Perspectives



Economic Review and Outlook: Implications for Asia-Pacific

The results from the Global Competitiveness Report 2013 - 2014 shows the Asia-Pacific region as one of the world’s largest and most diverse regions with mixed levels of economic competitiveness (Box 1). Three countries, Singapore (2nd), Hong Kong SAR (7th), and Japan (9th), are in the Top 10 of global competitiveness, with both Indonesia (38th) and the Philippines (59th) as the most rapidly improving economies.1 A number of other countries such as Pakistan (133rd) have been unable to improve their competitiveness, due to insufficient infrastructure, inefficiencies, or corruption in public institutions.2 Other relatively strong performers included Taiwan (12th), New Zealand (18th), and Australia (21st), with China (29th) and India (60th) outside the Top 25.3

While the economic output in the Asia-Pacific region has quadrupled during the past 20 years, this review will focus on the developed economies of Australia and Japan, and the two most populous nations in the world, China and India.

Asia-Pacific Economic Performance

  • The region’s expected annual economic growth is projected to increase from 6.1 percent (in 2013) to 6.2 percent in 2014, and 6.5 percent in 2015.4
  • Despite experiencing economic slowdown, China’s economic growth remains within its target, and its unemployment rate remains steady.
  • With increasing foreign investments, and efforts to clear infrastructure bottlenecks and implement economic and structural reforms, expect to see an increase in India’s economic growth.
  • Citing structural weaknesses, Bank of Japan has decreased its forecast growth for FY 2015.
  • Australia continues to experience robust economic growth, but remains cautious on the volatility of the Australian dollar and weakening consumer demands from overseas.

Over the past 20 years, the emerging economies of China and India have almost tripled their share of the global economy and, when combined with Japan, account for over a quarter of today’s global economy by purchasing power parity. This share is projected to increase to 30 percent by 2020.5 By 2025, the region is expected to account for almost half of the world’s economic output, and over 60 percent of the world’s total infrastructure market.6

China

China’s economic growth slowed to 7.7 percent in 2013, and 7.4 percent in Q1 2014 (versus a year earlier), and is expected to further slow to 7.2 percent in 2015.7 The slowdown has been attributed to a number of factors including wage increases, currency depreciation, tightening of credit growth, and the implementation of new policies that promote a more sustainable and balanced economic growth.8 Also high on China’s policy agenda is exchange liberalisation, allowing the currency to fluctuate against the US dollar.9 The currency is forecast to strengthen against the US dollar (RMB/US$, end of period) from 6.10 (2013), to 6.01 (2014), 5.96 (2015), and 5.90 (2016).10 Since 2010, the unemployment rate has remained steady around 4.1 percent, and this is expected to continue until 2019.11 The average annual consumer inflation was 2.6 percent for 2012 and 2013, and is expected to increase to 3 percent annually from 2014 to 2019.12

India

India’s economic outlook and capacity for growth will arguably depend on its ability to successfully prioritise and implement economic and structural reforms aimed at improving its policy credibility and business environment.13 India’s short-term forecast for annual economic growth (as measured by gross domestic product or GDP) is expected to be 5.2 percent in 2014, up from 4.6 percent in 2013, and increasing to 5.7 percent in 2015.14 The currency is forecast to depreciate by 2 percent against the USD, closing at 63 Indian Rupee to $1 USD.15

As part of the government’s plan to increase economic growth over the next three to four years to over 7 to 8 percent, India is looking to increase foreign investments.16 Most recently the government of Japan committed to help in raising 3.5 trillion yen (USD 35 billion) of public and private investment and financing.17 China has also pledged $20 billion in investments as part of the Five-Year Trade and Economic Development Plan with India.18 This is a significant step up from China’s cumulative investment of $400M over the past 14 years.19

Japan

Japan’s economic activity picked up towards the end of Q1 2014 due to strong household spending and private investments prior to the consumption tax rate increase in April.20 However, after implementing the sales tax, declining household spending has plunged the economy into its deepest contraction in five years.21 The Bank of Japan has adjusted its target for real GDP growth to 1.1 percent (FY 2015, ending March 2015), from 1.4 percent, citing structural weaknesses such as fiscal and external balances; however, FY 2016 target remains unchanged at 1.5 percent.22 The unemployment rate is expected to decrease slightly from 4.0 percent in 2013 to 3.9 percent in both 2014 and 2015.23 The Japanese yen is currently sitting at a six-year low against the dollar, increasing Japan’s importing costs.24 This comes at a time where all 48 of its nuclear reactors are non-operational (accounting for 30 percent of electricity demands), and Japan must import more fossil fuels for electricity generation, causing a trade deficit.25

