UN Report: MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES AT THE SUBREGIONAL LEVEL

Economic growth momentum and macroeconomic situation vary widely among the countries in Asia and the Pacific, in line with the diversity across the region. Several of the trade-dependent countries are likely to perform better in 2014, as the global economic recovery gains traction. Their macroeconomic performances thus depend on the implementation of appropriate policy measures to deal with spillovers from developed economies. This requires careful examination of the underlying reasons for changes in the macroeconomic aggregates and the likely impact of policy measures. On the other hand, a number of countries, mostly those with large domestic markets, are poised to experience either a growth slowdown or stagnation in 2014 due to diverse structural challenges. These countries need to accelerate structural reforms to deal with long-term impediments, while at the same time, address short-term macroeconomic issues. The macroeconomic performance of commodity-exporting countries varied widely in 2013. This group of economies faces the prospect of slowing growth in 2014. To counteract this, they should undertake policies to accelerate economic diversification.

This chapter presents a more disaggregated analysis of macroeconomic performance in 2013 and the prospects for 2014 at the sub-regional level, with some discussion centered on the country level, given their policy challenges. In the survey, the asia pacific region is divided into five geographic sub-regions: East and north east asia; north and central asia; the pacific; south and south west asia; and south east asia. An overview of macroeconomic and policy developments in these sub-regions is followed by more detailed discussions on each sub-region.

The east and north east asian sub-region comprises: China, democratic people’s republic of korea; hongkong, china, japan, macao, china, Mongolia and the republic of korea. In this highly trade-dependent sub-region, growth picked up in most of the economies by mid 2013, as global growth prospects improved. In particular, a recovery in exports to the united states led to increased economic activity. Notable economic related trends in the subregion were as follows. First, the decleration of growth in china in recent years has come to a halt, but as mentioned in chapter I the prospects for the Chinese economy to return to pre-global crisis growth rates are unlikely unless the economy is rebalanced to be more consumption led. On the positive side, stimulus announced by china in early April 2014 should help contain a deceleration in growth. Second china japan and the republic of korea have formulated a range of structural reforms to tackle long term impediments. In the case of china some path breaking announcements were made to push the economy more towards a market based system. Japan has been pursuing an aggressive and exceptional monetary policy stance coupled with strong fiscal stimulus to pull the economy out from deflation. This appears to be working as indicated by recent signs of higher growth and inflation. The country also intends to reform its tax system to address its growing public debt. The republic of korea launched sizeable stimulus measures that focused on promoting corporate investment through tax reductions and job creation by initiating through tax reductions and job creation by initiating public projects. Third, on the external side despite an increase in the second half of 2013, exports for the year decelerated, which had a negative impact on current account surpluses in some economies. Fourth although the net impacts of structural reforms are yet to be seen, the strengthening of the global recovery should help maintain the subregion’s growth momentum in 2014.

The north and central asian subregion covers Armenia, Azerbaijan, Georgia, kazakahstna, krygysthan and Uzbekistan. Among these countries there are net energy exporters and non energy commodity exporters. Subdued global demand for energy gold and non precious metals has impeded growth in the resource based economies particularly in the Russian federation which account for 80% of the subregions GDP. Thus, the economies of the subregion as a group grew at a slower pace in 2013 than in 2012. Few important trends are worth highlighting. First the growth performance within the subregion was diverse, ranging from 1.3% in the Russian federation to 10.5% in Kyrgyzstan. Similarly, the inflation rates also varied from 2.4% in Azerbaijan to 12.1% in Uzbekistan. Second in net energy importing and remittance dependent economies output growth declined as household spending moderated due to a deceleration in workers remittances a direct result of the economic slowdown in the Russian federation the largest host of migrant workers in the subregion. Third upward adjustments in administered prices pushed inflation higher in several of the economies in the subregion and applied further pressure on household spending. In response to inflationary pressures monetary policy was tightened in some economies with the Russian federation hiking the interest rate by 200 basis points. Fourth, a number of the countries in the subregion increased public spending especially on social programmes to sustain domestic demand. This led to deteriorations in their fiscal balances. Fifth on the external side current account balances generally deteriorated owing to subdued global commodity demand. Despite an expected rebound in the global economy in 2014 output growth in the subregion is not likely to pick up as the economy of the Russian federation further decelerates on the back of conflict with Ukraine. In the medium term diversification of economic growth drivers remains a major challenge for the countries that continue to be highly dependent on commodity exports.

