[Excerpt] Global headwinds notwithstanding, developing Asia will continue to contribute 60% of world growth. Weighing sluggish growth in the United States and the euro area, the transition of the People’s Republic of China (PRC) to an economy led by consumption and services, and India’s ongoing structural reform, Asian Development Outlook 2016 forecasts 5.7% growth for developing Asia in 2016 and 2017.
Most subregions of developing Asia will see growth slow in 2016 before rebounding in 2017. Growth in South Asia, whose expansion was the highest of any subregion in 2015, is expected at 6.9% in 2016, accelerating to 7.3% in 2017 as reforms are implemented in India’s financial sector. East Asia will see growth moderate in both years in tandem with the PRC, whose growth is expected to slow to 6.5% this year and 6.3% in 2017 as it contends with reduced investment among other factors.
Economic performance is poised to improve in Southeast Asia as the large economies of Indonesia and the Philippines ramp up investment, Viet Nam sustains its expansion, and Thailand gathers momentum, though Malaysia will slow further with weak oil prices. Meanwhile, low commodity prices will curb growth prospects in Central Asia and the Pacific, in part by constraining fiscal spending.
Regional inflation has been favorable to Asian economies, as low international food and fuel prices helped cut average inflation to 2.2% in 2015 from 3.0% in 2014. Inflation is likely to pick up to 2.5% in 2016 as domestic demand strengthens and to 2.7% in 2017 as global commodity prices recover slightly.
Uncertainties abound in the global economic environment, and risks to developing Asia’s growth are mostly on the downside. This publication examines the implications of an unexpectedly sharp slowdown in the PRC, which could cut both global and regional growth by nearly 1.8 percentage points. The impact in the region would be mainly on trade volumes and commodity prices, the severity felt by each neighbor economy depending on its ability to accommodate and adapt to the changes.
Producer price deflation is associated with lower investment and lower economic growth and has become an emerging concern for many Asian economies. Thus, policy makers are advised to pay attention to falling producer prices because they compound producers’ debt burdens and weigh on their investment decisions.
Asian Development Outlook 2016 examines in detail how the growth slowdown in Asia since the global financial crisis of 2008–2009 has affected the region’s potential growth. Defined as the maximum growth rate associated with the full employment of productive resources, potential growth is determined by changing demographics and labor productivity.
Potential growth in the region has fallen by 2 percentage points since the global financial crisis. Absent structural reform, many economies in the region will see a further decrease because of unfavorable demographics, convergence with advanced economies, and spillover from growth moderation in the PRC.
To invigorate potential growth, policy reforms are needed. On top of promoting sound macroeconomic management, reform should offset the impact of less-favorable demographics by increasing female participation in the workforce, extending the working age, and raising labor productivity through capital investment and measures to reduce factor misallocation. Policies such as these can help sustain growth, thereby raising living standards and further reducing poverty in Asia.