Australia

Australia continues to maintain a robust rate of economic growth relative to other advanced economies as a result of rising resource exports and increased mining capacities following the completion of infrastructure projects.26 Short-term forecasts for GDP growth (year-average) are 2 to 3 percent for 2014/15, and 2.5 to 3.5 percent for 2015/16.27 The outlook for consumer inflation remains relatively steady and is expected to remain within the 2 to 3 percent target zone for the foreseeable future.28 Australia’s currency has experienced volatile trading patterns over the past 12 months with the AUD/USD expected to close end of year at 0.92.29 The unemployment rate is near its highest levels since early 2000s with July’s unemployment rate (seasonally adjusted) at 6.6 percent, an increase from 6.0 percent reported in March.30 Despite strong upward trends in employment gains in the health and education industries, the unemployment rate is likely to remain elevated until 2016.31

As a commodity rich country, Australia’s economy has experienced the benefits of strong demand for iron ore, copper, steel, coal, and fuels from China and the wider Asia-Pacific over the past decade, with 10 percent of jobs related to the resource sector.32 Australia’s export of goods and services represents 20 percent of its GDP, with over 25 percent of exported goods attributed to iron ore.33 As the world’s greatest raw material consumer and Australia’s largest export market, serious declines in China’s growth rate will affect Australia’s economy. This is already evident with the slowdown in China’s residential property sector (accounts for more than 24 percent of China’s steel consumption), which has pushed the price of iron ore below the government’s forecast, causing a negative impact on the budget’s bottom line.34

Similarly, declines in Asia-Pacific’s growth, in particular Japan and South Korea, will affect Australia’s export market, with over 70 percent of its trade transactions occurring in this region.35 Other commodities such as Australian beer, wine, and dairy are also vulnerable to weaker consumer demands. However, HSBC predicts liquefied natural gas exports to more than double from 2015, and with low interest rates, rising government infrastructure spending, and increased exports, these will help support the Australian economy over the next few years.36

Asia-Pacific Infrastructure

  • The Asia-Pacific infrastructure market is forecast to grow 7 to 8 percent per year over the next decade.
  • China continues to invest in infrastructure, approving 55 major infrastructure projects in 2012, and its infrastructure spending is expected to grow on an average of 10 percent per year until 2025.
  • India’s infrastructure spending on transport and utilities is forecast to triple to support increasing urbanization.
  • As part of new partnerships with Japan and China, infrastructure investments in India are set to increase over the next five years.
  • The Australian government will invest up to 83 percent of its infrastructure spending on roads from now until 2017/18, including creating an AU$11.6 billion Infrastructure Growth Package in hopes of catalyzing over AU$125 billion of additional infrastructure investments.

Since 2009, the Asia-Pacific region has accounted for more than 50 percent of the global increase in capital spending, and its infrastructure market is expected to continue growing at 7 to 8 percent a year over the next decade, approaching $5.3 trillion per annum by 2025—representing nearly 60 percent of the world’s total37 infrastructure investment.

China

China currently accounts for over 50 percent of the Asia-Pacific infrastructure market in 2013 (Box 5) yet it still has to converge with the levels of development and standards of living in neighbouring advanced economies such as Japan and Australia.38 Infrastructure investment is therefore likely to remain strong with the unveiling of a new fiscal stimulus initiative targeting infrastructure earlier this year.39 China’s forecast infrastructure spending is set to grow annually by 10 percent (average) until 2025.40

India

Currently, infrastructure shortages in transport (roads, ports, airports, and railways) and utilities are the leading constraints to India’s growth.41 Regional infrastructure spending is expected to increase from 10.2 percent (2013) to 12.5 percent by 2025, with investments in transport and utilities set to triple.42 Credit rating and research agency, India Ratings & Research, maintains an overall negative outlook for the infrastructure sector for FY 2015, in particular some toll roads, minor seaports, and thermal power plants. In contrast, annuity roads, airports, and renewable energy (wind and solar) projects maintain a stable outlook.43 Both Japan and India are supporting infrastructure projects in India with Japan co-financing next generation infrastructure projects such as transport systems and the

building of Smart Cities.44 Japan will also provide an aid load of 50 billion yen (USD 480 million) to India Infrastructure Finance Company Limited for public-private partnership investments.45 China’s $20 billion pledge includes infrastructure investments in upgrading India’s railway system and building industrial parks.46

Japan

As one of the world’s largest steel producers, and with its proximity to emerging markets, Japan is expected to increase infrastructure investments in its manufacturing sector from $100 billion in 2014/15 to $127 billion by 2025.47 The government’s short-term stimulus package, worth 10.3 trillion yen, and earthquake reconstruction funding will be spent boosting private sector participation in public infrastructure projects, rebuilding disaster struck areas, upgrading aging infrastructure, and making schools and hospitals earthquake-proof.48 In the long term, infrastructure spending will likely be diverted towards healthcare to support Japan’s rapidly aging population—people aged 65 and older now make up 25 percent of its population.49

