Asia is well positioned to capitalise on the largely favourable global trends and enjoy steady growth in 2014-15. Recent policy actions taken to address vulnerabilities have started to bear fruit. With vigilance and further reforms, the region should rema
As we consider the state of the world economy, we see that global activity has been firming up, and this will help Asia’s exports. The growth momentum has gathered steam in the United States and the euro zone, on account of the reduction in fiscal tightening and still accommodative monetary conditions. And while some large emerging market economies are facing challenges, overall growth in emerging markets has picked up. Stock markets across most of the globe have reflected those trends and many have reached all-time highs.
The largest economies in the region are also doing relatively well, despite some challenges. In China, the unveiling of the government’s reform agenda has boosted sentiment, and growth should moderate only slightly to 7.5 per cent in 2014. Meanwhile, Abenomics has lifted confidence and inflation in Japan, and growth there should remain above trend at 1.4 per cent in 2014. This favourable external environment is benefiting the rest of the region, together with healthy labour markets and robust credit growth in many economies. The overall outlook for Asia is one of steady growth of about 5.5 per cent in 2014-’15. No longer as stellar as a few years ago, but still enviable by international standards.
External risks have receded in emerging Asia, including when compared to some emerging economies in other regions. Asia’s emerging markets moved swiftly to address their vulnerabilities following last year’s market turbulence, and now have stronger macroeconomic fundamentals.
So far so good for Asia, but this outlook assumes that risk factors remain dormant. An unexpectedly rapid tightening of global liquidity would affect the region. Domestic vulnerabilities could magnify the impact: as interest rates rise, vulnerabilities stemming from pockets of high corporate leverage and household indebtedness would come to the fore. In addition, economies with weaker fundamentals would be hard hit, similar to what happened a year ago when markets abruptly revised their expectations of future US monetary policy. Asia is also facing various risks originating from within the region. These include a sharper-than-envisaged slowdown and financial sector vulnerabilities in China, a waning impact of Abenomics, and political tensions and uncertainty.
A continuation of the recent macro-economic and structural policy momentum would help keep risks at bay, maintain investor confidence and sustain the region’s growth leadership. Decisive progress on structural reforms is critical. The agenda varies across the region, involving vigorous implementation of the government’s reform blueprint to put growth on a more sustainable path in China; further product and labour market reforms to prevent deflation and low growth from returning in Japan; and lifting regulatory impediments, boosting infrastructure and continuing to promote trade and financial integration in many emerging, frontier and developing economies, as well as in Pacific island countries and small states.
Thailand’s near-term economic prospects are clouded by the political uncertainty which has impaired the government’s ability to steer the economy. New infrastructure projects, which would provide a timely stimulus to demand in the short run and boost productive capacity in the long run, have been put on hold. Consumer and business confidence are drifting down, and tourist arrivals have started to decline. However, the Thai economy has shown an impressive resilience to shocks, and financial markets were not much affected by the international turbulence that started in mid-2013. This is due in part to its solid economic fundamentals such as ample international reserves, moderate public debt and healthy corporate and commercial bank balance sheets. We are hopeful that the country will weather the current situation well, and that the economy will rebound once the uncertainty is lifted.