Uncertainty and volatility have quickly become the “new normal” of the global economy. For several reasons, this turbulent external environment poses the most significant threat to Asia-Pacific growth this year.
One of this environment’s main features is the ongoing weakness of major developed economies. The expected V-shaped global recovery, from the depths of the 2008 financial crisis, proved short-lived. The world economy entered a second stage of crisis last year, owing to eurozone’s sovereign-debt crisis and continuing uncertainty about the economic outlook for the US.
Mapping the landscape of these threats, forecasting their impact and presenting a range of policy options to help countries to ensure inclusive and sustainable growth despite the uncertainty, is the focus of this year’s UN Economic and Social Survey of Asia and the Pacific.
Our forecast is that persistent headwinds will slow Asia-Pacific economic growth to 6.5 percent this year, down from 7 percent last year. Reduced demand for regional exports and higher costs of capital, combined with loose monetary policies and trade protectionism in some advanced economies, will contribute to the slowdown.
Nevertheless, Asia-Pacific growth will continue to outpace that of all other regions, acting as an anchor of stability and a new pole of dynamism for the world economy. For example, South-South trade with the Asia-Pacific countries this year will help other developing regions, especially Africa and Latin America, to reduce further their dependence on the low-growth advanced economies.
Moreover, robust growth from the Asian economic powerhouses will continue this year, with China likely to grow at 8.6 percent and India’s growth expected to accelerate from 6.9 percent to 7.5 percent. The Southeast Asian sub-region is likely to record a slight increase in growth, owing to Thailand’s strong recovery following last year’s floods, and annual inflation in the Asia-Pacific region as a whole is projected to fall from 6.1 percent to 4.8 percent.
The greatest risk to the Asia-Pacific economy this year is a disorderly sovereign-debt default in Europe, or an unraveling of the eurozone. This worst-case scenario could lead to Asia-Pacific export losses of up to US$390 billion in one year, with least-developed and landlocked developing countries worst hit — losing as much as 10 percent of their total exports. Although unlikely, such a scenario could reduce regional growth by as much as 1.3 percentage points, and prevent 22 million people from escaping US$2-a-day poverty this year.
A second key challenge to Asian regional growth in this year is commodity price volatility, together with a long-term rising trend. High prices and persistent volatility are increasingly features of the “new normal” and both national and regional economies need to adjust to this reality.
The commodity boom that has resulted from higher prices presents both risks and opportunities. Price shifts alter incentives, but the less-developed economies of Asia and the Pacific must resist the impulse towards narrow commodity specialization. The lesson from the first round of Western globalization was that natural resource specialization, especially in the poorest countries, can delay industrialization, economic diversification and the creation of productive capacity.