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Economic challenges

Interview: Gabriel Domínguez
December 31, 2014

Japan has returned to recession, and growth in Asia's developing countries is expected to slow down. Economist Rajiv Biswas talks to DW about the main risks and opportunities the region's economies face in 2015.


As China's economic expansion moderates and Japan struggles to come out of its third recession in two years, economists have revised down forecasts for several economies in the region. On December 17, the Asian Development Bank (ADB) said the regional gross domestic product (GDP) would slide to 6.1 percent in 2014 from an initially estimated 6.2 percent, and 6.2 percent in 2015, down from 6.4 percent.

Growth projections for Central Asia, East Asia, and Southeast Asia are all revised downward. China's declining real estate prices and knock-on effects on the construction sector are set to slow growth down to 7.4 percent in 2014 and 7.2 per cent in 2015, the bank said. However, no change was expected for South Asia. And the Pacific region's growth outlook is adjusted upward.

In a DW interview, Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, says the region will be entering 2015 amidst significant economic challenges. Nonetheless, a positive factor supporting the economic outlook could be the sharp decline in world oil prices during the second half of 2014.

Rajiv Biswas
Biswas: 'Asia's largest economies - China and Japan - will continue to face headwinds in 2015'Image: IHS

DW: What is the overall outlook for the Asian economies in 2015?

Rajiv Biswas: The Asia-Pacific (APAC) region is entering 2015 amidst significant economic challenges. China, Asia's largest economy, is facing some moderation in growth momentum as well as persistent economic imbalances from the slump in residential construction and rising problem loans due to the rapid expansion of credit since 2009.

Meanwhile Japan, Asia's second largest economy, slumped into recession in the third quarter of 2014 as the impact of the sales tax hike in April 2014 resulted in a sharp decline in household consumption.

However, the overall APAC growth outlook for 2015 has been given a considerable boost by the sharp decline in world oil prices in the second half of 2014. Overall GDP growth in the region is therefore forecast to be around 4.7 percent in 2015, similar to the 4.6 percent growth rate in 2014, strengthening to 5.1 percent by 2016.

Which countries do you expect the big winners of 2015 and which do you think will continue to face difficulties?

India was in an economic crisis during 2013, but now looks set to be one of the best emerging markets recovery stories for 2015. The Indian economic turnaround is being helped by the sharp decline in oil prices, since India is heavily dependent on imported oil. Inflationary pressures have fallen sharply during recent months, and Indian central bank governor Raguram Rajan is signaling that monetary easing is likely in early 2015.

The combination of monetary policy stimulus and the economic reforms of the new Modi government could drive a significant Indian economic recovery over the medium-term.

Among the Asian frontier markets, Vietnam is also a very exciting economic recovery story. In 2010-2011, the Vietnamese economy was in crisis, with soaring inflation and external account difficulties, with foreign exchange reserves at critically low levels. Since then, there has been a remarkable turnaround, with inflation estimated to be 4.1 percent in 2014, easing to 3.5 percent by 2015.

Meanwhile, GDP growth is forecast to strengthen to six percent in 2015, helped by the rapid emergence of a significant electronics manufacturing export cluster in Vietnam over the last four years. There has also been significant foreign direct investment into Vietnam to establish two large new petrochemicals projects, which will help to strengthen Vietnam's manufacturing sector. However a key vulnerability remains the banking sector, which is struggling with very high non-performing loans and requires considerable restructuring.

Also, Asia's largest economies - China and Japan - will continue to face headwinds in 2015. Japan is struggling with the impact of ageing demographics and very high government debt levels, which limit its long-term GDP growth potential to around one percent per year. China is also facing moderating growth momentum due to weakness in the residential property market, as well as the consequences of rapid credit expansion in the financial system since 2009.

What has been the impact of falling oil prices on the Asian outlook?

A key positive factor supporting the economic outlook for the Asia-Pacific region in 2015 has been the sharp decline in world oil prices during the second half of 2014. Most of the Asian economies are large net importers of oil and gas, and will benefit from lower oil import costs and significantly reduced fuel costs for consumers. IHS expects Brent crude to average USD 66 per barrel in 2015, which will reduce inflationary pressures throughout much of Asia, allowing many Asian central banks to either keep monetary policy on hold or reduce policy rates.

A number of Asian countries – India, Indonesia and Malaysia – have also taken the opportunity provided by falling oil prices to remove domestic fuel subsidies, which will provide a structural improvement to their fiscal deficits over the medium term. The Asia-Pacific growth outlook will also be supported by some improvement in GDP growth in the US and EU, both key export markets for many Asian countries.

What are the key risks to the Asian outlook in 2015?

China is facing some moderation in growth momentum, with GDP growth forecast to moderate from 7.3 percent in 2014 to 6.5 percent in 2015. This reflects some slowdown in fixed investment, particularly due to a significant slump in the residential construction sector. A key risk for the Asia-Pacific region is if the Chinese economy slows more sharply than expected, entering a hard landing scenario with GDP growth slowing to just 5 percent in 2015 and remaining weak for a protracted period of time.

Infografik Asia-Pacific Growth for 2015

If China has a hard landing, the negative shock waves to the rest of Asia will be severe, as it would hit Asian export countries such as South Korea, Taiwan, Australia, Malaysia and Singapore. Commodity prices would also suffer further significant declines, which would hit resource-exporting nations worldwide.

With the EU still an important export market for Asia, another key risk for 2015 would be if EU growth remains very weak, which would dampen the export growth outlook for many East Asian export economies, including China, South Korea and Japan.

With Japan currently in recession, what is the outlook now that Prime Minister Shinzo Abe and his LDP Party have been re-elected for another term of office?

The LDP Party won a convincing victory in the general elections held in December 2014, giving Prime Minister Abe another term of office and serving as an endorsement of his "Abenomics "policy mix. The main policy driver that is supporting Japanese economic growth at present is the Japanese central bank's massive monetary stimulus policies. Quantitative easing has resulted in significant yen depreciation during 2013-14, helping to boost Japanese export competitiveness and corporate profits.

However, the key focus during his next term of office will be on whether his policies on structural reforms can be implemented in any convincing way, since these are essential to boosting Japan's economic growth rate over the medium to long-term. Unless PM Abe can deliver significant reforms soon, the Japanese economic outlook will be for weak long-term growth constrained to around one percent per year due to the impact of the declining population and the need to stabilize Japan's very high government debt to GDP ratio.

How is the Indian economy expected to perform in 2015?

The Indian economy has been one of the main beneficiaries of lower world oil prices, since India is a significant oil importer. Indian inflation rates have slowed sharply this year, and the Indian central bank is expected to start cutting interest rates in early 2015, which will help to support a recovery in Indian economic growth.

India's Prime Minister Narendra Modi (front L) shakes hands with Japan's Prime Minister Shinzo Abe during a signing ceremony at the state guest house in Tokyo September 1, 2014 (Photo: REUTERS/Shizuo Kambayashi/Pool)
Biswas: 'The Modi government is also putting infrastructure investment at the top of its economic reform priorities'Image: Reuters

Indian GDP growth is forecast to strengthen from 5.5 percent in the 2014 financial year to 6.6 percent in the 2015 financial year. The Modi government is also putting infrastructure investment at the top of its economic reform priorities, with plans for boosting infrastructure investment in power and transport infrastructure, as well as building 100 smart cities across India.

The combination of economic reforms by the Modi government and monetary policy easing by the Indian central bank in 2015 are expected to push Indian economic growth back above seven percent by 2017.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.

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