13/04/2016

Shang-Jin Wei
Chief Economist, Asian Development Bank
The views expressed in this document are those of the author and do not necessarily reflect the views and
13/04/2016
policies of
the Asian Development Bank or its Board of Governors or the governments they represent.

Key messages
Growth in developing Asia softens to 5.7% in 2016 and
2017, from 5.9% last year
PRC growth moderating to 6.5% in 2016 and 6.3% in 2017
underscores the importance of supply-side reforms
India growth projected at 7.4% in 2016 and 7.8% in 2017

While CPI inflation remains subdued, many economies

face possibly harmful PPI deflation
Reforms to raise labor productivity can invigorate
developing Asias potential growth

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13/04/2016

Asias growth continues to

moderate
7.4
7.5
Developing Asias growth

7.0
6.3

6.5

6.4

6.3
5.9

6.0

5.7

5.7

5.5
5.0
4.5

4.2

4.0
3.4

3.5

3.3

3.4

2013

2014

3.6

3.4
3.1

3.0
2011

2012

2015

2016f

2017f

f: forecast

World GDP growth

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Uneven recovery in industrial

economies
GDP growth (%)

2015

2016f

2017f

Major industrial economies

1.8

1.8

1.9

United States

2.4

2.3

2.5

Euro area

1.5

1.5

1.6

Japan

0.5

0.6

0.5

f= forecast

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Divergence across subregions and

economies
(%)

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Asia still accounts for 60% of global growth in PPP terms

Contributions to world growth (%), 2016 vs. 20112015
40

Contributions, 2016 (%)

30

People's Rep. of China

20

India
United States

10

ASEAN
Euro area
Indonesia
Japan

0
0

10
20
30
Average contributions, 2011-2015 (%)

40

Note: Uses PPP-adjusted weights

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13/04/2016

...or 40% in market exchange rate terms

Contributions to world growth (%), 2016 vs. 20112015
40

Contributions, 2016 (%)

30
People's Rep. of China

20
United States

10
Euro area
India
ASEAN
Indonesia
Japan

0
0

10
20
30
Average contributions, 2011-2015 (%)

40

Note: Uses market exchange rates

13/04/2016

PRC growth still decelerating; projected at

6.5% in 2016
Fixed asset investment growth, %, ytd

Economic growth

30
25
20
15
10
5
0

18
15
12
9

Retail sales

GDP

Value-added by
industry

2012

2013

2014

2015

Manufacturing
Real estate

Jan
2014

0
2011

Infrastructure

Jan 2016 Feb 2016

Demand-side contributions to growth

Apr

Jul

Oct

Jan
2015

Apr

Jul

Oct

Jan
2016

Supply-side contributions to growth

%
10

%
12

%
100

100

10

80

80

8
6

120

Investment
GDP (rhs)

GDP (rhs)

Services

60

60

40

40

20

20

0
-20

0
Consumption
2011
2012

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Net exports
2013

2014

-2
2015

0
2011

2012

2013

Agriculture

2014

Industry

2015

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Indias growth slowing slightly to 7.4% in 2016

before picking up
Export growth, USD, %, year-on-year
40
20
0
-20
-40
-60
-80

Foreign investment inflows, USD million

15000

Non-oil exports

10000
5000
0
Portfolio investment
Direct investment
Foreign investment inflows
-10000
Jan-2013 Sep-2013 May-2014 Jan-2015 Sep-2015

Oil exports
Jan2013

Jul2013

Jan2014

Jul2014

Jan2015

-5000

Jul2015

Jan2016

Demand-side contributions to growth

%
150 Gross fixed capital Net exports

%
9

GDP (rhs)

formation

100

50

Government
consumption

Others

-50
2012

2013

Private consumption

-3

2014

2015

Supply-side contributions to growth

%
100

%
10

GDP (rhs)

Services

80

60

40

20

0
-20

0
2012

Agriculture

2013

2014

2015

Industry

-2

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ASEAN growth to edge up this year

and next
GDP growth, Southeast Asia (%)
2015

2016f

2017f

10
8
6
4
2
0
-2
ASEAN INO

THA

PHI

MAL

SIN

VIE

BRU CAM LAO MYA

f: forecast
ASEAN=Association of Southeast Asian Nations; BRU=Brunei Darussalam; CAM=Cambodia; INO=Indonesia;
LAO=Lao PDR; MAL=Malaysia; MYA=Myanmar; PHI=Philippines; SIN=Singapore; THA=Thailand; VIE=Viet Nam
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10

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Indonesias growth to slightly rise to

5.2% in 2016
Growth in fixed investment and private
consumption, %

18

Policy and inflation rates, %

10

Fixed
investment

14

Bank
Indonesia
rate

6
10

Private
consumption

Inflation

2
0

Jan2013

Q1-2013 Q3-2013 Q1-2014 Q3-2014 Q1-2015 Q3-2015

Demand-side contributions to growth

%
160

Government
consumption

GDP (rhs)

