9 Apr, 2013

FREE Download: Asian Development Outlook 2013 – Asia’s Energy Challenge

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HONG KONG, CHINA – Strong consumption and fiscal spending in the People’s Republic of China (PRC) will fuel a rebound in growth in 2013, but government steps to cool pressures on the environment and to narrow income gaps will limit the upside in 2014, says a new Asian Development Bank (ADB) report (click here to download free).

“The country’s new leaders are focused on delivering sustainable, quality growth, which is a welcome change from the growth-at-all-costs approach of the past,” said ADB Chief Economist Changyong Rhee. “They will face a difficult task in managing risks and keeping the economy on an even keel, while shepherding through the complex reforms needed to deliver more inclusive growth.”

ADB’s flagship annual economic publication, Asian Development Outlook 2013 (ADO 2013), released today, says PRC―the world’s second largest economy―is set to post gross domestic product (GDP) growth of 8.2% in 2013, and 8.0% in 2014 after expanding 7.8% in 2012―the lowest rate in 13 years. The outlook assumes that the US economy will continue its slow recovery, conditions in the eurozone will not worsen, and the government will continue to boost public spending.

The tough external environment continued to weigh on exports and a slowdown in the real estate sector pressured the economy in 2012. At the same time, consumption, government spending, and fiscal incentives supported overall activity. The industrial sector―the largest component of GDP―saw a revival in the last three months of 2012, while consumer price inflation slowed measurably over the year to average 2.6% against 5.4% in 2011, aided by improved food supplies and better weather. Inflation is expected to remain muted in 2013.

Monetary policy in 2012 remained accommodative, with cuts in benchmark interest rates and banks’ reserve requirement ratio. The renminbi appreciated by more than 2% against the US dollar and more than 10% against the euro, supported by a doubling of the currency trading band and central bank steps to liberalize exchange and interest rates.

Robust fixed asset investment and private consumption, supported by large-scale public projects, and rising wages and pensions, will underpin the growth resurgence in 2013, AD0 2013 says. However, planned fiscal and financial reforms and more stringent environmental targets for business will see growth level off next year. Ongoing sluggishness in the global economy will remain a drag on exports, while further headwinds from Europe―the PRC’s largest trading partner―and the possibility of renewed inflationary pressures pose downside risks to the overall outlook.

ADO 2013 also highlights the PRC’s declining labor competitiveness, with surging wages and other costs outstripping labor productivity. This trend, exacerbated by the strong exchange rate, has already seen many low-cost and labor-intensive manufacturing jobs shift to cheaper locales, such as Southeast Asia. To arrest the slide in competitiveness, policymakers need to ensure minimum wages do not outpace productivity growth and firms are given incentives to provide on-the-job training and invest in new technologies. Measures are also needed to reform the hukou residential registration system to reduce migration costs and improve labor market flexibility.

Asia’s energy challenge

ADO 2013 features a special chapter on Asia’s energy challenges. The region needs an ample supply of clean, affordable energy to continue its rapid growth in the coming decades. To achieve energy security, developing Asia must actively contain its rising demand, aggressively explore new supply sources and technology, and progressively integrate regional energy markets and infrastructure.

Key Messages

ADO 2013 key messages include the following:

Developing Asia’s gross domestic product is forecast to expand by 6.6% in 2013 and 6.7% in 2014, following the slower 6.1% pace in 2012;

• Growth will rebound in the People’s Republic of China (PRC), from 7.8% in 2012 to 8.2% in 2013 and 8.0% in 2014, driven by strong consumption and investment;

• India’s growth has the potential to pick up from 5.0% in 2012 to 6.0% in 2013 and 6.5% in 2014, but the South Asian giant must create a more favorable environment for investment if it is to sustain this higher rate;

• Southeast Asia is benefiting from robust domestic demand and greater trade with its neighbors in the region;

• Continued sluggishness in the United States (US), euro area, and Japan suggests that developing Asia must continue to shift toward more domestic demand and trade with emerging markets;

• Inflation is expected to tick up from 3.7% in 2012 to 4.0% in 2013 and 4.2% in 2014. These pressures remain manageable for now, but will need to be monitored closely, especially as strong capital inflows raise the specter of potential asset market bubbles;

• Developing Asia’s favorable fiscal position cannot be taken for granted, as longer-term structural issues need to be addressed to ensure inclusive growth in the future;

• Political risks are emerging as the main threats to the region’s continued robust growth over the forecast horizon;

• With its rising prominence in the global economy, developing Asia has become a major player in commodity markets;

• Developing Asia’s energy needs will expand in tandem with its growing economic influence, but its own endowment is insufficient;

• Expanding renewable energy sources will not be enough to meet future demand. Consequently, Asia needs to invest in making conventional power cleaner and more efficient; and

• Asia must aspire to the degree of regional cooperation and integration in energy by 2030 that currently prevails in Europe.

Background

The annual ADO provides a comprehensive analysis of economic performance for the past year and offers forecasts for the next 2 years for the 45 economies in Asia and the Pacific that make up developing Asia.