A quiet recovery in 2017, was overshadowed by more attention-grabbing headlines on deepening political divisions and a shift towards the right in the United States and the United Kingdom. But in 2018, the recovery is likely to come into sharper focus as major world economies operate in sync for the first time in a decade.
2017 gave us a lesson in looking beyond the hype. On the surface, it had the appearance of a difficult and tension-filled year, with political divisions deepening and significant shifts to the right in the United States and the United Kingdom just beginning to play out. In many ways it was challenging, but that was only one side of the story.
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Underneath all the bluster, the global economy was quietly recovering. Now, as we look at what’s ahead for 2018, that recovery has become the focus. For the first time in a decade, the major world economies are operating in sync and markets are confident. But is that the full story? In this edition of Voice of Asia, we are again looking beyond the headlines, at what 2018 will likely hold in store for Asia Pacific economies, and what some of the possible (but unlikely) vulnerabilities may be.
This time last year, in the first edition of the Voice of Asia series, we went against the prevailing gloomy mood and lacklustre economic forecasts of the moment to predict that “2017 will be better than you think,” with Asia playing a central role in better-than-expected global growth. At the time, the leading indicators showed signs that global growth would accelerate as economic recovery strengthened around the world. We also believed that China would weather its headwinds and maintain a decent growth trajectory through the year. And so we now look back on 2017, with the majority of the Asian economies having enjoyed stronger-than-expected growth.
A pickup in both domestic demand and export performance in 2017 helped deliver this in the region. Our predictions that global trade would accelerate faster, a more competitive Asia would emerge, and continuing demand from Asia’s consumers would drive intra-Asian trade proved to be close to the mark. What’s ahead for 2018? Let’s dive in.
Following 2017’s upside surprise, many expect growth in the Asia Pacific region to moderate over the next year. However, we are maintaining our optimistic outlook and believe that the economies in Asia will enjoy another year of growth that outpaces these expectations in 2018.
In our first article, “Strength from within and demand from outside: Asia's continuing growth opportunity,” we list three key factors that give us reason to believe this.
In much of the region, the initial drag from recent major policy reforms are fading. The effects of initiatives like the introduction of goods and services taxes (India and Malaysia) and the removal of fuel and other subsidies (Indonesia) hurt consumer confidence, but that effect is wearing off, as are the effects of India’s demonetisation policy.
Many countries and territories 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. For example, both India and Indonesia made significant gains in the World Bank’s “Doing Business” ranking.
Infrastructure remains a key priority in the region. Several countries are launching ambitious infrastructure building strategies. India has announced, and Thailand and the Philippines are implementing, a series of major transportation projects. The largest infrastructure effort in the region is China’s “Belt and Road Initiative,” aiming to boost productivity and efficiency gains in Asia by improving trade links between Asia and Europe.
These projects will support near-term activity and benefit long-term productivity.
There are encouraging signs of a recovery in capital spending worldwide, which has been the missing ingredient in the global recovery so far. Asian export economies stand to be the biggest beneficiaries of this recovery as demand for their exports of manufactured goods grows with increased capital spending in developed economies.
Global financial conditions remain accommodative, capital flows into the emerging market and developing economies have returned, and nonresident capital inflows to the region remain resilient. The global economy seems set for a new investment cycle that will boost the rebound.
We are optimistic about the near-term prospects for the Asia Pacific region.
However, if recent economic and geopolitical upsets have taught us anything, it is the importance of considering the “less likely” outcomes. So while we expect positive performance to continue, we also acknowledge ongoing dynamics within some regional economies, and globally, which could create vulnerability for the region.
In our second article, “The flip side: Being aware of what could go wrong in 2018,” we look at some of the potential challenges which could derail progress and growth in the region. 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, such as Australia, China, and South Korea, this debt has been channelled into housing markets, raising concerns of asset price bubbles.
Much attention has been focused on China, with no less than the Chinese central bank governor warning of a potential “Minsky moment,” while the International Monetary Fund has also called on China to boost banks’ capital buffers. So while our baseline scenario is for China to continue its impressive economic performance, there is a risk that financial imbalances which have been building for some time could worsen.
Highly leveraged corporate and household balance sheets have left the non-financial private sector vulnerable to shocks. If left unchecked, a significant negative shock could have far-reaching adverse consequences for economic stability in the region.
In the near term, we believe that the likelihood of such a shock is low, but the continued escalation of geo-political tension will increase this risk. There are threats to the global trade regime that has been so vital to the economic development in Asia.
The US administration’s policies towards the World Trade Organisation (WTO) and its approach to existing trade agreements have raised concerns. The decision by the United States to impose heavy tariffs on washing machine and solar panel imports is a sign that the risk is real.
While these measures could end up harming both US consumers and producers in the region, such as in China and South Korea, the real concern is whether this then leads to retaliatory measures. Continued escalation and the threat of a “trade war” could hit global market confidence and devastate the global recovery. More broadly, rising military tensions over North Korea could be the trigger for world risk-off sentiment and form the basis of the reversal of capital flows. An escalation of tensions could rock confidence and be a source of economic instability.
While we are conscious of the sources of vulnerability and downside risks, as are policymakers in the region, overall, the balance of evidence suggests that key drivers of growth are in place, and that the strong rebound in global activity in 2017 is set to continue into 2018.
As we approach the Chinese zodiac Year of the Dog in the Asia Pacific region, we say goodbye to the rooster. Those born in the Year of the Rooster are said to be trustworthy, with a strong sense of responsibility at work. Some roosters have been hard at work in the respective administrations of the Asian region, as they reap the benefits of domestic reforms and investments announced and implemented in 2017. Let’s hope for some traits of the dog to continue into administrations this new year—communicative, serious, and responsible—as Asia seeks to consolidate and expand on the good year in 2017.