Australia

Looking forward to 2015, Australia’s leading construction companies forecast a decline in total non-residential construction work driven by falls in resource related construction.50 Power and water infrastructure investments are also expected to decline, with anticipated falls between 6 to 9 percent per annum in utility projects; however, falls are expected to be moderated by continued strong growth in telecommunications (10.7 percent) and transport (8.8 percent) infrastructure.51

Based on the latest budget, the Australian government will boost nationwide infrastructure investments through:

  • Contributing AU$28.5 billion to infrastructure spending between 2014/15 to 2017/18, with substantial expenditure directed to developing and maintaining major roads and highways;
  • Creating an AU$11.6 billion Infrastructure Growth Package which, when combined with state and private sector funding, is expected to catalyse over AU$125 billion of additional infrastructure investments, boosting the annual GDP by 1 percentage point;52

  • Providing funding for some 36 major infrastructure projects including Sydney WestConnex motorway, Melbourne East-West Link, Gateway Motorway North, and Ipswich Motorway in Queensland;53 and
  • Working with state governments to fast track infrastructure projects to support future growth, including areas with communities in need and those with high unemployment.

The economic growth of the Asia-Pacific region is dependent on a number of factors, including its ability to implement appropriate economic policies and initiatives, and provide required infrastructure to meet growing population demands. As we see emerging Asian economies, such as Indonesia and Philippines, noticeably increase economic growth and infrastructure investments over the next five years, this will affect neighbouring commodity-rich and manufacturing-heavy economies.

Under the government’s economic plans, China’s growth is forecast to remain stable. However, its current economic slowdown, specifically in its residential property sector has already started to weaken consumer demand, affecting Australia’s commodities market. With significant investments from Japan and China, and the government’s efforts to clear infrastructure bottlenecks and implement economic reforms, the capacity for rapid growth for India over the long term is high. Japan continues to undergo economic reform to improve its economic growth, including investing in its manufacturing sector to meet demands from neighbouring emerging economies. Additionally, Japan will also invest in upgrading its aging infrastructure and rebuilding its disaster-struck areas.

The economic outlook for Australia will depend on consumer demand for exports and a sustained pick-up in non-mining investments over the coming year. Based on recent budget announcements, we expect to see a significant increase in public and private sector investment in infrastructure over the next two to three years, boosting economic growth.

 

Notes:

  1. World Economic Forum. (2013).
  2. Ibid.
  3. Ibid
  4. Asian Development Bank. (2013).
  5. Commonwealth of Australia. (2012); Commonwealth of Australia; Scotiabank Economics. (2014).
  6. Commonwealth of Australia. (2012). PwC. (2014).
  7. Kalish, D. I. (2014).
  8. Asian Development Bank. (2013). Scotiabank Economics. (2014).
  9. Scotiabank Economics. (2014). Asia/Pacific Regional Outlook. Toronto: Scotiabank Economics
  10. The World Bank. (2014).
  11. International Monetary Fund. (2014, April).
  12. Ibid
  13. Asian Development Bank. (2013). Scotiabank Economics. (2014). 
  14. Scotiabank Economics. (2014).
  15. Ibid
  16. Economic Times. (2014, July 10
  17. Prime Minister’s Office (India). (2014, September 1).
  18. Press Information Bureau. Government of India Prime Minister's Office. (2014, September 18).
  19. Mandhana, N. (2014, September 18).
  20. Majumdar, D. R. (2014).
  21. Iwamoto, M. (2014, September 18).
  22. Majumdar, D. R. (2014).
  23. International Monetary Funds. (2014).
  24. Iwamoto, M. (2014, September 18).
  25. Iwamoto, M. (2014, September 18).
  26. Scotiabank Economics. (2014).
  27. Reserve Bank of Australia. (2014).
  28. Commonwealth Bank of Australia. (2014).
  29. Scotiabank Economics. (2014).
  30. Australian Bureau of Statistics. ent
  31. Teserve Bank of Australia. (2014).
  32. Zhang, M. (2014, April 4).
  33. Department of Foreign Affairs and Trade. (2014).
  34. Janda, M. (2014, September 3
  35. Department of Foreign Affairs and Trade. (2013).
  36. HSBC (2014). Australia Trade Forecast Report. London: HSBC Bank plc 2012
  37. PwC. (2014).
  38. Wilkins, K., & Zurawski. (2014).
  39. Scotiabank Economics, 2014; KPMG. (2013).
  40. PwC. (2014).
  41. World Bank Group. (2014).
  42. PwC. (2014).
  43. India Ratings & Research. (2014).
  44. Prime Minister’s Office (India). (2014, September 1
  45. Ibid
  46. TNN. (2014, September 19).
  47. PwC. (2014).
  48. Ministry of Finance Japan. (2013).
  49. PwC. (2014).
  50. Australian Industry Group. (2014).
  51. Australian Industry Group. (2014).
  52. Commonwealth of Australia. (2014).
  53. Dossor, R. (2014).

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