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Economic and Social Survey of Asia and the Pacific 2015: Year-end Update United Nations Conference Centre 14 January 2016 Dr. Shamshad Akhtar Under-Secretary-General of the United Nations and Executive Secretary of ESCAP Key findings and messages • The Asia-Pacific region’s growth has plateaued around 5%. This has implications for its ability to drive global economic recovery; the region should focus more on domestic and regional demand to revive growth • While deceleration in extra-regional trade is an important factor, domestic demand and intra-regional trade also remains constrained • Key concern is impact on trade of slowdown in China and the recent volatility in equity and currency markets in the country and the region • Despite relatively lower inflation, monetary policy faces unenviable trade-offs. A more proactive fiscal policy stance is recommended to provide countercyclical support and strengthen long-term and inclusive growth • Key economic policy challenges include coping with rising private debt and higher financing costs due to US monetary policy normalization • Overarching medium-term priority is making growth more inclusive and strengthening productivity 2 Economic growth remains on a declining trend – Growth estimates for 2015 and 2016 downgraded from Survey 2015 – Growth seems to have plateaued around 5% compared to an average 9.4% growth between 2005 – 2007. • Declining growth trend in AP region is in contrast to somewhat accelerating growth in adv. eco. – AP region is no longer the leader in global economic recovery. – Highlights that domestic and regional factors are gaining significance and focus on them is important for growth revival in the region 12 Real GDP growth in developing Asia and the Pacific, advanced economies and the world, 2006-2016 10 Year-on-year percentage change • Slowdown in global trade as well as in Chinese economy together with domestic infrastructure constraints is holding back faster growth 8 6 4 2 0 -2 Developing Asia (current forecast) Developing Asia (forecast as of Survey 2015) Advanced economies World -4 -6 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3 2016 Outlook: Selected Asia-Pacific economies Real GDP growth and inflation of selected Asia-Pacific economies Inflation Real GDP growth (Percentage) China Fiji India Indonesia Japan Malaysia Philippines Republic of Korea Russian Federation Singapore Thailand Developing ESCAP economies Least developed countries Landlocked developing countires Small island developing States Total ESCAP 2014 7.3 5.3 7.3 5.0 –0.1 6.0 6.1 3.3 0.6 2.9 0.9 5.3 5.6 4.9 6.5 3.5 Latest estimates 2015 2016 6.9 6.5 4.0 3.5 7.4 7.5 4.8 5.3 0.5 1.1 4.8 4.8 5.9 6.3 2.6 2.9 –3.9 –0.5 2.0 2.2 2.6 3.5 4.5 5.7 2.9 6.3 3.2 5.0 6.0 3.4 4.3 3.6 Survey 2015 2015 2016 7.0 6.8 4.0 4.0 8.1 8.2 5.6 5.8 0.6 0.8 4.9 5.2 6.5 6.4 3.4 3.7 –4.0 –1.6 3.1 3.5 3.9 4.0 4.9 5.7 3.2 9.6 3.4 5.2 5.8 3.9 4.8 3.7 2014 2.0 0.5 6.0 6.4 2.7 3.1 4.1 1.3 7.8 1.0 1.9 4.2 6.4 5.7 3.1 3.7 Latest estimates 2015 2016 1.5 2.2 2.0 3.0 5.0 5.5 6.6 5.3 0.8 0.7 2.4 3.3 1.8 3.2 0.7 1.6 15.7 9.0 –0.5 0.5 –0.8 1.5 4.2 5.3 6.2 3.8 3.0 4.0 5.4 6.8 4.0 2.9 Survey 2015 2015 2016 1.7 2.5 2.5 2.5 5.5 5.8 5.5 5.0 1.0 2.2 3.0 2.9 3.0 3.2 1.9 2.6 13.0 10.0 0.3 1.5 0.3 2.0 4.3 5.5 7.1 4.3 3.1 4.4 5.4 6.9 4.3 3.6 4 Slowdown in the Chinese economy continues Mostly due to China’s ongoing efforts, for the right reasons, to rebalance the economy towards domestic demand, particularly consumption • • Share of (net) exports and investment is declining. Industrial production has slowed due to both external and internal factors. • • • Lower demand by advanced economies for Chinese exports Less demand for new projects due to higher supply from previous activity. China growth contributions, by expenditure, 2005-2014 China slowdown in manufacturing and Industrial output, 2012-2015 55 13 54 12 53 11 10.6% 13 11 15.0% 11.5% 3.1% 9 1.3% 42.5% 87.9% 7 52.1% 67.3% 1.4% 46.2% 41.6% 54.5% 49.3% 48.1% 50.7% 5 56.6% 42.5% 10 43.7% 45.8% 3 44.8% 58.2% 48.1% 64.5% 57.1% 1 Percentage 31.9% 51 9 50 8 49 7 48 -45.1% -1 -13.5% -8.6% -2.6% PMI (manufacturing) RHS 47 6 Industrial production index -3 46 5 45 4 Net exports Growth 2014 2013 2012 2011 2010 2009 2008 Investment Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Cosumption 