The rise of the East is the great economic story of our times. Containing the bulk of the world population, Asia is now also becoming the centre of gravity in economic terms.
After an impressive period of growth at double-digit pace, China is now in slowdown mode. This is the inevitable by-product of its reaching a new phase of development on the journey from an emerging to an advanced market. The character of its economy is changing: growth is increasingly driven by domestic consumption and the services sector as it rebalances away from a heavy focus on manufacturing and investment.
In the long term, this should make growth more sustainable: too much reliance on exports is proving to be an unreliable strategy as the advanced world enters a period of “secular stagnation” with structurally lower rates of growth. In the short term the road to transition is proving bumpy, with the property market, the shadow banking sector, and the diminishing returns to investment all posing risks to the world’s second biggest economy. Overall, a hard landing scenario still has a relatively low probability. The central expectation is for a soft and managed slowdown whereby the economy does not crash, but gently sees its pace of expansion descend from double-digit rates seen in the beginning of this decade to reach a rate close to 5% by the end of the next.
The other Asian giant, India, has not yet reached the economic importance of China but is enjoying faster growth and is on track to become the world’s third largest economy by the end of the 2020s. Highly favourable demographic trends and the potential for catch-up growth and development are supporting its long term economic prospects. In the short and medium term, cheaper oil prices are a big boost to the Indian economy given its status as a net energy importer and its recent struggles with high inflation. Moreover, reforms targeted at its extensive bureaucracy and infrastructure investment to address capacity constraints are also raising its potential for future expansion. Annual growth is currently near the 6% mark and is expected to accelerate in the coming years to reach an average of 6.6% between 2015 and 2019.
The ASEAN region1 is getting ready to enjoy the fruits of closer regional integration: in 2015 it is expected to convert its free trade agreement into a closer-integrated ASEAN Economic Community. The subsequent freer movement of economic resources such as labour and capital across the region is expected to raise the potential growth prospects. Moreover, rising wages in China as its economy develops further mean that much of the production taking place in the “world’s factory” is now moved to the economies of ASEAN that offer more competitive labour costs. Overall growth for the bloc is expected to average 5.4% between 2015 and 2019.
1Includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam