China: Despite Political Worries, Asia Still World’s Economic Powerhouse

Asia is set to remain the world’s biggest contributor to world increase in 2017, with activity picking up in two-thirds of the region’s developing economies, according to the Asian Development Bank (ADB). The increase outlook has reassured investors amid rising geopolitical tensions in the world’s most economically dynamic region.

In its “Asian Development Outlook 2017,” the Philippines-based organization predicted gross domestic product (GDP) increase for Asia and the Pacific of 5.7 % this year and next, a slight drop from last year’s 5.8 %, despite stronger external request, improved commodity prices, and domestic reforms.

The uptick will see the region remain the major single contributor to world increase in 2017, accounting for 60 % of world activity, the ADB said.

“Developing Asia continues to drive the world economy even as the region adjusts to a additional consumption-driven economy in [China] and looming world risks,” the ADB’s chief economist, Yasuyuki Sawada, said.

“While uncertain policy changes in advanced economies do pose a risk to the outlook, we feel that most economies are well positioned to weather potential short-term shocks.”

The ADB said industrial economies were picking up speed, with the United States, Eurozone, and Japan expected to post a collective expansion of 1.9 % in 2017 and 2018. The United States, the world’s biggest economy, is benefiting from rising business and consumer confidence, while the Eurozone continues to improve, despite the uncertainties posed by Brexit.

Japan, the world’s third-major economy, “remains dependent on its ability to maintain export increase to continue its expansion,” the ADB said.

Meanwhile, increase is expected to moderate in China, Asia’s biggest economy, as Beijing implements measures to transition toward a additional consumption-driven model. The days of double-digit GDP increase are a distant memory, with output expected to slow to 6.5 % this year and 6.2 % in 2018, down from 6.7 % last year and representing the slowest pace of increase in 26 years.

“Efforts to maintain financial and fiscal stability will continue to be a modest drag on increase going forward, but continued structural reform will help to maintain increase in the government’s target range,” the ADB said.

Incredible India

On a brighter note, South Asia will remain the fastest-growing subregion, with GDP increase rising from 7 % this year to 7.2 % in 2018, led by its major economy, India. The South Asian powerhouse is seen expanding by 7.4 % in fiscal 2017 and 7.6 % the following fiscal year, both improvements on the 7.1 % registered last fiscal year.

“The impact of the demonetization of high-price banknotes is dissipating as the replacement banknotes enter circulation. Stronger consumption and fiscal reforms are as well expected to improve business confidence and investment prospects,” the ADB said.

Southeast Asia is as well expected to accelerate further, with the region seen growing by 4.8 % this year and 5 % in 2018, up from the 4.7 % posted in 2016. Improved world food and fuel prices are expected to aid Indonesia, Malaysia, and Vietnam, the ADB said, factors that will as well benefit Central Asia and the Pacific.

However, the ADB pointed to risks to its rosier outlook, inclunding higher U.S. interest rates and rising household deficit in some Asian economies. Economies with flexible exchange rates could experience sharper depreciations and higher imported inflation should capital outflows increase to developed economies, while authorities may need to intervene to cool housing bubbles in some economies, it said.

Investors Return

Investors appear to have shrugged off the risk of capital flight from Asia’s emerging economies, judging by the new data.

The benchmark MSCI Emerging Markets stock index hit a near two-year high in March on the back of gains in China, India, and South Korea. Some $30 billion flowed into emerging market assets last month, the biggest inflows since January 2015, according to the Institute of International Finance.

Despite the gains, emerging market stocks are still trading at a 26 % discount to those in developed markets, according to UBS Wealth Management. Bond yields as well remain well above those prevailing in developed markets such as the United States, Japan, and Europe.

“Emerging markets are one of the very few places in the world where valuations still look cheap,” Chiron Investment Management’s Ryan Caldwell told the Wall Street Journal.

“There’s not a lot of price left in developed markets.”

According to the U.S. financial daily, the rally in emerging markets reflects expectations that the U.S. Federal Reserve will raise interest rates only gradually in 2017. Beijing’s stimulus efforts and improved commodity prices have as well helped sentiment, while fears over a protectionist Trump government have eased.

However, it as well noted reasons for caution, inclunding the fact that the emerging markets index fell for three straight years before rebounding in 2016, while commodity prices are still subject to the economic health of China, the world’s biggest resource consumer.

Nevertheless, even Asia’s developed economies appear to be showing healthier signs. The new Bank of Japan survey showed Japanese households to be the majority upbeat since 1998, helped by the lowest jobless rate in 22 years of just 2.8 %.

The survey found the highest impression of livelihoods since 1998, while sentiment toward gain was the highest on record dating to 2006 and confidence regarding employment was the second-highest since 11 years prior.

Asia’s outlook may as well be influenced by political issues, from North Korean missile strikes to relations between the world’s two biggest economies, the United States and China.

In a keenly watched initial conference Thursday between U.S. President Donald Trump and Chinese President Xi Jinping in Florida, Trump reportedly joked that “we’ve had a long discussion by presently, and so far I have gotten nothing, absolutely nothing. But we have developed a friendship… and I think long term we are going to have a very, very great relationship.”

With fears over a U.S.-China trade war apparently subsiding, and worries over the U.S. Fed’s interest rate hikes easing, Asia’s outlook in 2017 may be far better than a lot of feared at the start of the Year of the Rooster.