120

%
8

Net exports

2011

Investment

2012

2013

Statistical
discrepancy

2014

Jan2015

Jul2015

Jan2016

Supply-side contributions to growth

%
100

Services

GDP (rhs)

%
7
6
5

40

20

-2

40

-40

Jul2014

60

Private
consumption

Jan2014

80

80

Jul2013

2
2011

2015

2012

2013

Agriculture

2014

Industry

2015

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11

Slow recovery in global commodity

prices
Commodity price indexes
2010=100
170

Futures

Brent crude

150
130

Food

110

Gold

90

Copper

Beverage

70
50

Natural gas

30
2010

2011

2012

2013

2014

2015

2016

Sources: World Bank Pinksheets; Bloomberg

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12

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will keep CPI inflation low

CPI inflation (%)

5-year average
5.9

3.9

3.8
3.0
2.2

2.5

2.7

2015

2016f

2017f

0
2011

2012

2013

2014

f: forecast

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13

But there are risks

1. Rise in US interest rate and market
volatility
2. PRCs growth moderation
3. Producer price deflation

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14

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1. Future path of US interest rate and market

volatility
The Fed raised interest rates
in December 2015
The Fed sees further gradual
tightening going forward
The Fed indicated that first
stirrings of rising US inflation
is present
Changes to US monetary
policy have implications on

6
5
4
3
2
1
0

Actual

Trade
Capital flows
Foreign debt burden

Fed baseline (as of Mar 2016)

GPM Mar 2016
ADO 2016 baseline
Roubini Global Economics

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15

Strong dollar raises foreign debt

burden
US dollar per Asian currency, 1 Jan 2013=100
110

110

LAO

110

PRC

100

100

90

VIE
PHI

80

INO

70

MAL

80

IND

ARM

80
70

GEO

60

60

50

50

50

40
Jan-13

40
Jan-13

40
Jan-13

110
105
100
95
90
85
80
75
70
65
60

Jan-14

Jan-15

Jan-16

LAO
VIE
PHI
MAL
INO

1-Jan 12-Jan 23-Jan 3-Feb 14-Feb25-Feb 7-Mar

13/04/2016

110
105
100
95
90
85
80
75
70
65
60

KGZ

UZB

90

70

AZE

TAJ

100
SRI

90

Jan-14

Jan-15

Jan-16

60
KAZ

Jan-14

Jan-15

Jan-16

90
80
PRC

UZB
70

SRI
ARM
IND
GEO

60
50
40

KGZ

TAJ

AZE
KAZ

30
1-Jan 12-Jan 23-Jan 3-Feb 14-Feb25-Feb 7-Mar

1-Jan 12-Jan 23-Jan 3-Feb 14-Feb 25-Feb 7-Mar

$ appreciation tends to increase domestic currency value of debt, posing a threat

to economies with large foreign liabilities
Lower index indicates depreciation of local currency

16

13/04/2016

2. PRCs growth moderation has had global

impact
Global Projection Model:
PRC growth moderation scenario

Assume PRC growth

weaker by 0.85pp

0.4

Then
0.0
0.00

Rest of developing
Asias growth falls by
0.3pp

-0.05
-0.20

-0.4

-0.20

-0.15

-0.30

-0.30

Japans growth drops by

0.2pp

-0.8
-0.85
-1.2
PRC

USA

Euro
area

Trade and policies

Japan

EA ex
PRC

LA

Commodity prices

RC

World

EA = Emerging Asia; LA = Latin America; PRC =

Peoples Rep. of China; RC = remaining countries.

Total effect

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17

Sharper fall is unlikely,

but if it happens, it could generate a bigger impact
Assume 4.6pp fall in PRC
growth
Then

0
-0.60

-0.65

-1

Global growth to decline

by 1.75pp
Japans growth to drop by
1.5pp
Rest of developing Asias
growth to tumble by
1.8pp

-1.10

-0.95

-1.50
-1.80

-2

-1.75

-3

-4
-4.60
-5

EA = Emerging Asia; LA = Latin America;

PRC = Peoples Rep. of China; RC = remaining
countries.
13/04/2016

Global Projection Model:

PRC sharp slowdown scenario

PRC

US

Euro
area

Japan

EA ex
PRC

LA

RC

Trade and policies

Commodity prices

Global financial shock

Total effect

World

18

13/04/2016

PRCs structural change is transforming the structure of its

imports

Share of parts and components in PRC's imports

%
50
40
30
20
10
0
1992

1995

1998

2001

2004

2007

2010

2013

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19

but some countries could grow faster

Index of Competition with PRC, 2014
Cambodia
Viet Nam
Bangladesh
Sri Lanka
Pakistan
Hong Kong, China
Nepal
Philippines
Rep. of Korea
Tonga
Thailand
Malaysia
India
Singapore
Samoa
Indonesia
Fiji

