Republic of China Malaysia Thailand Rep. of Korea India Hong Kong, China Viet Nam Indonesia Euro area Japan United States Producer prices Consumer prices 21

22 Strong inverse association between PPI deflation and growth Average per capita GDP growth rate in low, high, and negative inflation In the postwar era, per capita real GDP growth is visibly lower during PPI deflations than during CPI deflations CPI PPI CPI PPI CPI PPI Low inflation High inflation Deflation

23 adverse effect of lower producer prices on investment Changes in log Investment Changes in log PPI 23

24 Key messages Growth in developing Asia softens to 5. in 21 and 5.7 in 217, from 5.9 last year PRC growth moderating to.5 in 21 and.3 in 217 underscores the importance of supply-side reforms India growth projected at 7.4 in 21 and 7.8 in 217 While CPI inflation remains subdued, many economies face possibly harmful PPI deflation 24