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World Economic Trend & Challenges for Asia
The world economy, five years after the global financial crisis, is showing signs of bouncing back this year pulled along by a recovery in high-income economies. The Finance Ministers of Group of G-20 during the latest Meeting in October Washington D.C. remained confident about the global economy, despite renewed weakness in areas like the eurozone. They reiterated their commitment to undertake reforms that will boost the global economy by $2 trillion more over the next five years.
Despite the malaise that has many worried that the Eurozone may sink back into recession, the G20 still expect to achieve that goal, after talks on the sideline of the International Monetary Fund-World Bank annual meetings.
Besides reforms, the G20 has backed a new Global Infrastructure Initiative, aimed at supporting infrastructure development around the world as a way to boost economies and create jobs.
Developing Asia remains the fastest growing region globally
Developing Asia remains the fastest growing region globally, as key economies in the region move ahead with structural reforms, says a new Asian Development Bank (ADB) report.
In an update of its flagship annual economic publication, Asian Development Outlook 2014 (ADO 2014), released on September 25, 2014, ADB kept its forecasts for growth of gross domestic product (GDP) for the region at 6.2% in 2014 and 6.4% in 2015. The region grew 6.1% in 2013.
GDP growth in East Asia will remain at 6.7% in 2014 and 2015, as moderating growth in the PRC and Hong Kong, China—and a slowdown in Mongolia—are offset by export-driven upswings in the Republic of Korea and Taipei, China. GDP growth in Mongolia will fall sharply below the ADO 2014 forecast for 2014 and 2015 as foreign direct investment plummets and mining projects suffer delays. Inflation in East Asia will remain subdued at 2.4% in 2014 but likely creep up to 2.9% in 2015, mainly reflecting the trend in the PRC.
South Asia is performing better than expected. The sub-regional growth forecast for 2014 is raised slightly to 5.4%, reflecting vibrant economic activities in Bangladesh and Pakistan on higher exports and remittances. Growth in South Asia will pick up to 6.1% in 2015,0.3 percentage points higher than previously forecast. In addition to the upward revision for India, growth forecasts for Pakistan and Bangladesh edged up in 2015, but efforts to improve the climate for private investment are key in both cases. Forecasts for subregional inflation are trimmed by about a third of a percentage point to 6.1% in 2014 and 5.9% in 2015.
Southeast Asia will see stronger growth next year after a surprisingly soft 2014. Growth this year is now projected at 4.6%, down from 5.0% forecast in ADO 2014 and actual growth of 5.0% in 2013.
Growth in Central Asia is hobbled by a slowdown in the Russian Federation. Underperforming ADO 2014 projections, growth in the sub-region is now projected to decelerate to 5.6% in 2014 as activity slows in Armenia, Kazakhstan, the Kyrgyz Republic, Turkmenistan, and Uzbekistan. The forecast for 2015 is lowered to 5.9% on revisions for Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Uzbekistan. These lower growth projections reflect a stagnant Russian Federation and a sharp industrial slowdown in Kazakhstan.
Developing East Asia will grow by 6.9% this year and next, down from 7.2% in 2013, the report says. In China, growth will ease slightly to 7.4% this year and 7.2% in 2015, as the government seeks to put the economy on a more sustainable path with policies addressing financial vulnerabilities and structural constraints. In Japan, GDP contracted more than expected in the second quarter of 2014 in the wake of an increase in the consumption tax. Looking ahead, private investment is forecast to recover and growth to remain broadly stable in 2015. Excluding China, growth in developing countries in the region is expected to be 4.8% this year, before rising to 5.3% in 2015, as exports rise and domestic economic reforms advance in the large Southeast Asian economies, report added.
Significant uncertainties remain that could affect the region’s growth. High-income economies, especially in the Euro zone and Japan, could face downside risks in the near term. Global financial conditions could tighten sharply, and international and regional geopolitical tensions could affect prospects. The region also remains vulnerable to a sharp slowdown in China, which, though unlikely to happen, could hurt commodity producers especially hard, such as metal exporters in Mongolia and coal exporters in Indonesia.The East Asia Pacific Economic Update identifies policy recommendations for different countries to deal with risk and embark on a path of sustainable growth. The report also discusses long-term structural reforms that will help countries maximize the benefits from the global recovery.
Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific
A weak and uneven global economic recovery continues, but reflecting different evolutions across various countries and regions, says the IMF’s latest World Economic Outlook (WEO) released on October 7 2014.
The IMF forecasts global growth to average 3.3 percent in 2014— unchanged from 2013— and to rise to 3.8 percent in 2015. The weaker than expected growth outlook for 2014 reflects setbacks to economic activity in the advanced economies during the first half of 2014, and a less optimistic outlook for several emerging market economies, says the report.
Potential growth rates—that is, the pace at which annual output can expand without pushing up inflation— are also being revised down. In the face of weaker-than-expected global growth for the first half of 2014 and increased
downside risks, growth may again fail to pick up or may fall short of expectations. This underscores that, in most economies across the globe, raising actual and potential output must remain a priority, the IMF says.
In advanced economies, there remains a need to avoid procyclical monetary policy. Fiscal adjustment must be tuned in both pace and composition to support the recovery and lay the groundwork for long-term growth and jobs. In this context, an increase in public infrastructure investment could provide a boost to demand in the short term and help raise potential output in the medium term in those countries with clearly identified infrastructure gaps (such as structure maintenance/ upgrading in United States and Germany) and efficient public investment processes.
The scope for emerging market economies to use macroeconomic policies to support growth varies and is more limited in countries with external vulnerabilities. At the same time, emerging markets will need to deal with monetary policy normalization in the United States and possible shifts in financial market sentiment.
For both advanced and emerging market countries, there is a general, urgent need for country-specific structural reforms to realise potential growth and make growth more sustainable. For many countries, this means improving labor and product markets, including reforms to lower the costs of hiring on regular employment contracts and facilitating greater labor force participation (many advanced European economies and Japan), and
easing barriers to doing business and geopolitical tensions, especially on investment in the services. Russia and neighboring countries.
Growth in emerging market and developing economies will continue to account for the lion’s share of global growth. Still, at 4.4 percent for 2014, the growth forecast is a bit weaker than in the April 2014 WEO. This slowdown is due to lackluster domestic demand and the impact of increasing
How Asia will face Global Challenges?
Asia is well positioned to meet the challenges ahead provided it under takes required reforms. The region has strengthened its resilience to global risks and will continue as a source of global economic dynamism. Recent
actions taken to address vulnerabilities are showing sign of success. However, with the risk of further bouts of volatility ahead, policy complacency will be penalized. Asia’s reform momentum must therefore be nurtured so as to secure the region’s position as the global growth leader.
With the expected upcoming tightening of global liquidity, Asia will face higher interest rates and potential bouts of capital outflow and asset price volatility. Nevertheless, despite some tightening, financial conditions should remain supportive, underpinned by still-accommodative monetary policies, strong credit growth, and exchange rates that remain weaker than they were a year ago.
Growing regional integration is propelling Asia’s growth but could also amplify the impact of global and regional shocks. Events over the past year have been a reminder of Asia’s exposure to policy decisions in advanced economies.
In order to cope with risks from financial interconnectedness, Asian policymakers have been active in deploying macro prudential policies. These tools are neither a silver bullet nor a substitute for warranted macroeconomic policy adjustment, but they have served the region well.
However, economies where inflation outturns are high and above their
central bank’s comfort zones may need to hike rates in the coming months to ensure that inflation is firmly on a downward path. Any volatility in capital flows should be met with exchange rate adjustment and sparing use of foreign exchange intervention.
Conclusion
In the past Asia, led by China, Japan and India have played the key role in overcoming the economic downturn by maintaining steady growth. It is expected that Asia will continue to the lead the way for sustained world growth. According to experts, China’s growth will open up the door for achieving higher growth in the neighbouring countries, including India, Bangladesh, Myanmar, Nepal, Bhutan and other countries of the Region. It is therefore imperative that the Asian countries give their top most priorities for the development of an integrated global strategy for sustaining the projected world growth momentum.
In celebration of the 20th year of ICC’s presence in Bangladesh, it’s National Committee has, therefore, chosen the theme “Global Economic Recovery: Asian Perspective” for deliberations by the public and world leaders as well as experts on economic recovery strategies.
The article prepared by ICC Bangladesh based on IMF, ItrrO latest projection and XFEF latest analysis.