For the first time in decades, growth in the People’s Republic of China will be slower than the rest of developing Asia. Abdul Abiad, director of the Macroeconomic Research Division of ADB, discusses how this and other headwinds are impacting the region’s economic recovery from COVID-19.

Transcript

Nisha Pillai 

Hello and welcome to ADB Insight. I'm Nisha Pillai. Well into 2022, Asia and the Pacific continues to face economic challenges. The region is recovering from the pandemic, but the growth outlook is worsening. Monetary tightening, the Russian invasion of Ukraine and a slowdown in the People's Republic of China are all weighing on economic activity in our region. To discuss the economic outlook further over the next year or two, I'm joined now by Abdul Abiad, director of the Macroeconomic Research Division of the Asian Development Bank. Abdul, good to have you with us. Thank you for joining us on ADB Insight. 

Abdul Abiad 

Glad to be here. 

Nisha Pillai 

First off, can you summarize how you see the economic outlook for the Asia and Pacific region? 

Abdul Abiad 

Thanks. In our recently released Asian Development Outlook Update, we've lowered the forecast for developing Asia to 4.3% growth this year and 4.9% growth next year. And the reason we did so is because of several headwinds that are slowing the recovery. The first and actually the most important one right now is a sharp slowdown in the growth in the People's Republic of China. Our forecast right now for China is 3.3% growth this year. In fact, this will be the first time in more than three decades that China will be growing slower than the rest of developing Asia. In other words, it'll be a drag on growth rather than an engine of growth for the region. The second is the Russian invasion of Ukraine. This has a number of effects. It's raising uncertainty, it's continuing to disrupt supply. And as we all know, it's raising food and energy prices around the world. And the third challenge facing the region and the world is aggressive monetary tightening in the major advanced economies in the U.S. and Europe. And this is going to be a drag on global growth and will obviously affect developing Asia as well. So, all in all, a very challenging environment right now. 

Nisha Pillai 

So, let's drill down a little bit on the PRC, on China. What are the particular challenges that it's facing right now? 

Abdul Abiad 

So, the short-term challenge is really the recurrent lockdowns the country has had to do under its zero-COVID policy, and that's the primary reason for the downgrade this year. The more medium-term challenge is that the country has to deal with the vulnerabilities in its property sector. And so, these are, you know, a lot of apartment buildings, office buildings. Property sector drove growth to a large extent over the past decade, but it was largely driven by investment, possibly overinvestment, and a lot of leverage. And they're trying to tamp that down, but it'll also mean it'll slow growth. And finally, the two long-term challenges that are facing the Chinese economy are the aging of the Chinese population and the need for the country to find a new growth model. The old growth model, which was dependent on exports based on low-cost assembly—it worked fine for China over the past 20 years, but it's no longer a workable model for an economy that's now upper middle income. 

Nisha Pillai 

And what's the likely broader economic impact of a slowdown in China on the rest of the region?  

Abdul Abiad 

The reason China's slowdown matters for the region is, one, it's a matter of accounting that China is 60% of developing Asia's GDP. But, beyond that, it matters for the rest of developing Asia, because many of these economies have very tight trade and supply chain linkages with China. 

Nisha Pillai 

And, of course, inflation is on everyone's mind right now pretty well wherever you may live in the world. So, what's the outlook for our region here in Asia and the Pacific? 

Abdul Abiad 

So, inflation is rising in developing Asia, just as it is everywhere in the world. So, we've raised our forecasts for developing Asia's inflation from 3.7% to 4.5% this year. And the reason for that is the reason prices are going up everywhere else in the world—it's primarily food and energy prices and really, to a large extent, connected to Russia's invasion of Ukraine. Now, one of the things we're starting to see is that inflation is starting to broaden beyond just food and energy. So, if you look at measures of core inflation, for example, in the region, core inflation is starting to rise in several economies. And that is a worry because when that happens, that's when inflation sort of ends up building momentum and it becomes harder to stop, and we're actually seeing this in the US for example, right now. 

Nisha Pillai 

So, the fact that inflationary pressures aren't as intense here as elsewhere, presumably that opens up opportunities for outside investors. 

Abdul Abiad 

Yes, in fact, that is what we're seeing. So, one of the things that happens when the Federal Reserve raises interest rates is that money tends to flow out of emerging economies, not just here in Asia, but elsewhere. But, if you do look at foreign direct investment to developing Asia, it’s continued to be robust. The last data point is still in the first quarter of this year, but it's been stable and strong and that really reflects the region's strong macroeconomic fundamentals, for the most part. 

Nisha Pillai 

The outlook certainly sounds concerning, Abdul. But, are there any bright spots in your forecast? 

Abdul Abiad 

So, despite all the challenges I mentioned, it's important to keep in mind that the growth that we were forecasting for developing Asia, you know, between 4.5-5% this year and next, is still pretty good in comparison to the rest of the world. And so, Asia will continue to be the driver of global growth. The other bright spot is on inflation. Again, yes, it's true. Inflation in Asia is rising, it hit 5.3% in the middle of this year, but that's still much lower than inflation elsewhere. So, if you look at Latin America, sub-Saharan Africa, inflation there is running at double digits. And even if you look at the US and Europe, you know, inflation peaked above 9% in the US; in Europe, it's at 9% and hasn't peaked yet. 

Nisha Pillai 

So, finally Abdul, if you were a policymaker, what would you be prioritizing to help our region navigate its way through what could be, after all, a pretty tricky couple of years? 

Abdul Abiad 

Ok, one of them would be, you know, ensuring that inflation doesn't get out of hand. So central banks need to really keep their eye on inflation developments and stay ahead of the curve. I think one of the lessons from what happened in the US is that it's really dangerous once you fall behind the curve. A second important policy takeaway, I think, is to ensure that the recovery doesn't just benefit a few. So, the pandemic and the now high inflation, these things hurt the poor and the vulnerable the most. And, you know, the reason why this matters is that, you know, we're already seeing social unrest in places where, you know, shortages and high prices have been most felt. So, you want to avoid that, but more importantly, it's just the right thing to do. And a third thing, I would say for policymakers, is that even in these challenging environments, you have to not lose sight of longer-term challenges. And let me just highlight two of those: one is that there's really right now an education crisis. Many school-aged kids are falling behind and have experienced large learning losses because of the school closures during the pandemic. And that's something policymakers really need to focus on, even though it's a longer term concern. And the other, obviously, is climate change. Yes, a longer term issue, but you're already seeing the effects of extreme weather events, whether it's flooding in Pakistan or droughts in China. 

Nisha Pillai 

Abdul, thank you so much for your analysis. It was really interesting stuff. Good to have you with us on ADB Insight. 

Abdul Abiad 

Thanks very much, Nisha. 

Nisha Pillai 

In fact, thank you to all of you for joining us for this episode of ADB Insight. I'm Nisha Pillai. Until the next time, goodbye.

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