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No. 15
Facing a Sluggish and Volatile Global Economy
Five years since the start of the global financial crisis,
the world economy continues to face downside risks,
while the outlook remains clouded by weak market
sentiments. Governments in developed economies
are engaging in fiscal consolidation, which is
negatively affecting their economic growth, as well
as that of developing economies. At the same time,
households and the business and financial sectors
continue to deleverage in an effort to rebuild their
balance sheets, to the extent that the global economy
is likely to experience a “new normal” of lower growth
for years to come.
point per year. Growth in developing Asia-Pacific
economies is estimated to decelerate from 7.3%
per year during the pre-crisis period of 2000-07 to
6.3% during 2013-17. Although medium-term growth
prospects remain relatively robust in historical terms,
this masks two important concerns.
First, the crisis-related loss in output is sizeable.
Under the no-crisis scenario, which assumes the
pre-crisis growth rate of 7.3% per year throughout
2008-17, the GDP level by end-2017 would be about
10% higher than the scenario that is based on actual
growth during 2008-12 and projected growth of 6.3%
during 2013-17. In value terms, the estimated loss
amounts to almost $1.3 trillion by end-2017.
In the past few years, the world economy has
also been characterized by heightened economic
uncertainty. Driven in large part by policy uncertainty
in developed economies, such as divided negotiations
on fiscal policy in the United States and the timing and
magnitude of monetary injections in many advanced
economies, near-term economic prospects have
become more unpredictable, with sharp upward and
downward revisions in growth projections. Moreover,
businesses remain reluctant to expand operations
as consumers further delay their spending due to
increased job insecurity and as financial institutions
continue to tighten lending standards due to
heightening of perceived default risks. For emerging
economies, massive inflows and the risk of sudden
reversals of foreign capital, particularly in the form
of short-term portfolio investments, add volatility to
domestic financial markets.
Second, at a country level, several regional
economies will suffer from much lower future growth
compared to pre-crisis trends (Figure 1). In Armenia,
Azerbaijan, the Islamic Republic of Iran and Samoa,
projected growth is less than half of the pre-crisis
pace, while Pakistan, the Republic of Korea, the
Russian Federation and Singapore are also notably
affected.
Figure 1. Growth moderation is expected to be sharp in
many economies
18
Projected output growth, 2013-17 (%)
15
Asia-Pacific is experiencing a “new normal” of
lower growth
Overall, the Asia-Pacific region is experiencing a
“new normal” of moderately lower growth. Under
assumptions of the continuation of present economic
trends such as subdued advanced economies and
slowing Chinese economy,1 projected and pre-crisis
growth rates would differ by about one percentage
MNG
12
BTN
9
LAO
PNG
3
JPN
1
In particular, growth in developed economies gradually picks up but remains
subdued; the Chinese economy shifts towards a more sustainable growth as rebalancing moves forward; global commodity prices remain high and volatile relative
to the past trends; and limited progress on reorienting sources of growth towards
domestic demand in developing Asia-Pacific.
TKM
LKA
UZB
MMR
IDNBGD
IND TJK
KGZ
KAZ
GEO
PHL
VNM
MYS
AFG
THA
BRN
MDV
ARM
TUR
NPL
VUT
SLB
PAK
RUS
TWN
RUSSGP
KOR
AUS
FJI NZL
KIR
WSM
6
0
CHN
KHM
0
AZE
IRN
3
6
9
12
Actual output growth, 2000-07 (%)
15
18
Source: ESCAP, based on ADB Asian Development Outlook, IMF World
Economic Outlook, United Nations World Economic Situation and Prospects, and
World Bank Global Economic Prospects.
UNITED NATIONS ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
1
impact of lower economic uncertainty in any given
year during 2008-12 could be up to 7-9% of total
output. These estimates are large, considering that
the assumed magnitude of improvement in market
confidence and bond market distress is relatively
modest.
Increased economic uncertainty in Asia-Pacific
has constrained output growth
The volatility of daily stock market indices, a highfrequency variable that is very sensitive to changes
in market sentiments, surged in 2008-09 relative to
the pre-crisis period. This finding remains generally
true when measured over the longer period of 200812, a period in which episodes of macroeconomic
upswings and downswings occurred. Financial
market volatility reflects fluctuating future cash
flows, thus consumption and investment decisions.
Meanwhile, export-oriented economies such as
Malaysia, the Republic of Korea, Thailand and Hong
Kong, China registered more pronounced changes
in inventories as a share of gross domestic product
(GDP) during 2008-09. Rapid destocking and
restocking often indicate large mismatches between
anticipated and actual shipment orders. Overall,
fluctuations in the trade and domestic components
of GDP have pushed up volatility in output growth in
most regional economies (Figure 2).
Policy uncertainty markedly affected regional output
levels over 2008-12
Estimated increases in the output level relative to the actual levels (%)
9
8
7
6
5
4
3
2
1
Output growth volatility also rose
China
India
Australia
Republic of
Korea
Japan
Singapore
Indonesia
Thailand
Malaysia
Turkey
Russian
Federation
Hong Kong,
China
Philippines
0
Taiwan, China
Figure 2.
Figure 3.
Source: ESCAP, based on the Oxford Global Economic Model.
Note: The boxes represent the mean values of the impact.
Standard deviation-to-mean ratio of seasonally-adjusted, quarterly GDP
growth, multiplied by 100
120
Growth volatility during 2008-12
100
The impact of the global economic turmoil on
poorer economies is notable
KOR
THA
SGP
80
MYS
TWN
TUR
In addition to the traditional channel of merchandise
trade, the global financial crisis has hindered economic growth in least developed economies (LDCs)
through weaker financial flows. The rising trend of net
official development assistance (ODA) and migrants’
remittances to LDCs in Asia observed in the precrisis years has been reversed (Figure 4). An uptick in
foreign direct investment inflows also subsided.
