ADB warns of slow growth in Asia

Growth in developing Asia could slow for a second straight year in 2019 and lose further momentum in 2020, the Asian Development Bank (ADB) said, warning of rising economic risks from a bitter Sino-U.S.trade war and a potentially disorderly Brexit.

Background 

The Asian Development Bank (ADB) is a regional development bank established on 19 December 1966, which is headquartered in the Ortigas Centre located in the city of Mandaluyong, Metro Manila, Philippines. The company also maintains 31 field offices around the world to promote social and economic development in Asia. The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly the Economic Commission for Asia and the Far East or ECAFE) and non-regional developed countries.

The ADB was modelled closely on the World Bank and has a similar weighted voting system where votes are distributed in proportion with members' capital subscriptions. ADB releases an annual report that summarizes its operations, budget and other materials for review by the public.

Analysis 

Developing Asia, which groups 45 countries in the Asia-Pacific region, is expected to grow 5.7 this year, the ADB said in its Asian Development Outlook report, slowing from a projected 5.9 percent expansion in 2018 and 6.2 percent growth in 2017.

The 2019 forecast represents a slight downgrade from its December forecast of 5.8 percent. For 2020, the region is forecast to grow 5.6 percent, which would be the slowest since 2001.

“A drawn out or deteriorating trade conflict between the People’s Republic of China and the United States could undermine investment and growth in developing Asia”, Yasuyuki Sawada, ADB’s chief economist, said in a statement.

The lender also cited uncertainties stemming from U.S. fiscal policy and a possible disorderly Brexit as risks to its outlook, because they could slow growth in advanced economies and cloud the outlook for the world’s second-largest economy. “Though abrupt increases in U.S. interest rates appear to have ceased for the time being, policymakers must remain vigilant in these uncertain times,” Sawada said.

China’s economy will probably grow 6.3 percent this year, the ADB said, unchanged from its December projection, but slower than the country’s 6.6 percent expansion in 2018 despite recent government stimulus measures including more tax cuts and increased state spending on infrastructure. Growth in the Chinese mainland is projected to cool further to 6.1 percent in 2020.

Beyond trade risks, the ADB said China’s growth will also be retrained by restrictions on shadow banking, which is expected to limit credit expansion even as fiscal stimulus provides some offset. “I should emphasize although the government would like to stablize growth, it wouldn’t want to push up the growth rate as in previous years when you saw a big stimulus package, like in the period of 2008-2009,” said Jian Zhuang, senior economist at ADB in Beijing.

Chinese banks may still remain reluctant to lower lending costs for companies partly due to worries of the rising risks of corporate defaults in a slowing economy. The central bank could take further actions, such as cutting the benchmark 1-year lending and deposit rates, the ADB said. China has set its 2019 economic growth target at 6.0 to 6.5 percent.

By region, South Asia will remain the fastest growing in Asia Pacific, with the ADB predicting an expansion of 6.8 percent this year - lower than its previous forecast of 7.1 percent - and 6.9 percent next year.

Assessment 

Our assessment is that the US-China trade war has finally started to negatively impact countries which are not directly involved in the two country’s dispute. We believe that the trade war will have a significantly more impact than a disorganised Brexit as we feel that Brexit will prove to be a windfall for key Asian economies like China and India based on the UK’s government priority to sign Free Trade Agreements with these countries, independent of existing EU treaties. 

India Watch 

From an estimated 7.0 percent growth in 2018, India’s economy is projected to expand at a faster pace of 7.2 percent in 2019 and 7.3 percent in 2020, the ADB said, as lower policy rates and income support to farmers boost domestic demand. The upcoming elections are also slated to impact the Indian economy, based on the economic policies offered to be implemented in the contesting parties’ manifestos. 

Image Courtesy: AndreaADB (https://commons.wikimedia.org/wiki/File:Adb-hq.jpg), https://creativecommons.org/licenses/by-sa/4.0/legalcode

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