Where Do We Go From Here – A Report

The global economy is showing signs of recovery, but at an uneven pace; global growth is expected to rise modestly to 2.6 percent in 2014, and an average 3.3 percent in 2015–17. Activity in high-income economies as a group expanded in the second quarter, but performance varied sharply across countries. In the United States, output rebounded strongly, supported by still accommodative monetary policy, easing fiscal consolidation, and rising employment, investment growth, and confidence. Growth is projected at about 2 percent in 2014, rising to 3 percent in 2015. In the Euro Area, the recovery continues to be impaired by weak domestic demand and credit growth, and subdued investment prospects. In Japan, monetary policy accommodation and reform commitments are providing ongoing support, but fiscal consolidation is expected to keep domestic demand subdued throughout 2015, with exports recovering only slowly. In both the Euro Area and Japan, growth is projected at about 1 percent in 2014, rising slowly thereafter.

The gradual strengthening of activity in high-income economies will boost demand for exports from developing East Asia and Pacific (EAP), helping the region sustain its growth performance. Growth in developing EAP will moderate gradually from 7.2 percent in 2013 to 6.9 percent in 2014–15. In the region excluding China, growth will bottom out at 4.8 percent in 2014, reflecting the slowdown in Indonesia and Thailand, before recovering to 5.3 percent in 2015–16. Developing EAP will remain the fastest-growing developing region.

In China, growth will gradually moderate to 7.4 percent in 2014 and 7.1 percent in 2016, reflecting intensified policy efforts to address financial vulnerabilities and structural constraints, and place the economy on a more sustainable growth path. Measures to contain local government debt; curb shadow banking; and tackle excess capacity, high energy demand, and high pollution will reduce investment and manufacturing output.

In the rest of the region, growth will gradually pick up, as exports firm and the impact of domestic adjustment in the large ASEAN countries eases. However, the capacity to benefit from the global recovery will vary significantly across countries, reflecting structural constraints to investment and export competitiveness, and weak export prices for commodity producers. Cambodia, Malaysia, Vietnam are well positioned to increase their exports, reflecting their deepening integration into global and regional value chains. But in Indonesia, export performance will remain fragile, as its commodity export prices continue stagnating and infrastructural bottlenecks hamper efforts at diversification.

Investment in the large ASEAN economies weakened, while private consumption remained resilient. In Indonesia, the investment slowdown reflects a poor investment climate, compounded by falling commodity export prices, increases in the cost of capital, and corrections in the real estate sector. In the Philippines and Vietnam, weak investment reflects structural factors, again reinforced by a weak real estate market. And in Thailand investment continues to suffer from political unrest and uncertainty. Conversely, private consumption remains generally robust, although underlying factors differ across countries. In Indonesia, consumption was supported by election-related spending; in Malaysia, by robust labor markets; in the Philippines, by buoyant remittances; and in Thailand, by the respite from political turmoil.

The East Asia Pacific Economic Update is a joint product of the Office of the Chief Economist, East Asia and Pacific Region, and the Macro and Fiscal Management Global Practice, supported by the Development Prospects Group. The work was supervised by Nikola Spatafora, under the guidance of Sudhir Shetty (Chief Economist, East Asia and Pacific Region).