South Asian economy
The South Asian region appears to be in a growth mode. According to the ' World Economic Situation and Prospects 2018' published by the United Nations, positive economic outlook is widespread across the South Asian region, with most economies projected to see stronger growth rates in 2018 as compared to 2017. The economic outlook remains steady, driven by robust private consumption and sound macroeconomic policies. According to the UN report, monetary policy stances are moderately accommodative, while fiscal policies in several economies maintain a strong emphasis on infrastructure investment. The recovery of external demand is also buttressing growth.
In the opinion of UN experts, regional GDP growth is expected to strengthen to 6.5 per cent in 2018 and 7.0pc in 2019, following an estimated expansion of 6.3pc in 2017. Among the smaller economies in the region, economic activity in Pakistan is expected to remain vigorous, with GDP growth projected to reach 5.5pc and 5.2pc in 2018 and 2019, respectively. Economic activity will be supported by a pickup in exports and rising investment demand, which is expected to benefit from an improving business sentiment, the China-Pakistan Economic Corridor (CPEC) and other infrastructure initiatives. However, a rising current account deficit coupled with a recent deterioration of fiscal accounts, poses risks to the baseline projection.
In a regional context, inflation is expected to remain stable and at relatively low levels. The overall inflation prospects remain benign across the region. Consumer price inflation reached a multi-year record low of 4.9pc in 2017, due to relatively low commodity prices, waning depreciation pressures and good harvest seasons in most countries that have supported lower food prices, notably in India. Consumer price inflation in South Asia is expected to rise moderately to 5.8pc in 2018 and 5.9pc in 2019, still well below historical levels in the region. The favourable prospects for inflation, coupled with mostly sustainable current account deficits, will facilitate macro-economic policy management across the region in the near term. Overall, this positive outlook is a continuation of the improvement in economic conditions in South Asia over the past several years, and will contribute to gradual progress in labour market indicators and a reduction in poverty rates.
However, South Asian economies face several downside risks and uncertainties, which could significantly alter the projected growth trajectory. On the domestic front, the reform agenda, a crucial element of higher productivity growth, could experience setbacks in some countries, while heightened regional geopolitical tensions may restrain investment projects. On the external front, the monetary normalisation process in the United States poses risks to financial stability across the region. Tighter global liquidity conditions could significantly affect capital flows into the region, leading to a spike in financing costs, depreciation in exchange rates and a decline in equity prices.
This could adversely impact banking and corporate sector balance sheets as well as the capacity to roll over debt, especially in countries with relatively low financial buffers and high dollar denominated debt. Amid relatively high levels of public debt, fiscal policies are officially in a moderately tight stance in most economies. Ongoing fiscal consolidation efforts, however, have yielded different levels of progress, as public budgets have been more expansionary. The UN report emphasises that despite a favourable economic situation, there are crucial areas that South Asia needs to address to unleash its growth potential and to promote a more sustained and inclusive development path in the long term.