Growth forecasts for Asia as a whole have once again been brought down from previous expectations. The Asian Development Bank said in a new report that it will be cutting its forecasts for the region mainly due to slowdowns in China and India, as well as the developed markets’ slow recovery.
“The first half of 2015 has been softer than expected across the board,” the ADB said, citing harsh winter weather and labor disputes at the U.S.’s West Coast ports and Japan’s weak economic recovery as key impacts on growth. “Emerging markets are facing receding capital flows and depreciating currencies – a trend that may be exacerbated by the upcoming rise in U.S. interest rates.”
As a result of the economic challenges confronting Asia’s largest and third-largest economies, China and India, the ADB cut the region’s growth outlook to 5.8% for 2015 and 6.0% for 2016, which is noticeably lower than the previous 6.3% forecast for both years. For comparison, the region’s growth rate for 2014 was 6.2%.
The US and Japan-led bank also revised down its expectations for economic growth in India to 7.4% from 7.8%, citing “external demand weakness and slower-than-expected pace of enacting key reforms”.
However, there is still a consensus to be reached as to how much of a concern the slower growth rate should be and its estimated impact. Piyush Gupta, chief executive of DBS Bank Ltd, told the Milken Institute’s Asia Summit last week that as economies grow in size, “a glide path of slower growth” is normal and should be expected. As China slowly goes onto this path of slower growth, the region’s exports, particularly of commodities, are taking a hit, he noted.
Yet, he added that there is still somewhat of a cause to be worried. “China at 5% to 6% [growth] still puts a Germany on the map every four years. It’s not negative growth. It’s still creating massive demand. But it might not be enough.”
The ADB cut its forecast for China’s growth to 6.8% for 2015, 0.4% down from its previous forecast of 7.2% and a long way below 2014’s 7.3% growth rate. It anticipates that the growth rate will continue its current trend of falling even in 2016, predicting 6.7% during that year.
“Despite robust consumption demand, economic activity fell short of expectations in the first eight months of the year as investment and exports underperformed,” the report said. “As external demand strengthens with the pickup in growth in the industrial countries, and as improved financial conditions support investment, downward pressure on growth will ease.”
Slower Growth Expected Throughout Asia – Not Just China
India’s forecasts were cut by 40 basis points to 7.4% for 2015, down from a previous forecast of 7.8% growth.
“External demand weakness and slower-than-expected pace of enacting key reforms are holding back India’s growth acceleration,” the ADB said, but it added that it expected 2016 growth to pick up to 7.8% as reforms began to take hold.
The ADB also cut the outlook for the Southeast Asian region to 4.4% this year, the same pace as in 2014, but down from its previous forecast of 4.9%. It said it expected growth to rise to 4.9% in 2016.
“Thailand has yet to bounce back from its 2014 slump, while infrastructure investment has fallen behind schedule in Indonesia and the Philippines. Drought in several countries, and floods in Myanmar, have hurt agriculture,” the ADB said. “Vietnam, by contrast, is growing faster than anticipated earlier this year, powered by foreign direct investment and buoyant private consumption.”
However with this recent update on the forecast numbers, ADB has also urged Asian central banks to strengthen their financial system because of the rise in capital outflow as dealers look for safer US investments ahead of a possible Fed rate hike.