Tokyo: The economic challenges faced in the Asia and Pacific region in 2017 are beginning to subside. The state of the world economy has improved, food and oil prices have come down, and China's economy is getting stronger.
Growth is forecast to rise from 3.8 percent this year to 4.7 percent in 2022, these developments are helping to improve prospects across the region. As a result, it will be the most dynamic ever in the world's major geographies and a ray of hope in a slowing global economy.
This dynamism is driven by the region's emerging and developing economies, which are expected to grow by 5.3 percent this year. As pandemic supply-chain disruptions ease and the service sector expands, these economies are beginning to find their feet again.
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This year, China and India are expected to account for more than half of global growth, with the rest of Asia accounting for another quarter. Thailand, Vietnam, the Philippines, Indonesia, Malaysia and Cambodia have all resumed their strong pre-pandemic growth.
Since we last published the forecast in October, China has seen the biggest revision, as the sudden reopening has allowed for a faster-than-expected recovery in activity. This is good news for Asia as half of the region's trade is between its economies, which have strong ties to China's economy in terms of trade and tourism.
According to our analysis in the most recent Regional Economic Outlook for Asia and the Pacific, the rest of Asia grows by about 0.3 percentage points for every percentage point when China's growth rate is higher.
The advanced economies of Asia will benefit from these developments, but the future is less clear. The outlook for Japan is better in the short term due to favorable policies, opening up of borders and improving supply chains. However, growth will slow down in 2024 as conditions return to normal and policy support is reduced.
The strong manufacturing export performance is also beginning to taper off as a result of the slowing down of international trading partners. The technology cycle, evident in the falling price of microchips, is hampering exports to Korea, Singapore and China's Taiwan province, and is likely to continue through the end of the year. However, assuming growth in the rest of the world has peaked, external demand should strengthen over the next year.
In Asia, inflation, which rose alarmingly above the central bank's target last year, is expected to decline. While core inflation is proving more tenacious and has not abated completely, there are now encouraging signs that headline inflation peaked during the second half of last year.
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Sometime in the coming year, as financial and commodity headwinds ease, we anticipate inflation once again approaching the central bank's target.
There has been some improvement in the financial situation of the world and at the same time there has been a decrease in the strength of the US dollar. Central banks in Asia are raising interest rates as they combat inflation that is above target.
These elements have aided the recovery of Asian currencies, most of which have erased nearly half of their losses over the past year. This has reduced the pressure on domestic prices.
Commodity prices skyrocketed after Russia's invasion of Ukraine early last year, putting pressure on energy importers in Asia. Rising shipping costs also resulted in increased prices for imported goods, with a particularly strong impact on Pacific island nations. However, in recent times, both these factors have been on a steady decline, easing inflationary and current account pressures.
Inflation is trending in the right direction, yet central banks need to be vigilant. Core inflation is still higher than desired. The significant supply shocks and long-term structural restructuring of the pandemic have made monetary policy calibration particularly difficult.
Data about the effects of the second round are mixed, adding to the uncertainty of decision-makers. Greater flexibility in longer-term yields would be beneficial in light of twin risks to Japanese inflation.
And finally, the renewed dynamism of the Chinese economy could exert upward pressure on global goods and service prices, especially in countries that are anticipating a return to tourism.
This indicates that central banks should be careful when reiterating their dedication to price stability. In fact, they may need to raise rates even further if core inflation shows no clear signs of returning to target.
Even though the short-term outlook has improved, significant longer-term obstacles still exist. Our downgrading of China's medium-term prospects represents another significant revision to the outlook for the country.
The slowdown in the coming years will affect growth prospects across Asia's highly integrated supply chains as well as globally, just as the near-term acceleration in China's growth is anticipated to produce positive spillovers. This will result in changes to boost productivity and long-term growth more urgent across Asia.
Public debt loads were increased by fiscal deficits during the pandemic and higher long-term interest rates recently. The authorities must continue with their plans for gradual fiscal consolidation because several Asian nations are in debt distress. Additionally, doing so will prevent monetary and fiscal policies from working against one another.
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In addition, many Asian nations have significant bank exposure to real estate downturns and high levels of leverage across the corporate and household sectors.
This points to subtle policy trade-offs between maintaining financial stability and limiting inflation as well as the necessity of strengthening resolution frameworks.