2007 2006 -5 2005 Percentage 52 Percentage change 15 Chinese slowdown having large spillovers to the region • Slowdown in domestic demand by China is impacting regional trade. – Most affected are commodity-exporters ( Indonesia) and manufacturing exporters (Singapore, Republic of Korea, Taiwan Province of China) • In 2015, it has impacted both the equity and currency markets in China as well as the region; as seen again in recent days. Growth of exports to China for selected Asia-Pacific economies, 2012-2015 Equity market performance for China and selected economies, 2015-2016 160 5 150 0 140 Thailand China India Index January 2015 = 100 -5 -10 -15 Indonesia Korea 130 Singapore 120 110 100 -20 90 Note: Data for 2015 is available up to November 2015. 01-Jan-16 01-Nov-15 Republic of Korea Japan 80 01-Sep-15 Thailand Indonesia 2015 01-Jul-15 2014 01-May-15 Malaysia Singapore 2013 01-Mar-15 -25 2012 01-Jan-15 Year-on-year percentage change 10 6 Moderate recovery in advanced economies also affecting the region given its export-led growth orientation • Apart from slowing demand in China, slow recovery in advanced economies is affecting exporting economies in region directly … – China has seen consecutive months of export contraction over second half of 2015 – This translates into less demand for products from the region for processing and onward export by China Indonesia Republic of Korea 60 Russian Federation Thailand 40 Singapore 20 0 -20 -40 -60 Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Nov-2010 Jan-2011 Mar-2011 May-2011 Jul-2011 Sep-2011 Nov-2011 Jan-2012 Mar-2012 May-2012 Jul-2012 Sep-2012 Nov-2012 Jan-2013 Mar-2013 May-2013 Jul-2013 Sep-2013 Nov-2013 Jan-2014 Mar-2014 May-2014 Jul-2014 Sep-2014 Nov-2014 Jan-2015 Mar-2015 May-2015 Jul-2015 Sep-2015 Nov-2015 • …and indirectly through re-exports from China. 80 Percentage change – Global trade in 2015 is expected to show slowest expansion since 2009 Monthly export growth for selected AP economies, 2010-2015 7 Domestic demand is also not growing in a robust manner • Consumption being affected in some economies due to rapid accumulation in private debt and relatively high inflation • Investment being affected by slow progress in reforms, a constrained private sector, and high economic uncertainty. Contributions of private consumption to economic growth in selected developing Asia-Pacific economies, 2012-2014 Contributions of fixed investment to economic growth in selected developing Asia-Pacific economies, 2012-2014 5 5 2012 2013 2014 2012 2013 2014 4 3 3 Percentage points Percentage points 4 2 1 2 1 0 0 -1 -1 Malaysia Russian Federation Indonesia Thailand Malaysia Russian Federation Indonesia Thailand 8 Slower economic activity coupled with lower commodity prices drive inflation downwards • lower imported inflation in SouthEast Asia and East and North East Asia For commodity-exporters, there is higher exchange rate depreciation due to low commodity prices. • higher imported inflation in North and Central Asia 6 5 4 3 2009 2010 2011 2012 2013 2014 2015 2016 Oil and commodity price trends, 2009-2015 230 120 210 110 190 100 170 90 150 80 130 70 110 90 All commodity price index (LHS) Average crude price (RHS) 60 70 50 50 40 Average crude price (USD per Barrel) • Inflation for developing Asia-Pacific region, 2009-2016 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 For most commodity-importers, exchange rate impact is less pronounced due to lower commodity prices Year-on-year percentage change • An important factor behind inflation dynamics is the effect of commodity imports/exports on exchange rates All commodity price Index (2005 = 100) • 7 Currency depreciation has accelerated due to US MP policy normalization and Chinese growth concerns • US policy normalization will be an ongoing factor. Initial impact in December 2015 was factored in but uncertainty regarding path of increase could lead to volatility Weaker economic data from China and managed depreciation of the Renminbi is a growing concern, as seen again in recent days Countries have allowed currency weakness due to concerns about export prospects • However competitive devaluations are not beneficial. 