Three factors suggest Asia Pacific economies will see faster than predicted growth in 2018

Published: 14 March 2018

Economies in Asia will see another year of faster growth in 2018, according to Deloitte who today released the fourth edition of their Voice of Asia series. Following a better than expected 2017, and despite some regional vulnerabilities, three factors suggest Asia Pacific will continue to thrive, rather than moderate over the next year.

Stephen Smith, Deloitte Australia Economist explained that, "Following 2017’s upside surprise, growth in the Asia Pacific region could be expected to moderate during 2018. However, we are maintaining our optimistic outlook for 2018 and believe the economies in Asia will enjoy another year of faster growth. This is driven by the improving domestic conditions in the region, a strong pipeline of infrastructure spending initiatives and a continued recovery in global demand which will boost Asia's trade-driven economies."

Domestic conditions are well placed to deliver growth.

In much of the region, recent major policy reforms, like the introduction of goods and services taxes and the removal of fuel and other subsidies, hurt consumer confidence and had short-term negative implications for business. But that effect is wearing off, as are the effects of India’s demonetisation, driving a pick-up in domestic demand in the form of consumption and external demand in the form of trade.

Many countries have also taken steps to improve their business climate, paving the way to more investment opportunities, or have refocused their policy efforts towards attracting investment.

A strong pipeline of infrastructure spending initiatives.

Infrastructure remains a key priority in the region. Several countries are launching ambitious infrastructure building strategies to support near-term activity and drive long-term productivity.

“The largest infrastructure effort in the region is China’s Belt and Road Initiative, which aims to boost productivity and efficiency gains in Asia by improving trade links between Asia and Europe. Even though it's in the early stages, a number of infrastructure deals have already been signed under the Initiative, which will create jobs and business opportunities across the region in the short-term, as well as improve the movement of goods across economies and support business productivity in the long-term,” said Sitao Xu, Deloitte China Economist.

Continued recovery in global demand providing greater impetus to the trade-driven economies of the region.

There are encouraging signs of a recovery in capital spending worldwide, suggesting the global economy has turned a corner and will likely accelerate. Asian exporting economies stand to be the biggest beneficiaries of this recovery as demand for their manufactured goods grow with increased capital spending in developed economies.

Global financial conditions remain accommodative, capital flows into the emerging market and developing economies have returned and non-resident capital inflows to the region remain resilient. The global economy seems set for a new investment cycle which will bolster the rebound.

Potential challenges

Despite the positive growth forecast for 2018, there are a few potential challenges which could derail progress and growth in the region.

Stephen Smith, Deloitte Australia Economist commented, “At the top of our list of challenges is the build-up of debt from the post-2008 financial crisis period of excess global liquidity. In some instances, this debt has been channelled into housing markets, raising concerns of asset price bubbles. Additionally, there is a risk that financial imbalances which have been building in China for some time could worsen. However, our baseline scenario is for China to continue its impressive economic performance."

"Highly leveraged corporate and household balance sheets also remain a challenge, as they have left the non-financial private sector vulnerable to shocks. If left unchecked, a significant negative shock, such as the continued escalation of geo-political tension or a change in the global trade regime, could have far-reaching adverse consequences for economic stability in the region."

For more analysis and details on the Voice of Asia, please visit Deloitte Insights.