Asia-Pacific growth to pick up moderately in 2015

2014 Year-end Update Economic and Social Survey of Asia and the Pacific
2014 Year-end Update Economic and Social Survey of Asia and the Pacific

Lower oil prices an opportunity, but comprehensive structural reforms needed

Growth in Asia-Pacific developing economies will pick up moderately in 2015. Prospects for growth would be better if supported by much-needed structural reforms, and could also be boosted by lower oil prices that are an opportunity to mobilize resources for inclusive and sustainable development, the United Nations said here today.

Developing countries in Asia and the Pacific are forecast to grow at an average of 5.8 per cent this year, up from 5.6 per cent in 2014, driven by improved economic performances in Bangladesh, India, Indonesia, Papua New Guinea, Republic of Korea and Thailand, according to updated forecasts by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its Economic and Social Survey of Asia and the Pacific 2014: Year-end Update. The report also highlights that growth in the region remains below pre-crisis levels.

Structural reforms in India and Indonesia are projected to help increase their growth to 6.4 and 5.6 per cent, respectively, from 5.5 and 5.2 per cent, respectively, in 2014. Growth in China is forecast to hover around 7 per cent in 2015 consistent with the ongoing economic rebalancing.

A decrease in regional inflation this year to 3.5 from 3.9 per cent in 2014, offers room in some regional economies for loosening monetary policies to support growth, indicates the Year-end Update, which was unveiled by United Nations Under-Secretary-General and ESCAP Executive Secretary Dr. Shamshad Akhtar.

“Despite improved prospects many developing economies in the region face structural constraints which have kept them from realizing their growth potential. Infrastructure shortages remain acute and growth has not translated into enough decent jobs,” Dr. Akhtar said.

The steep decline in oil prices in recent months may be the start of a longer-term trend and will have a significant, yet varying impact across the region. The Year-end Update estimates that for energy-importing countries, a $10 per barrel fall in the oil price in 2015 would translate into an increase in GDP growth of up to 0.5 percentage points.

However, it could reduce growth in the Russian Federation, a net energy exporter, by 1.1 percentage points and deprive neighbouring Central Asian countries of $1.7 billion in remittances from nationals working in the Russian Federation.

While a recovering United States economy will support growth in Asia-Pacific exporting economies, slow growth in the eurozone and Japan will be a challenge as will be China’s moderating growth. ESCAP also alerts the region to brace for capital outflows following an expected raising of interest rates by the US Federal Reserve although this could be buffered to some extent by new financial injections by the eurozone and Japan.

ESCAP also projects higher growth in all Asia-Pacific subregions in 2015, except North and Central Asia where it is expected to decline to 0.2 from 1.0 per cent in 2014, mainly due to the difficult outlook for the Russian Federation. The Russian Federation accounts for almost 80 per cent of the GDP of North and Central Asia subregion.

Among the growth drivers in the region, Thailand’s economy, after the sharp slowdown to 0.8 per cent in 2014, is forecast to grow by 3.9 per cent due to increased short-term consumer and investor confidence following the end of the protracted political instability.

Constraints and opportunities

Likely capital volatility in 2015, triggered by developed world monetary policies could slash Asia-Pacific GDP growth by up to 0.7 percentage points, ESCAP estimates, advocating sound macroeconomic management and macroprudential policies to address this.

On the domestic front, developing countries in the region need to bridge physical and social infrastructure gaps that need an annual investment of $815 billion, according to the Year-end Update. It outlines ways to increase infrastructure financing and recommends labour market reforms to increase decent job opportunities.

Declining global oil prices are a valuable opportunity for Asia-Pacific economies to reduce fuel subsidies that account for a large share of national budgets in many countries in the region. Regressive fossil fuel subsidies more often benefit the rich and have little impact on reducing poverty. The savings from a cut in these could be better invested into more productive and inclusive development, says the report.

ESCAP estimates that savings from energy subsidies could, for example, finance the provision of income security to all elderly and persons with disabilities as well as universal access to health and education in Indonesia, Malaysia, Philippines and Thailand.

“This is a particularly critical and opportune time to decrease subsidies,” the ESCAP Executive Secretary said, noting that this would not only reduce budgetary strains but also prepare governments for the near future when global financing may be even more challenging to secure.

“Reducing subsidies can raise significant public financial resources for productive investment in the region and could make needed funds available for financing sustainable development,” Dr. Akhtar closed.

Download: Economic and Social Survey of Asia and the Pacific 2014: Year-end Update