ASIA WELL PLACED TO WEATHER GLOBAL ECONOMIC TURBULENCE
Asian economies are sailing in choppy waters, facing severe headwinds from an uncertain and challenging global environment, but the region also has many strong points in its favour.
The global recovery has been weaker than expected, global trade has been sluggish, and financial conditions have been volatile. The rise of China as a global economic superpower has also created challenges of its own. A necessary rebalancing from manufacturing toward services and from investment toward consumption, while critical for both Chinese and global growth over the medium term, remains bumpy.
As in much of the world, many Asian economies face risks associated with natural disasters and geopolitical and domestic political uncertainty. But not all is doom and gloom, as Asia also has considerable strengths on which policymakers can build.
The region remains the major engine of the global economy, providing nearly two-thirds of global growth. In addition, Asia has policy buffers such as current account surpluses and high reserve levels and has used macroprudential policies well to help bolster financial stability. It is also likely to benefit from further economic integration and regional and multilateral trade agreements such as the Trans-Pacific Partnership.
Asia’s growth is moderating slightly, in line with the rest of the global economy. According to the most recent IMF World Economic Outlook, growth in the region moderated in the second half of 2015, and is expected to continue decelerating to 5.3% in both 2016 and 2017 — just 0.1 percentage points lower than in 2015.
In addition to weaker global growth and sluggish trade, the moderation in regional growth reflects the ongoing necessary rebalancing in China. But while external demand is relatively weak, domestic demand, particularly consumption, is expected to remain resilient across most of the region. The relative strength of domestic demand is due to generally low unemployment, lower commodity prices benefiting oil and commodity importers, economic stimulus in some countries, and ongoing secular trends, including steadily rising disposable income.
In this regional context, Thailand’s growth is actually expected to strengthen in the near term, though at a modest pace. Growth recovered in 2015 after a slowdown induced by political uncertainty, and is projected to pick up to 3.0% in 2016 and 3.2% in 2017 — still below most other Asean economies and Thailand’s own historical record.
As in other regional economies, domestic demand will underpin growth. In particular, the authorities’ ambitious infrastructure plan would be a key driver, with public investment rising over the next few years and crowding in private investment. A slight improvement in confidence and low energy prices also foreshadow an uptick in private consumption. As the base effect of lower oil prices gradually dissipates, headline inflation is projected to turn positive in 2016, but it may take time to reach the mid-point of the inflation target band.
As in the rest of the region, downside risks dominate the Thai economic landscape. On the external front, global growth could turn out weaker or financial conditions could tighten suddenly. On the domestic front, slowerthan-expected execution of infrastructure projects would reduce domestic demand and capital accumulation. Negative inflation could linger longer than expected, resulting in higher real interest rates and a rising real debt burden. In turn, elevated household debt could be a drag on consumption and, in an adverse scenario, affect financial institutions’ balance sheets. In addition, regional growth is more dependent on China than ever before, which presents both challenges and opportunities. While rebalancing in China will underpin more durable and resilient growth over the longer term, the short-term transition could prove challenging, with varying impact on countries and markets.
In this respect, Thailand’s goods exports that support China’s investment and construction could be adversely affected, while exports for consumption and services stand to gain. A visible bright spot has been the rapidly-growing Chinese tourism destined to Thailand. China’s move to higher value-added production will also provide opportunities for low-income Asian countries, particularly in labourintensive sectors.
Financial links are also growing with regional markets becoming more sensitive to shocks from China after the global financial crisis. Over time, though, as economic rebalancing makes China’s growth model more sustainable, the region is likely to benefit.
Amid challenging conditions, strong fundamentals enhance Thailand’s resilience and provide room to lift economic prospects in the near to long term. Anchoring a lasting recovery calls for a three-pillar strategy consisting of expansionary macroeconomic policies, steps to safeguard financial stability, and structural reforms.
Public investment stimulus is essential to support domestic demand, crowd in private investment, upgrade infrastructure, and enhance economic potential. There is also scope to further ease monetary policy, given modest growth, low inflation expectations, and downside risks. Efforts to upgrade the macroprudential toolkit can help maintain financial stability in a low-interest rate environment.
Finally, concerted reforms should tackle Thailand’s structural challenges — such as the rapid ageing of its population, relatively low quality of education and skill sets, and overdue structural transformation — to boost growth potential and raise living standards.