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Economic conditions stabilized in the Asia-Pacific region in the second half of 2016. Resilient domestic demand and policy support have resulted in the region’s developing economies growing at a steady pace of just below 5 per cent annually despite a sluggish global economy and weak trade growth. Indeed, with developed economies losing some of their recovery momentum, the region’s high and steady growth rate, led by China and India, has arguably been an anchor of stability for the struggling global economy. The outlook for 2017 is broadly positive based on China’s rebalancing-led moderation being offset by an expected return to positive economic growth in the Russian Federation, sustained high economic growth in South Asia supported by moderate inflation, and increased public investment in South-East Asia and the Pacific.

The main purpose of the Economic and Social Survey of Asia and the Pacific Year-End Update 2016 is to provide recommendations to policymakers, civil society and academia on the current macroeconomic situation and trends in the region.

Despite sluggish global growth, economic conditions in the Asia-Pacific region have somewhat stabilized in 2016 on the back of resilient domestic demand and an easing of financial conditions. However, labour market prospects seem weak while income inequality has been on the rise. Going forward, sustaining the region’s dynamism against weak external demand will require parallel progress on both productivity and inclusiveness fronts, supported by proactive fiscal policy and good governance.

Economic conditions have somewhat stabilized in 2016 and the outlook for 2017 is broadly stable, following a period of downward revisions to the growth forecast. Thanks to resilient domestic demand and policy support, the Asia-Pacific region is growing at a steady pace despite global growth and trade reaching the lowest point since the global financial crisis of 2008-09. A projected improvement in the region’s growth in 2017 is based on China’s rebalancing-led moderation being offset by a return to positive growth in the Russian Federation, sustained high growth in South Asia supported by moderate inflation, and increased public investment in South-East Asia and the Pacific.

While low inflation and an easing in financial conditions have allowed monetary authorities to lower policy rates, a prudent stance is needed given the partial recovery in global oil prices and expected further hikes in the US federal funds rate, especially for countries with high private debt and currency exposures. Despite the recent calm, bouts of financial volatility can re-emerge given the uncertain external environment, including the Brexit negotiations in Europe, and vulnerabilities on the domestic front, such as in corporate and bank balance sheets. Deleveraging and restructuring efforts in countries such as China and India should contribute to enhanced financial stability and higher productivity.

While the region continues to lead global growth, growth has not translated into commensurate increases in decent jobs, which has also contributed to heightened income inequality. Labour market prospects seem weak in a number of countries, with relatively slow employment growth and a persistently high share of vulnerable employment. As the region undergoes further structural transformation, efforts to lift productivity and innovation should be matched by measures to enhance worker skills and social protection. Moreover, productivity gains derived from technological progress should be passed on to society through higher wages and cheaper goods and services.

Fiscal policy can play a critical role in this regard. Public investments in infrastructure and research and development can support long-term growth and ‘crowd in’ private investment, while more progressive fiscal policies can strengthen domestic demand. Such measures would help sustain the region’s dynamism in the coming years when external demand is expected to remain subdued. However, this will require good governance, as reflected inter alia in the effectiveness and integrity of public institutions. Good governance can enhance investment prospects, productivity and innovation, while accelerating poverty reduction and mitigating inequalities, as highlighted further in the forthcoming Survey 2017.

Macroeconomic Policy and Financing for Development Division +66 2 288-1234 [email protected]