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Cautiously optimistic for Asian economies in 2014
Publication Date : 07-01-2014
The storm clouds that have been hanging over the global economy in recent years are forecast to gradually recede in 2014, with growth prospects improving for the United States, European Union and the Asia Pacific. Economic growth in the Asia-Pacific region is forecast to strengthen in 2014, supported by a rebound in East Asian exports, driven by an upturn in the US and EU.
However, the Asia-Pacific outlook is clouded by political risks which continue to create uncertainties in a number of countries; notably India, Indonesia and Thailand which are facing national elections in 2014.
In the US, GDP growth is forecast to increase from 1.8 per cent in 2013 to 2.5 per cent in 2014, boosted by an upturn in private consumption, residential construction and private investment.
US industry will continue to benefit from low US domestic natural gas prices, helped by the shale gas boom, which has also helped to lower US electricity prices and make US manufacturing more competitive.
Eurozone GDP growth is forecast to recover from 0.4 per cent contraction in 2013 to 0.8 per cent growth in 2014, led by an upturn in Germany, the EU’s largest economy. The EU recovery in 2014 will also be helped by the rebound in the UK economy, with UK economic growth strengthening from 1.4 per cent in 2013 to 2.6 per cent in 2014.
Meanwhile, Asia’s two largest economies, China and Japan, are expected to continue to show sustained expansion. Chinese GDP growth is forecast to improve from 7.8 per cent in 2013 to 8.1 per cent in 2014, helped by stronger growth in exports and continued robust consumer demand. The Japanese economy is projected to grow at 1.8 per cent in 2014, broadly similar to the pace of growth in 2013.
With economic growth showing some increase in all four of the world’s largest economies, global economic growth is forecast to rise from 2.5 per cent in 2013 to 3.3 per cent in 2014. This upturn in world growth will also drive a rebound in world trade, with growth in world containerised trade forecast to rebound from a sluggish 2.1 per cent growth rate in 2013 to 4.7 per cent growth in 2014.
With many of Asia’s industrial economies continuing to have a high share of exports in total GDP, including South Korea, Malaysia, Singapore and Thailand, the improving outlook for East Asian exports will be an important growth driver for much of East Asia.
The economic outlook for China is also helped by the improving prospects for the US and EU, which remain key export markets for China.
Exports have been one of the main growth engines of the Chinese economy over the last two decades, and the upturn in world trade will support stronger Chinese export growth in 2014, creating positive transmission effects throughout the supply chain of Chinese small and medium enterprises producing export-related goods and services.
The outlook for sustained strong Chinese economic growth in 2014 is also supported by continued large-scale infrastructure spending on urban development and transportation networks, including a major new investment program for the development of ‘smart cities’ in China.
Two key megatrends that will support Chinese economic growth over the medium term are the sustained strong growth of Chinese consumer spending, helped by rapidly growing household disposable incomes, and the continued urbanisation of China, with another 300 million people projected to live in urbanised areas by 2030.
China is already the world’s second largest economy, and with rapid growth of over 8 per cent forecast for both 2014 and 2015, China will continue to provide a fast-growing export market for the rest of the Asia Pacific. Association of Southeast Asian Nations (Asean) exports to China have been growing at an average annual rate of over 20 per cent per year over the last decade, and strong Asean-China bilateral trade will continue to be an important export growth market for both Asean countries and for China.
Meanwhile, the impact of ‘Abenomics’ has also helped to boost Japanese economic growth in the near term, with Japanese GDP growth forecast to be around 1.8 per cent in 2014, which will also provide positive transmission effects for Asia-Pacific trade and investment flows.
Two of the three arrows of Abenomics, namely monetary and fiscal stimulus, will be key supporting factors for Japanese growth in 2014. The Bank of Japan will continue to pursue quantitative easing policies to push inflation to the target rate of 2 per cent, while the Japanese yen has depreciated by over 25 per cent versus the US dollar since late 2012, boosting the export competitiveness of Japanese industry.
The Japanese economy continues to face structural headwinds, however, with the high level of government debt to GDP forcing the government to hike the sales tax from 5 per cent to 8 per cent in April 2014, which will dampen consumer demand, while the impact of ageing demographics is also a major drag on Japan’s long-term potential growth rate.
The combined impact of Japan’s relatively slow pace of long-term economic growth combined with its sharp exchange rate depreciation since 2012 have resulted in a major transformation in the economic structure of the Asia-Pacific regional economy.
In 2005, China’s total annual GDP in nominal US dollar terms was half that of Japan. Just a decade later, in 2014, Chinese total annual GDP is forecast to be double Japanese GDP. The rapidly growing gap between Chinese and Japanese GDP since 2012 partly reflects the sharp depreciation of the Japanese yen against the dollar since late 2012, while the Chinese exchange rate has been relatively stable against the dollar.
India, Asia’s second BRICS (Brazil, Russia, India, China, South Africa) economy, has experienced a sharp economic slowdown since 2011 due to the impact of tight monetary policy to curb inflationary pressures. Prospects for 2014 are for only a gradual improvement in Indian economic growth, with inflationary pressures still high and the Indian rupee having experienced sharp depreciation in 2013 due to the large current account deficit.
The Asean economies have shown a very resilient growth performance during the last two years, supported by strong domestic consumption and investment in some of the largest Asean countries, including Indonesia, Malaysia, Thailand and the Philippines. The outlook for 2014 is for exports to play a greater role as a growth engine, while domestic demand is expected to moderate.
Meanwhile, some of the frontier economies of Asean are experiencing improving growth. The Vietnamese economy is showing signs of better economic growth momentum after several years of macroeconomic difficulties, with inflationary pressures having significantly abated while exports have strengthened.
In Myanmar, the rapid pace of economic reform is also supporting strong growth, as foreign direct investment inflows and multilateral and bilateral aid inflows support investment growth while the tourism sector continues to experience a boom due to surging international visits.
A key trend in the Asesan region during 2013 has been the rapid growth of Chinese tourism visitors, with Thailand experiencing a spectacular surge in Chinese visits, which are estimated to have doubled in 2013.
In summary, the economic outlook for the Asia Pacific in 2014 is for some improvement in regional growth momentum, helped by the upturn in the US and EU economies. However, global investors will differentiate amongst the individual Asian economies, taking a more cautious approach to countries with increased political risk due to factors such as national elections and displaying macroeconomic vulnerabilities such as large fiscal and current account deficits.
In the long term, the Asia-Pacific region is forecast to continue to be the fastest-growing region of the world’s economy over the next two decades, helped by the ascendance of China to become the world’s largest economy within the next decade and by the rapid growth of consumer spending power in emerging Asia.
The author Rajiv Biswas is the Asia-Pacific chief economist for IHS and the author of a new book called Future Asia.