World Economy

Asia to Account for Most of World Growth

Asia to Account for Most of World GrowthAsia to Account for Most of World Growth

Growth in Asia and the Pacific is expected to remain strong at 5.3% this year and next, accounting for almost two-thirds of global growth.

Despite a slight moderation, Asia remains the engine of global growth, according to the IMF’s latest Regional Economic Outlook for Asia and the Pacific, IMF report said.

While external demand remains sluggish, domestic demand continues to show resilience across most of the region, driven by low unemployment, growth in disposable income, lower commodities prices, and macroeconomic stimulus.

“Of course, Asia is impacted by the still weak global recovery, and by the ongoing and necessary rebalancing in China,” said Changyong Rhee, Director of the Asia and Pacific Department at the IMF. “But domestic demand has remained remarkably resilient throughout most of the region, supported by rising real incomes, especially in commodity importers, and supportive macroeconomic policies in many countries,” he added.

A Mixed Outlook

The outlook for individual countries within the region varies. China and Japan, the two largest economies in Asia, continue to face challenges.

China’s growth is forecast to moderate from 6.9% in 2015 to 6.5% this year and 6.2% in 2017. China’s economy continues its rebalancing of shifting away from manufacturing and investment to services and consumption.

Japan’s growth is expected to continue at 0.5% in 2016, before dropping to -0.1% in 2017 as the effect of the widely anticipated consumption tax increase takes hold. An aging population and high public debt remain major drags on Japan’s long-term growth.

Other economies in the region are set to perform well. India has benefited from lower oil prices and remains the fastest-growing large economy in the world, with GDP expected to increase by 7.5% this year and next.

In Southeast Asia, Vietnam is leading the fast-growing economies in the region, helped by rapidly growing exports of electronics and garment manufactures.

For the Philippines and Malaysia, growth is expected to remain robust, underpinned by resilient domestic demand.

Downside Risks Looming

However, the region faces a number of external challenges, including slow growth in advanced economies, a broad slowdown across emerging markets, weak global trade, persistently low commodity prices, and increasingly volatile global financial markets.

Geopolitical tensions and domestic policy uncertainty add risks of potential trade disruptions or lower domestic demand. Natural disasters, too, can reverse economic gains, particularly in lower-income countries and small states (including many Pacific islands).

Small states also face the challenge of reduced financial services by global banks (or “de-risking”), which could hold back financial inclusion and growth.

Africa Growth Cut

Economic growth in sub-Saharan Africa will slow to 3% in 2016 as much of the continent reels from low commodity prices, the IMF warned.

Governments need to implement urgent and substantial reform as prolonged domestic downturns and other weak external factors subdue growth, the report said.

Policy responses, particularly among commodity exporters, to the economic shock caused by falling prices during the past 18 months had “generally been behind the curve”, resulting in declining foreign reserves and constrained financing.

The immediate outlook therefore “remains clouded by downside risks”, it added, as it sharply revised down its 2016 economic growth forecast from the 4.3% it predicted last October. Growth in sub-Saharan Africa last year was 3.4%, down from above 5% in both 2012 and 2013. The forecast for next year is 4%.

Greater exchange rate flexibility, coupled with supportive monetary and fiscal policies, should be “the first line of defense”, while many nations “critically need to contain fiscal deficits and build a sustainable tax base”, Antoinette Sayeh, the IMF’s Africa director said.

The revised growth forecast is largely due to economic turbulence in Nigeria and South Africa, the region’s two largest—and currently among the weakest—economies. If they are removed from the calculations, the 2016 growth forecast rises to 4.4%, down from 4.7% last year, and rises to 5.4% next year.

South Africa’s economy is set to expand by only 0.6% this year, while Nigeria’s growth is expected to be 2.3%.