0
13/04/2016

10

20

30

40

20

10

13/04/2016

3. Many Asian economies experiencing producer

price deflation
Consumer and producer prices,
2015 (% change)
Singapore
Philippines
People's Republic of China
Malaysia
Thailand
Rep. of Korea
India
Hong Kong, China
Viet Nam
Indonesia
Euro area
Japan
United States
-10

-8

-6

-4

-2

Producer prices

Consumer prices

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21

Strong inverse association between PPI inflation and

growth..
Average per capita GDP growth rate in
low, high, and negative inflation

In the postwar era,

per capita real GDP
growth is visibly
lower during PPI
deflations than
during CPI
deflations

%
3.0
2.8

2.8

2.8
2.6

2.6
2.4

2.3

2.3

2.2

2.1

2.0
CPI

PPI

Low inflation

13/04/2016

CPI

PPI

High inflation

CPI

PPI

Deflation

22

11

13/04/2016

0.02
0.00
-0.02
-0.04
-0.06

Changes in log Investment

0.04

0.06

adverse effect of lower producer prices on investment

-0.04

-0.02

0.00

0.02

0.04

0.06

Changes in log PPI

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23

Theme chapter:
Asias potential
growth

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24

12

13/04/2016

Growth momentum has flagged: temporary or

persistent?
Average Regional Growth Rate
(% per year)

12.0

10.1

10.0
8.0

5.9

6.0
4.0

1.8

2.0

1.5

0.0
-2.0
-4.0

Developing Asia

Latin America

OECD

-6.0
1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

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25

Temporary vs. persistent effects depend on gauging

potential growth

Potential growth is the maximum growth rate associated

with the full employment of productive resources
= Growth of labor force + Growth of labor productivity
Consistent with natural rate of unemployment
If realized growth is very different from potential
growth, aggregate demand management might be
deployed
Potential growth depends on an economys institutions
and economic structure.
Not immutable, i.e., amenable to policy
Can move closer to frontier potential growth by
removing obstacles to efficient factor allocation
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26

13

13/04/2016

Developing Asias potential growth fell by 0.32

pp between 2000-2007 and 2008-2014. Down in
14 of 22 economies
Percentage change in actual and potential
output growth (2008-2014) / (2000-2007)

Developing Asias average potential output

growth rate

10
7.3-7.4%

(1995-96)

7.39%
(Ave. 2000-07)

8.45%
7.07% (Ave. 2008-14)

6.68

6
4
Asian-13 Average

Asian-12 Average (No PRC)

Asian-4 Average

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

Falling potential growth accounts for about

40% of the moderation in post-crisis actual
average growth

5.21

Papua New Guinea

Uzbekistan
Pakistan
Indonesia
Philippines
Bangladesh
Fiji
India
Malaysia
Singapore
Thailand
Sri Lanka
People's Republic of China
Viet Nam
Taipei,China
Japan
Tajikistan
Hong Kong, China
Cambodia
Kazakhstan
Rep. of Korea
Turkmenistan
Azerbaijan
-15

Actual
Potential

-10

13/04/2016

-5
0
Percentage point

10

27

Determinants of potential growth and frontier

potential growth
Labor
productivity
growth
(80%)

Labor force
growth
(20%)

Initial income per

capita

Productivity gap
with the US

Tertiary
enrollment ratio

Trade ratio

Convergence effect
through capital
accumulation (-0.33
per additional $1,000)

Positive advantages of
backwardness (0.077);
larger for less
politically stable
countries

Positive effect up to
50%

Positive effect up to
440% of GDP

Good Institutions

Financial capital
integration

Macroeconomic
stability

Positive (0.004); larger

effect for countries
with low regulatory
quality

Volatile gap between

actual and potential
growth rates has a
negative effect (0.19)

Efficient factor
allocation of
capital and labor
at firm level

Labor market
flexibility
Government quality
Citizen participation

Working-age
population
(ages 1564)
growth

Unequal access to
credit makes firms too
labor intensive
Lack of access to land
makes firms too small

One-to-one effect on
potential growth

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28

14

13/04/2016

Reforms can offset the demographic drag

Impact on potential growth, annual increment, percentage points
Weighted average
Cambodia
Azerbaijan
Uzbekistan
Viet Nam
Turkmenistan
Kazakhstan
Tajikistan
Bangladesh
Pakistan
PRC
India
Thailand
Sri Lanka
Indonesia
Philippines
Malaysia
Taipei,China
Republic of Korea
Singapore
Hong Kong, China

-0.31
0.99
-1.01
0.98
-0.87
0.97
-0.6
0.95
-0.32
0.94
-0.63
0.94
-0.43
0.92
-0.01 0.85
-0.2
0.8
-0.34
0.8
-0.13 0.76
-0.33
0.74
0.38
0.73
-0.11 0.72
-0.26 0.68
-0.38
0.59
-0.65
0.54
-0.41
0.5
-0.93
0.36
-0.59 0.2

-1.5
-1
-0.5
Impact of demographics

0
0.5
1
Impact of reforms

1.5

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29

A new normal for potential growth?

