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In the midst of geopolitical tensions and a global economic slowdown, how are the economies of Asia faring?
Since Asia contributed about two-thirds of all global growth in 2023, it’s important to explore how the largest economies of the continent have been performing lately.
Then, we’re going to talk about the future economic outlook for Asia as a whole, and what Asian countries could do to avoid economic fallouts caused by geopolitical uncertainty.
We’ll start with the largest economy in Asia, China.
Besides being the country with the largest economy in Asia, China also has the world’s second-largest economy, trailing only the United States. In 2022, China recorded a GDP of $17,963 billion, accounting for 7.73% of the world’s economy.
Currently, China is going through an economic slowdown that’s caused by multiple domestic difficulties, such as elevated debt, a property crisis and an aging population.
Despite all of these pressing troubles, China’s economy showed signs of recovery in the third quarter, expanding at a 4.9% annual pace.
Even though this is a lot lower than the 6.3% growth rate of the second quarter, it still beat the 4.5% expectations. This is thanks to increased industrial activity and retail sales, which exceeded market expectations.
Industrial production grew by 4.5%, and retail sales growth rate was 5.5% in September from a year earlier. Also, in September, imports and exports reached $520.6 billion, the highest monthly volume in 2023 so far.
This isn’t an improvement from last year’s figures. In fact, it is actually a 6.2% decrease. However, it’s still an improvement from August’s data, when overall trade contracted by 8.2% year-on-year.
According to Sheng Laiyun, the deputy head of the National Bureau of Statistics, China’s GDP needs to grow by 4.4% in the fourth quarter, in order to meet the 2023 full-year target of 5% growth.
Additionally, the IMF upgraded its forecast for China’s 2023 economic growth following China’s approval of $137 billion sovereign debt issuance to support the economy, from 5% to 5.4%.
While China’s third quarter results exceeded expectations, Japan’s on the other hand were greatly disappointing.
Last year, Japan recorded a GDP of $4231.14 billion, accounting for 1.82% of the world economy. Although Japan has one of the largest and most advanced economies in the world, and the second-largest in Asia after China, it’s been slowing since the start of 2023.
Japan’s GDP in the third quarter contracted by 2.1%, a much larger decline than the forecasted 0.6%. What makes this even worse is that both the first and second quarters witnessed a 3.7% and 4.5% economic growth respectively.
The decline in the third quarter was mainly driven by businesses’ spending decreasing by 0.6% after a 1% drop in the previous quarter, in addition to private consumption shrinking by an annualized 0.2%, when it was forecasted to have a 0.3% increase.
This lack of spending is attributed to the increasing inflation rate, which reached 3% in September, while its long-term average is 2.42%.
Wages in Japan haven’t risen to compensate households for the steady rise in inflation. In fact, inflation-adjusted real wages fell by 2.4% in September from a year earlier, marking 18 months of straight decline.
Another reason for the decline is the decrease in net exports resulting from a 0.5% increase in exports accompanied by a 1% increase in imports. This alone subtracted 0.1% from the overall GDP figure.
The long-term weakness of the Japanese economy caused the IMF to forecast a 0.2% year-on-year decrease in the country’s nominal GDP. It also added that Germany will most likely surpass Japan’s economy and become the country with the third largest economy in the world by the end of 2023.
The country with the third largest economy in Asia after China and Japan is India, and it’s also one of the fastest growing economies of the world and set to continue on that path.
India recorded a GDP of $3385.09 billion in 2022, representing 1.46% of the world’s economy.
In the July-September quarter, the Indian economy likely grew by 6.7%. The economy grew 7.8% in the April-June quarter and 6.2% in the July-September quarter last year.
This growth is thanks to increased manufacturing and construction activities, and according to the Reserve Bank of India, the economic growth in India continues to be strong.
The bank also stated that India is better positioned to deal with any risks arising from geopolitical tensions, which are the main threat to global growth.
In its October update of its World Economic Outlook, the IMF updated its 2023 growth forecast for India, changing the 6.1% GDP growth forecast to 6.3%, and said that the country’s growth will remain strong in 2023 and 2024.
Moving on the fourth-largest economy in Asia, South Korea. This country recorded a GDP of $1665.25 billion in 2022, which makes up 0.72% of the global economy.
Since the beginning of the year, South Korea’s economy has grown for three consecutive quarters. The third quarter witnessed GDP growth of 0.6%, which was the same growth rate for the second quarter as well.
The central bank said the growth was mainly due to the increase in net exports as well as private spending, which are the two main drivers behind the country’s GDP.
Exports increased by 3.5% from the second quarter thanks to a recovery in shipments of semiconductors, machinery, and equipment. While imports increased by 2.6% mainly because imports of petroleum products increased.
Additionally, private spending increased by 0.3%, mostly driven by increased spending on food and housing.
Even though net exports and private spending have been rising, it remains unclear whether South Korea will be able to reach its 1.4% growth goal for 2023 due to global uncertainties.
These uncertainties include the geopolitical risks caused by the Israel-Hamas conflict and the continued interest rate hikes in the United States, according to Bank of Korea officials.
This country has the largest economy in Southeast Asia. It recorded a GDP of $1319.10 billion last year, representing 0.57% of the world’s economy.