The pacific subregion includes the cook islands Fiji, Kiribati the marshall islands the federated states of Micronesia, Nauru, palau, papua new guinea, Samoa, Solomon islands, tongo, Tuvalu, and Vanuatu. Australia the newzealand are also part of this subregion. The pacific island developing economies face unique challenges including small populations a poor resource base (Except in a few exceptional cases) remoteness from their more developed trading partners frequent natural disasters and the adverse impact of global climate change. These economies as a whole experienced lower economic growth in 2013 mainly due to an economic slowdown in the resource rich economies of papua new guinea and Solomon islands. Natural disasters also constrained output growth in Fiji and Samoa. Moderating global food and fuel prices helped limit inflation in several of these economies in 2013, although overall inflation increased modestly on high price rises in  papua new guinea amid its weakening currency. Budgetary deficits were generally not very large in 2013 despite some increases in the larger economies. Heavy reliance on imported food and fuel together with limited export capacity generally led to sizeable external current account deficits. Some improvement in the growth performance of this subregion is expected in 2014, in line with the more positive outlook for the global economy and an increase in mineral output in papua new guinea.

Australia and new Zealand, the two developed economies of the subregion experienced slower growth in 2013. Inflation remained low although new Zealand was the first developed country globally to raise interest rates in March 2014 in anticipation of a trend towards higher rates in the united states. Both of these countries are committed to fiscal consolidation in the coming years. In 2014 growth is expected to remain relatively sluggish in Australia on weak mining investments while new Zealand should record a rebound due to ongoing reconstruction activities better prospects for diary industry and higher net immigration.

The south and south west asian subregion comprises Afghanistan, Bangladesh, Bhutan , India the Islamic republic of iran, Maldives, Nepal, Pakistan, srilanka and turkey. Economic growth in the subregion picked up slightly in 2013 as the economies of Bhutan, India,  Maldives, srilanka and turkey expanded at a more rapid rate aided by increased household spending stemming from steady farm incomes and workers remittances. Energy shortages have constrained economic activities in several of these economies and political tensions and security issues capped growth in Afghanistan, bangaldesh, nepan and Pakistan. Large fiscal deficits limit fiscal manoeuvrability within the subregion. Some deceleration in the overall inflation rate occurred but food inflation remained elevated. Meanwhile the prospects of quantitative easing tapering in the unites states triggred capital market volatility in India and turkey. This underscored weak macroeconomic fundamentals such as large current account deficits financed by short term external borrowings. The large current account deficits are partly a reflection of large fiscal deficits in the subregion. Monetary policy has been tightened to stem capital outflows and combat financial market volatility. Despite, this, economic growth in the subregion is projected to further increase in 2014 due to a stronger global economy. Tacking supply side constraints especially energy shortages remains vital for achieving medium term growth.

The south east asian subregion covers brunel Darussalam, Cambodia, Indonesia the lao people’s democractic republic Malaysia Myanmar the phillippines, Singapore, Thailand timor leste and viet nam growth momentum in the subregion slowed somewhat in 2013. The sluggish global economic recovery held back exports particularly in the first half of the year. Growth in domestic economies such as Indonesia due to monetary tightening in response to higher inflation and capital flight. Domestic demand in Thailand was diversely affected by rising household debt and political uncertainty. In contrast the economy of the phillipines grew rapidly despite the extensive damage caused by typhoon haiyan which struck in late 2013. Namely Cambodia the lao peoples democractic republic Myanmar and timor leste maintained high growth rates underpinned in part by steady inflows of foreign investment especially in the resource sector. Modest inflation enabled the economies of the subregion to ease monetary policy which supported domestic demand amid weak external demand. Fiscal reforms moved forward a in several economies in an attempt to restore fiscal sustainability following large scale stimulus measures taken during the global economic downturn. As for 2014 growth is generally expected to moderate especially in economies with large domestic markets. Financial market volatility which could arise from monetary policy normalization in the united states is a downside risk.

EAST AND NORTH EAST ASIA

Recovery under way as the external environment improves

Growth in the subregion increased to 4.2% in 2013 from 4% in 2012 (See table 2.1) in most of the economies growth picked up gradually in midyear as the global economy rebounded and domestic demand gained traction. However, subregional growth remained below pre-crisis levels largely due to the slowing growth rates in china in recent years. The Chinese economy grew by 7.7% in 2012-13 compared to more than 9% during the period of 2009-11.

Slower growth in China is having is having a negative impact on other economies in the subregion. However, there are far greater long run potential benefits if the slowdown is resulting from the process to rebalance the economy. By reducing the economy’s dependence on exports, efforts will be made to spur more rapid growth in domestic demand. As a result, China will increase its imports of higher value added final goods. Also the country’s graduation from being a supplier of low skilled manufacturing jobs may free up nearly 100 million labour intensive jobs for less developed countries. It is also interesting to note that in 2013 the services sector made upto 46.2% of GDP overtaking the manufacturing sector. With the services sector’s contribution to GDP expanding, the service sector’s contribution to GDP expanding the Chinese economy would be on its way to growth diversification. In the line with the government’s policy direction, going forward, growth in the country is likely to be driven by the developments in the services sector. Similar to China, many other economies in the subregion have witnessed an expansion in output