Is positive outlook unduly optimistic in light of potential economic dangers?


Prospects for economic growth remain positive in the Asia-Pacific region, according to a slew of recent data.

The International Monetary Fund’s latest Regional Economic Outlook (REO) for Asia and the Pacific predicts world-leading growth for 2013 of 5.7% (7.2% in emerging Asia) with domestic inward demand driving expansion.

Analysis from the World Bank – again citing rising demand from within – offers an even more robust forecast of 7.8% regional growth this year, followed by 7.6% in 2014.

Hardly surprising, then, that last month’s Thomson Reuters/INSEAD Asia Business Sentiment Survey revealed another rise in optimism during Q2 2013. The Index climbed six points to 71 in June, its highest level in five quarters and the third consecutive quarterly rise. This, according to Thomson Reuters, suggests the rebound from a drop in the three months ended last June and September was not a blip.

Almost 44% of those polled were positive about their outlook, while just 2.2% reported a negative outlook. The remainder (53.8%) were neutral.

But, as both the IMF and World Bank also highlighted potential risks such as a slowdown in China and also the build up of regional financial imbalances, in addition to continued vulnerability to potential fallout from the euro zone crisis, are businesses operating in the Asia Pacific region right to remain so bullish?

Potential risks dominate the 2013 Annual Evaluation Review by the Independent Evaluation Department at the Asian Development Bank which says Asia’s resilience to shocks is being tested again by the turmoil on the world’s financial markets and a destructive start to the monsoon season.

 “Asia leads the world in the pace of growth, but governments need to be more conscious of the risks facing the region from economic, social, and environmental factors,” says Independent Evaluation director general Vinod Thomas.

“Emerging vulnerabilities point to a longer road than previously expected in eradicating extreme poverty in the region unless action is stepped up.”

Governments and development agencies need to do more to provide effective early warnings of impending economic and financial shocks, the Review says. They also need to increase disaster preparedness to deal with the rise in national catastrophes in the region.

Despite these dangers, the overall consensus from analysts remains that the Asia-Pacific region is thriving, albeit against a troubling global backdrop.

China’s growth curve may have shifted from its vertical ascent but it keeps rising nonetheless, while the ASEAN economies continue to flourish.

Some of this is being driven by Japan but there are other factors at work, according to Rajiv Biswas, Asia-Pacific chief economist at global information provider IHS.

“Although growth momentum in China is showing some signs of moderating, this is being mitigated by the rebound in the world’s third largest economy, Japan, driven by Abenomics,” Biswas says. “IHS forecasts APAC GDP growth to strengthen to 5.5% in 2014, as east Asian exports benefit from stronger growth in the US economy.

“In China, real GDP growth in 2013 is expected to moderate to 7.5%, as the export growth engine falters and signs of excess capacity in manufacturing abound in many key sectors, including steel, chemicals and shipbuilding. However Japanese growth momentum has picked up, helped by the sharp yen depreciation since November 2012, with industrial production and exports rebounding.

“Growth in the ASEAN economies of South-East Asia is also projected to remain strong, helped by strong domestic demand in Indonesia, Malaysia, Thailand and the Philippines. Private consumption and investment remain robust, and government investment in infrastructure projects is also supporting growth, even though the export sector has been hit by the impact of the euro zone recession.”

Biswas does see potential trouble on the horizon, however. “Despite rapid growth in the Asia-Pacific, downside risks are rising,” he says.

“In China, the economy faces risks due to the rapid growth of the largely unregulated shadow banking sector in the last three years, creating a ticking time bomb for the financial system. Large local government debt levels also pose a risk to the balance sheets of the large state-owned banks.

“The risk of a hard landing in China some time in the next three years has increased to around 25%. If a China hard landing downside risk scenario should eventuate, the transmission effects to the rest of Asia and the global economy would be significant, as China has become the most significant growth engine for the world economy since the global financial crisis of 2008-09.”

“Beyond the near-term outlook, emerging Asia remains at the forefront of a major long-term rebalancing of the world economy from West to East. A key factor will be the rapid growth in the number of Asian middle class households over the next two decades, led by China and India. This will become the new locomotive for world consumer demand growth.

“Another key trend will be the continued urbanisation of emerging Asia, driving infrastructure investment growth in Asia. For Western multinationals, this means that corporate strategy must increasingly focus on driving market expansion in emerging Asia as a core driver of revenue growth.”

It is the changing nature of business across the Asia-Pacific region which is driving much of the growth, according to Bruce Wineman, senior managing director with Aon Global Client Network.

“A tremendous amount of opportunity continues to exist in Asia for business because there is so much economic expansion taking place in a number of different ways,” says Wineman.

“In the past there has been a lot of focus on western companies investing in Asia – now we are seeing lot of Asian companies investing in the west and also a lot of intra-regional investment activity. While I was in China recently I met with a major western-owned hotel client to discuss their expansion plans. The client’s strategy includes targeting Asian rather than western businessmen and developing hotels in second and third-tier Chinese cities. The business model is changing from a colonial to a more integrated international one.”

Growth in some parts of the region has been particularly rapid but this in itself should not be alarming for the future.

“Five or six years ago what was then open land around some Chinese cities is now covered with factories and housing for workers,” says Wineman. “If you look at what is happening inside those factories – many of which are the size of a football field – it is going to be hard to replicate that type of work elsewhere. So economic growth will continue.

“We will also see this type of expansion both in terms of growth in other cities across China and also beyond its borders to places such as Cambodia. Businesses across the region remain focused on looking for a competitive advantage. So, for example, we might have a manufacturing slowdown in Hong Kong, but this is typically only because that manufacturing output has gone somewhere else in the Asia region.”