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, changing 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.