East Asia and Pacific Economic Update, October 2017: Balancing Act
Growth Prospects for 2017 and 2018 remain positive for developing East Asia and the Pacific
- Improved global growth prospects and continued strong domestic demand underpin a positive outlook for the developing economies of East Asia and the Pacific, says the October 2017 edition of the East Asia and Pacific Economic Update.
- Stronger growth in advanced economies, a moderate recovery in commodity prices, and a strengthening of global trade growth, are the favorable external factors that will support the economies of developing East Asia and Pacific to expand by 6.4 percent for 2017. Growth in the region is expected to slow slightly to 6.2 percent in 2018 primarily reflecting China’s gradual slowdown.
- The uptick in growth in 2017 relative to earlier expectations reflects stronger than expected growth in China, at 6.7 percent, the same pace as in 2016.
- In the rest of the region, including the large Southeast Asian economies, growth in 2017 will be slightly faster at 5.1 percent in 2017 and 5.2 percent in 2018, up from 4.9 percent in 2016.
- Several external and domestic risks could impact this positive outlook.
- Uncertainty remains about economic policies in some advanced economies, and escalating geopolitical tensions could have adverse economic impacts. Monetary policies in the U.S. and the Euro Area could be tightened more quickly than expected.
- Many countries in the region also have vulnerabilities in their financial sectors with high levels of private sector debt or deteriorating asset quality. In several countries fiscal deficits remain high or are on the rise.
Larger economies faring well, mixed outlook for smaller countries
- China’s gradual rebalancing away from investment and towards domestic consumption is expected to continue, with growth projected to slow to around 6.4 percent in 2018-19.
- Thailand and Malaysia are expected to grow more rapidly than expected, due to the stronger exports, including tourism, for the former, and increased investment in the latter.
- Gains in real wages are fueling strong consumption in Indonesia, and a rebound in agriculture and manufacturing is boosting growth in Vietnam.
- In the Philippines, the economy is projected to expand at a slightly slower pace than in 2016, partly due to slower than expected implementation of public investment projects.
- The outlook for smaller countries is mixed.
- Mongolia and Fiji are expected to fare better in 2017-2018. Mongolia’s macroeconomic stabilization program is encouraging new foreign direct investment in mining and transport. Fiji’s growth will be supported by reconstruction from Cyclone Winston.
- Growth in Cambodia and Lao PDR is moderating compared to 2016, but its pace remains higher than other countries in the region; the power sector in Lao PDR and trade and FDI in Cambodia are the main economic drivers.
- Expanding tourism, low world commodity prices, high levels of revenue from fishing fees, and rising construction activity are supporting moderate GDP growth rates in most of the small Pacific Island Countries. In the longer term, reforms in tourism, labor mobility, fisheries, and the knowledge economy have the potential to lead to significantly higher incomes, employment, and government revenue.
- Robust growth will mean that poverty is expected to continue falling across the region. By 2019, it is projected that that there will be about a third fewer people living in extreme poverty while the number of those in moderate poverty will fall by about a fifth.
Priorities for Reforms
- Reducing financial sector and fiscal risks while strengthening competitiveness, including through deeper regional integration, remain priorities.
- A move away from measures aimed at short-term growth towards policies that address financial sector and fiscal vulnerabilities would boost the region’s resilience.
- These measures include: strengthening supervision and prudential regulation in countries experiencing rapid growth in private-sector credit and debt; reforming tax policies and administration to help boost revenue collection; and being ready to tighten monetary policy if warranted by the pace of interest rate increases in advanced economies.
- Structural reform priorities differ across countries. Sustained reforms of state-owned enterprise sectors in China and Vietnam can improve growth prospects.
- The Philippines, Thailand, Cambodia and Lao PDR will benefit from continued improvements in public investment management systems to support their expanding public infrastructure programs.
- In Indonesia, liberalizing the regulations for foreign investment remains important.
- The report also highlights the potential benefits from the well-managed expansion of tourism can offer to the region, including for the Pacific Island Countries. This will require closer collaboration between governments and the private sector to address any adverse environmental and social impacts while enhancing the economic gains.
- Deepening regional integration can help offset the risks of protectionism. The ASEAN Economic Community offers one avenue for doing so, including by further liberalizing trade in services and reducing non-tariff barriers.
- High and rising inequality is a growing concern across the region, as are falling mobility and growing economic insecurity. To address these challenges, measures to reduce extreme poverty must be accompanied by policies that broaden access to quality services and more productive jobs, and stronger social protection systems that reduce the consequences of adverse shocks.