Without structural reforms, potential growth could
fall further.
End of the demographic dividend in some
countries
Past success has narrowed the gap with the
advanced economies
Moderating growth in the PRC spilling over to
other economies

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30

15

13/04/2016

Policy reform can invigorate potential

growth
Offset the impact of less-favorable demographics
Supply-side policies to raise labor productivity
Productive capital investment
Reforms to boost labor productivity growth
Reforms to reduce factor misallocation

Sound macroeconomic management

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31

Policy space to engage in countercyclical

measures
Developing Asian economies still equipped with
some policy spaceboth fiscal and monetaryto
provide more aggregate demand if needed
But scope for policy intervention more limited than
in the past
Legacy of past policy and external constraints often
bound the actual amount of policy space

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32

16

13/04/2016

Corporate Income
Household
Country
Tax
Income Tax
Flexible with Both Fiscal and Monetary Policies
Armenia
20
36
China, People's
Rep. of
25
45
Philippines
30
32
Tajikistan
24
13
Georgia
15
20
Taipei,China
17
45
Thailand
20
35
Afghanistan
20
20
Flexible with Fiscal Policy
Bangladesh
45
30
Indonesia
25
30
Kiribati
35
30
Azerbaijan
20
25
Bhutan
30
25
Korea, Rep. of
24.2
38
Mongolia
25
10
Papua New Guinea
30
42
Kazakhstan
20
10
Flexible with Monetary Policy
Maldives
15
Sri Lanka
28
24
Cambodia
20
20
India
40
30
Pakistan
34
20
Samoa
27
27
Consider other type of policy options
Brunei Darussalam
18.5
0
Hong Kong, China
16.5
17
Lao People's Dem.
Rep.
24
24
Sample Median
24.6
27
Japan
25.5
45
US
35
39.6

VAT

Social Security
Contribution Tax

Govt. Debt
Ratio

Fiscal
Balance

20

10

41

-4.6

8.5

3.7

17
12
18
18
5
7

28
17
26

41
36

-3.5
-0.9
-2.3
-3.7
-1
-2.5
0.7

2.25
5
16
8
1.625
1.5

17
20
1.5
10
25
8.5
8

1.4
1.4
5.1
4
-0.3
-0.9
-1.5

15
10
12.5
18

25
15.7
15
25
22
17.7
23

34
25

6.75
7

6.5
6.5

5
7
1.5
12

0.5
10
3.5
12

10

15

-4.3
-2.5
-1.1
-1.2
-2.2
-3
-3.1
-3.2
-2.2

17

6.4
6.4
1.4
4
6.6
0.7
6.6
5.1
6.6

14
20

-7.4
-4.5
-2.4
-3.9
-5.3
-3.9

10
8

20
6
12

73
76
34
66
65
55

6.75
6
0.17

10
7.5
12.5
4
5
15

1
3.8
1.2
5
4.5
1.9

10
10

2
0

-14
1.3

5
0.75

-0.4
3

5
7.5
0.75
10

1.3

10
10
10
12

11
10
17
15
0

10
11.5
8

12
10
16

11.5
15.7
29
15.3

35
38
44

16
36

-4.7
246
105

-5.4
-2.7

Policy Interest Required Reserve

Rate
Ratio
Inflation

4.5
6
-0.5
0.5

0.8
0.1

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33

Economies having space in both fiscal and monetary

policies: Armenia, People's Rep. of China, Philippines,
Tajikistan, Georgia, Taipei,China, Thailand, and
Afghanistan
Economies having space in fiscal policies: Bangladesh,
Indonesia, Kiribati, Azerbaijan, Bhutan, Rep. of Korea,
Mongolia, Papua New Guinea, and Kazakhstan
Economies having space in monetary policies:
Maldives, Sri Lanka, Cambodia, India, Pakistan, and
Samoa

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34

17

13/04/2016

Key messages
Growth in developing Asia softens to 5.7% in 2016 and
2017, from 5.9% last year
PRC growth moderating to 6.5% in 2016 and 6.3% in 2017
underscores the importance of supply-side reforms
India growth projected at 7.4% in 2016 and 7.8% in 2017

While CPI inflation remains subdued, many economies

face possibly harmful PPI deflation
Reforms to raise labor productivity can invigorate
developing Asias potential growth

13/04/2016

35

18