Asia, for long the global engine of growth, is losing momentum. Between aging, stagnant trade, and rising debt, many Asian economies face major headwinds to growth and prosperity in the coming years. There are enough savings and safeguards in place in the region to mitigate risks of an outright crisis owing to these headwinds; a more likely scenario, however, is a gradual erosion of potential GDP growth rate, worsening of public finances, and a general decline in sentiment about the region’s prospects.
– The loss of growth momentum is most pronounced in China, but clearly visible in Hong Kong, Singapore, South Korea, Taiwan, and Thailand as well. Beyond the three key headwinds, hanging pattern of global consumption, China’s vigorous import substitution, and poor productivity growth are also creating difficulties for these economies. Additionally, the ongoing commodity bust poses considerable risk for Indonesia and Malaysia.
– Asia is not monolithic. The outlook for economies like India, Indonesia, and the Philippines will remain favorably pre-disposed with respect to demographics for decades to come. These economies also look set to maintain comfortable growth and interest rate differential to keep their debt burdens sustainable. Trade stagnation could hurt, but all three are blessed with large populations and a favorable domestic demand dynamic that could generate satisfactory growth.
– Asian policy makers need to recognize the near-term risk of deflation, debt, and trade dependency, and the medium-term risk of aging and lower potential growth. Aggressive demand generating policy in the immediate future and well thought-out structural policies to address aging and competitiveness are needed. The previously successful model of growing fast as a global beta is unlikely to be replicable for most Asian economies. The key is to recognize the challenges mentioned here and strive for a more domestically (and perhaps regionally) sustainable growth model.
We feature three theme pieces this month. First, we take stock of the regional outlook. Second, we explore various aspects of trade linkages between China and the rest of the world. After adjusting for processing trade, we estimate that China maintains the upper hand with trade share in central Asia, Oceania, a large part of Africa and Middle East, Brazil, Chile, and Russia. But the US influence in also visible in every continent. Interestingly, China and the US are split even in East Asia. Third, we look at the potential a united Korea. A gradual economic union with its Northern neighbor would be a boon for the South Korean industry, giving it access to a cheap, organized, literate workforce. Given their vast economic differences, Korea may not pursue the German model, which could result in a migration crisis and push the cost of unification prohibitively high. What is clear, however, is that North Korea has the option of using its labor force as a bargaining chip, not the nuclear weapons program, which has mutated from being a source of monetary reward and security insurance into an existential threat.