Meanwhile, abundant global financial liquidity, resulting from unconventional monetary easing in developed economies, has kept prices of non-energy commodities at unusually high levels3, and has contributed to greater price volatility4. With food prices
close to their historic peaks recorded in mid-2008,
high and volatile food prices pose a significant challenge to food-deficit low-income economies in ensuring adequate domestic food supplies, especially
considering that net ODA to this group of economies
decreased steadily from 2.8% of their GDP in 2001
to only 0.6% of GDP in 2010.
RUS
HKG
PHL
60
40
IND
IDN
20
20
40
60
80
100
120
Growth volatility during 2000-07
Source: ESCAP, based on CEIC data.
Based on a counterfactual analysis, if advanced
economies were exposed to lower policy uncertainty
during 2008-12 than actually observed, the annual
output levels of Asia-Pacific economies would have
been 3% higher on average (Figure 3). A less volatile
macroeconomic environment benefits growth
performance through stronger market confidence
and lower bond market distress.2 In the Philippines,
Turkey, and Hong Kong, China, the estimated
3
See, for example, Ansgar Belke, Ingo Bordon and Ulrich Volz, “Effects of global
liquidity on commodity and food prices”, Discussion Papers, No. 1199 (Berlin, DIW,
2012).
2
The simulation assumes that (i) consumer and business confidence in all economies in the model simultaneously fell by only two-thirds of the actual declines,
and (ii) the gap between the interest rates on government and corporate bonds
and a safe-haven interest rate was 200 basis points narrower than the actual margins. Such improved sentiments and accommodative credit conditions help to
revive domestic demand and trade activities.
4
The standard deviation-to-mean ratio (multiplied by 100) of World Bank’s nonenergy commodity index increased from 3.8 during 2000-06 to 6.5 during 200912, or 72% higher. For food items and agricultural raw materials, the ratios rose by
84% and 41% respectively during the same period.
2
Figure 4.
Proactive and consistent countercyclical fiscal
and financial policies help to mitigate the effects
of economic uncertainty. Of central importance
is a set of automatic stabilizers that sustain
household consumption amid shocks, such
as unemployment benefits for workers and
agricultural price support and insurance for small
farms. Active macroeconomic policies to restore
confidence such as temporary tax rebates for small
businesses, targeted cash transfers, and bank
deposit insurance may be promptly pursued when
needed. In this aspect, governments need to build
and maintain ample fiscal space through: among
others, comprehensive tax reforms to enhance
progressivity, improve tax administration, close tax
loopholes and widen the tax base; medium-term
expenditure frameworks; fiscal transparency; and
deeper domestic financial markets.
Financial flows to least developed countries in
Asia have recently softened
% of GDP
9
8
Net official development assistance
Migrants' remittances
Inward foreign direct investment flows
7
6
5
4
3
2
1
0
1990
1995
2000
2005
The policy options highlighted above have been
widely discussed but their implementation will take
time. The adjustment process could be accelerated
in some cases. For example, the shares of
domestic demand (total consumption expenditures
and fixed investment) in GDP in Asia-Pacific have
been mostly unchanged since the crisis began, or
even lower in open economies such as Azerbaijan,
Brunei Darussalam and Turkmenistan. Meanwhile,
many regional economies continued to rely heavily
on traditional markets. In Cambodia, exports to
high-income markets still accounted for over 90%
of total goods shipments during 2008-11, which
is similar the level observed prior to the crisis.
In Azerbaijan, Bangladesh, Brunei Darussalam,
China, the Philippines and Sri Lanka, the export
shares to advanced economies are still at least
75%. Finally, the ILO data show that the proportion
of unemployed persons who benefit from
unemployment assistance is less than 20% in Asia,
much lower than about 40% in Latin America and
the Caribbean and 80% in developed countries.
Effective implementation of suggested policy
measures in this policy brief can help to minimize
the adverse impact of global economic uncertainty
on economies in Asia and the Pacific as well as to
enhance the prospect for inclusive and sustained
growth.
2010
Source: ESCAP, based on data from UNCTADSTAT database.
.
Some policy options to weather a sluggish
and volatile global economy
Available data suggest that Asia-Pacific
economies which face the “new normal” of lower
growth are more open than others and rely more
on high-income markets for their export earnings.
Promoting more intra-regional economic activities
through, for example, lower trade barriers and more
comprehensive economic partnership agreements
is clearly desirable. Another strategy is to boost
domestic demand as a new or alternative source
of growth. This is especially critical for more open
economies. Policy options include enhancing
investment in the agricultural and services sectors,
strengthening small businesses, introducing
a minimum wage scheme, and upgrading
public infrastructure. To reduce precautionary
savings, efforts can be made to provide more
comprehensive social safety nets through health
insurance reforms and wider pension coverage.
A larger middle-class population would help to
support domestic demand given their relatively
resilient consumption.
The MPDD Policy Briefs Series aims at generating a forward-looking discussion among policy planners, researchers and
other stakeholders to help forge political will and build a regional consensus on the needed policy actions and pressing
reforms. Policy briefs are issued without formal editing. This issue has been prepared by Vatcharin Sirimaneetham of
the Macroeconomic Policy and Development Division, ESCAP. It is partly based on the Economic and Social Survey
of Asia and the Pacific 2013: Forward-Looking Macroeconomic Policies for Inclusive and Sustainable Development.
For further information on the policy brief, please contact Dr. Anis Chowdhury, Director, Macroeconomic Policy and
Development Division, ESCAP ([email protected])
www.unescap.org/pdd
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