110 100 90 80 70 60 50 40 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 • • Exchange rate indices in selected Asia-Pacific economies, 2013-2015 General outflow of portfolio capital Index January 2013 = 100 • China Malaysia Thailand India Philippines Turkey Indonesia Russian Federation Republic of Korea Note: A declining trend represents depreciation and vice versa 10 Monetary policy constrained by capital outflow concerns • Most economies have lowered policy rates recently. Policy rates in selected developing Asian developing economies, 2012-2015 18 16 • However, despite subdued growth and inflation outlook, risk of capital outflow and financial stability considerations hampers further monetary easing 14 12 10 8 6 4 2 • Countries more at risk of excessive outflow are those with weak macroeconomic fundamentals and substantial commodity dependence 0 China India Indonesia Malaysia Thailand Russian Federation Domestic financing costs in the region may rise due to increase in US interest rate • US federal funds rate expected to gradually rise in 2016 and could reverse part of the foreign funds invested in the region – Impact on equity and debt market and cross-border bank loans, and pressure on exchange rates • Whether domestic interest rates will increase accordingly depends on country-specific factors, such as ... – Exchange rate regime, external debt, asset prices, effectiveness of macroprudential measures, etc. Asia-Pacific policy rate and United States federal funds rate, 2012-2015 Rapid increases in private debt call for vigilance Household, corporate and sovereign debt in 2014, % of GDP • Household debt in Malaysia, Thailand on a par with OECD levels, while China holds more corporate debt than the US – Exposure to real estate sector and concentration in low income households and low profit firms Debt service ratios (DSR) for the private non-financial sector • Risks for financial stability and economic growth prospects – Pressure on debt servicing capacity if financing costs rise when income growth is slowing Fiscal policy can play a proactive role Fiscal balance, regional average, 2001-2016 1 – More countercyclical and expansionary policy can be adopted • … and support inclusive, longterm growth 0 -1 -2 -3 – Spending on education, health and infrastructure is low or uneven Fiscal space contingent on tax and other reforms – But there are no mechanical and universally accepted thresholds 25 Percentage of GDP • Mean, unweighted -4 20 Median Selected current and capital expenditures, % of GDP infrastructure health 15 education 10 5 0 Pakistan Philippines Indonesia Georgia Sri Lanka Armenia Tajikistan Iran Bangladesh Russia Kazakhstan India Cambodia Azerbaijan Lao PDR Afghanistan Nepal Bhutan Fiji Thailand Viet Nam Mongolia Malaysia Maldives China …to stabilize the economy Percentage of GDP • 1 4 Medium term economic challenge is to strengthen productivity and make economic growth more inclusive • Despite tremendous progress, development has not been inclusive in the region. Labour income share in Asia and the Pacific from 1991 to 2011 (in per cent of output) 54% 52% 50% 48% • • Higher economic growth has not created enough decent jobs, and higher labour productivity has not translated into commensurate increases in real wages. With growth of total factor productivity having declined in recent years, greater effort is needed to strengthen productivity and ensure that its benefits are passed on to the labour force. 46% 44% 42% 40% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Average for AP Annual percentage growth rate of total factor productivity and labour productivity, 1991-2013 Five takeaways 1. A “new normal” of economic growth continues amidst weak global trade and China’s slow growth; AP economies will need to look more towards domestic and regional demand. 2. Fiscal policy can tackle cyclical and long-term challenges, and relieve pressure on monetary policy, provided tax revenues are strengthened 3. Rapid increases in private debt call for vigilance, especially as financing costs are likely to increase in the region. 4. Productivity growth should be accelerated and its benefits adequately shared with the labour force. 5. With the adoption of 2030 Agenda for Sustainable Development, it is not just about economic growth anymore ---- we live in the era of sustainable development! 1 6 Thank you www.unescap.org twitter.com/unescap facebook.com/unescap youtube.com/unescap