China and India will weigh on Asian growth in 2015 and 2016
Softer growth prospects for the China and India, and a slow recovery in the major industrial economies, will combine to push growth in developing Asia for 2015 and 2016 below previous projections, according to a new Asian Development Bank (ADB) report.
In an update of its flagship annual economic publication, Asian Development Outlook 2015 (ADO 2015), ADB now sees gross domestic product (GDP) growth for the region coming in at 5.8% in 2015 and 6.0% in 2016 — below the March forecasts of 6.3% for both years.
“Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows,” said Shang-Jin Wei, ADB chief economist. “In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macroprudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.”
Growth in the industrial economies is seen easing to 1.9% in 2015, down from 2.2% forecast in March, as consumption and investment remains soft, although there are some positive signs with improved prospects for the euro area and continued growth in the United States, the report said.
China — the world’s second largest economy— has seen growth moderate due to a slowdown in investment and weak exports in the first 8 months of 2015. Growth is now seen at 6.8% in 2015, down from 7.2% projected earlier, and below the 7.3% posted in 2014.
External demand weakness and a slower-than-expected pace of enacting key reforms are holding back India’s growth acceleration, with the pace in 2015 now seen at 7.4%, down from 7.8% forecast earlier.
Southeast Asia meanwhile is bearing the brunt of the slowdown in China — one of its key markets — as well as subdued demand from industrial countries, with growth in 2015 now seen at 4.4%, before bouncing back to 4.9% in 2016.
Soft global commodity prices, including oil and food, are keeping price pressures low with regional inflation projected to decline to 2.3% in 2015, from 3.0% in 2014, although a pickup is expected in 2016. Net capital outflows from developing Asian markets which gained pace in the first part of 2015, exceeding $125 billion in the first quarter, remain a concern as investors anticipated a near term US interest rate hike. As a consequence the region has seen rising risk premiums and weakening exchange rates which could further impede growth momentum, the report said.
The report says a strengthening US dollar poses a threat to Asian companies with large foreign currency exposure, with data showing that the share of foreign currency debt among firms in Viet Nam, Sri Lanka, and Indonesia exceeds 65%. In addition, a declining appetite by China for energy, metals and other commodities, and soft global prices, is a worry for a number of developing Asian commodity-focused export economies, including Azerbaijan, Brunei Darussalam, Indonesia, Kazakhstan, and Mongolia.
To counter the impacts of a US rate rise, the ADB says monetary policy authorities in developing Asia will need to find a balance between stabilising the financial sector and stimulating domestic demand, the report said. Continuing steps to build liquid, well-developed domestic financial markets can help reduce the corporate sector’s reliance on foreign currency borrowings.