In the third quarter of this year, Indonesia’s GDP growth slowed to 4.94%, falling short of the 5.17% increase in the second quarter, and the 5.05% growth forecast. This marked the weakest growth in two years.
Indonesia Statistics head, Amalia Adininggar Widyasari, blamed this economic slowdown on the declining exports that fell by 4.26% in the third quarter.
Exports in the first quarter witnessed growth of more than 10%, but fell by 2.75% in the second quarter on a yearly basis.
Widyasari explained that the decline in commodity prices globally has had a negative impact on the export value of several of Indonesia’s leading export commodities, including coal, iron, steel and crude palm oil.
For instance, the price of coal reached an all time high of $457.80/MT in 2022, and this was the same year when the Indonesian economy grew by 5.31%, the fastest pace in nine years.
But, since the beginning of 2023, coal prices have decreased by 69.50%. In addition to that, it’s expected to trade at $127.46/MT by the end of the year.
The 2022 spike in commodity prices can be explained by the start of the Russia-Ukraine war, which Indonesia managed to capitalize on. For its 2023 full year outlook, the Indonesian central bank has forecast a growth rate of 4.5% to 5.3%.
Despite the decrease in exports, Indonesia’s economy is still expected to grow with no problems in the future as domestic demand takes over from commodity exports as the driver of growth, according to the Asian Development Bank.
Private consumption makes up over half of Indonesia’s GDP, and it increased by 5.06% this quarter compared with the same period in 2022. In addition to that, the country is starting to see tourism levels that matched the pre-pandemic levels.
Even though Indonesia managed to capitalize on the Russia-Ukraine war, Pakistan wasn’t so lucky.
The war led to soaring oil prices and disruptions in trade of agricultural goods, threatening Pakistan which imported oil and wheat from Russia and Ukraine respectively.
This increased inflation in Pakistan, which resulted in a higher imports bill that contributed to a balance of payments crisis caused by excessive government spending that plagued the country for years.
Thus, Pakistan recorded its worst trade deficit of -1,013,894 million PKR in June of 2022.
A year after the war started, it’s estimated that it cost Pakistan 1% of its GDP, and contributed to its current inflation rate, which was 31.4% in September, by 9%.
As of October 2023, Pakistan recorded a trade deficit of 589,333 million PKR, after exports reached 760,287 million PKR and imports reached 1,349,620 million PKR.
In an attempt to save Pakistan’s economy, the IMF offered a $3 billion bailout to help the country meet its balance of payments needs and avoid defaulting on its debt. And after meeting most of the IMF’s targets, it was allowed access to $700 million in funds.
The IMF program has increased optimism among investors over Pakistan’s financial recovery, which led to a more than 50% return in its dollar bonds this year.
Additionally, the PKR has come back from the record low it hit in early September of 307 rupees against the U.S. dollar, to 275 rupees against the dollar in October.
However, many are still skeptical, including Goldman Sachs Group Inc. The group warned that the strength the PKR newly acquired will be short lived, especially since the Pakistani government is still dependent on outside creditors, and as the 2024 election approaches.
Last year, Malaysia’s GDP was worth $406.31 billion, which is around 0.17% of the global economy.
In the July-September quarter, Malaysia’s economy grew by 3.3% from the previous year, and even though it beat the forecast of 3%, the country is struggling with the same problems that Indonesia and other Southeast Asian economies have, declining exports.
Exports declined by 12% in this quarter, causing the country to focus more on expansion in domestic sectors and find ways to boost domestic demand.
This could be the right move, as Malaysia’s private consumption rose by 4.6% this quarter.
The Malaysian government also believes that this focus on domestic growth would provide support to the country’s currency, the ringgit, which fell to a 25-year low in October, dropping by 0.3% to 4.7635 per U.S. dollar. Marking the currency’s weakest performance since the 1997 Asian Financial Crisis.
However, the lack of external demand and a decline in exports caused the World Bank to lower its target for Malaysia’s growth rate to 3.9% from 4.3% for 2023, even though the Malaysian central bank forecast a growth rate between 4% and 5% for the full year.
What’s Next For Economies In Asia?
A strong Asian economy is important for the entire world and growth in the region contributes significantly to global growth. This year, Asia contributed about two-thirds of all global growth.
According to the IMF, growth in Asia and the Pacific is expected to grow by 4.6% in 2023, up from 3.9% in 2022.
However, growth is expected to slow to 4.2% in 2024 and 3.9% percent in the medium term, mainly because of the slowing growth and investment in the third quarter as the global economy slows and demand, internal and external, weakens. This is the case in some Southeast Asian countries, Japan and of course, China.
Eventually, the slowdown in China’s economic activities caused by its real estate crisis will spillover to the rest of Asia, especially to the countries that have close trade relations with China.
There are also concerns over the global environment as a whole, and how global uncertainties might impact Asia’s economies. Asia’s policymakers must work to stabilize tensions in the world and promote continued growth and stability.
The impacts of global geopolitical tensions can be avoided through strong regional integration and cooperation, so both economic and political reforms should be made in order to increase connectivity, lower trade barriers, and improve economic environments so they can attract more investment in the region through domestic or global sources.
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