The World Bank has reduced growth forecasts for East Asia from 7.8% to 7.1% amid a slow down in China and the prospect of the United States eventually cutting back on its tapering policies. While this downgrade in outlook might seem minor, any slowdown in economic growth could have dramatic effects on the region.
China’s economy has slowed amid stagnating demand from traditional export markets in Europe and North America. At the same time, China has been trying to shift from an export oriented economy, to a consumer demand driven economy. China has made progress, its middle class is growing, and the country is making headway in developing more advanced industries. The country, however, is a long way from replacing its reliance on exports with local consumer demand.
This could change as the Chinese government continues to pour money into advanced R&D and improving its university system. At the same time, China is also upgrading its military and local infrastructure. These moves could help create higher paying jobs in the long run, which will increase discretionary income and thus consumer spending. In the short run, however, China will not be able to drive Asia’s growth on its own.
Fed’s quantitative easing program
The biggest concern at the moment, however, is probably the eventual end of the United States’ quantitative easing program. The United States now finds itself in a tricky position as leaders across the emerging world are urging the country to continue its quantitative easing program, or to at least end it slowly. The QE program was meant to inject liquidity into the market and encourage lending and investment. Some also believe that it was meant to make the dollar cheaper and to boost the prices of imports, which in theory could help spur local growth.
Asian countries, however, have been relying on Western FDI that was drummed up due to the QE program. The increased investments have lead to property booms and low unemployment as foreign companies have moved in and expanded operations across the region. Much of the growth has been focused in more advanced sectors, such as IT. If the United States cuts its quantitative easing, however, FDI inflows will almost certainly drop.
Slow down in economic growth
While this slow down in economic growth may seem minor to many Western observers, it could have dramatic potential impacts across the region. First, there are important differences between GDP grow rates between advanced nations and developing nations. For developing nations, parts of the economy that are “formalized” through taxation and oversight are accounted for in GDP growth, even if the actual activities taking place are the same.
For example, if small farmers are suddenly taxed and their production is now accounted for, that will be added to the GDP, even if the farmers are not growing any more crops than before. This means that a growth rate a growth rate of 8% for a developing country can be dramatically marked up in terms of real economic growth.
Asia’s governments are coming under fire
Also, across Asia governments are coming under fire from citizens who are demanding more voice in the government, more freedoms, a higher quality of life, and numerous other things. Governments have been able to assuage pressure, largely by ensuring strong economic growth and improving economic circumstances. If growth slows, however, citizens may grow more restless. Such developments were seen in Malaysia and Singapore in the aftermath of the 2009 financial crisis. China has also been seeing an increase in protests and an increasingly vocal population.
So while a decline from 7.8% to 7.1% may seem minor, for countries in Asia, the results could be worse than expected. And with European and North American demand likely to remain stagnant in the years to come, Asian countries may have to find new engines of growth as traditional export markets dry up. These challenges could add to increasing instability in a region long regarded for stable governance and economic growth.