Noticeable effect

The Asian Development Bank (ADB) has cut its 2015 growth forecast for Developing Asia to 6.1 percent from 6.3 percent amidst slower-than-expected economic activity in the United States and the People's Republic of China (PRC), according to a new report.

In a supplement to its annual Asian Development Outlook (ADO) 2015 published last March, the Manila-based institution also projected 2016 gross domestic product (GDP) growth for the region to come in at 6.2 percent, down from 6.3 percent forecast previously.

In a DW interview, Shang-Jin Wei, the bank's chief economist, talks about how slower growth in China is likely to have a noticeable effect on the rest of Asia and the world economy, and why India is unlikely to be affected by this.

DW: What are the ADB's current growth forecasts for China for this and next year?

Shang-Jin Wei: We project China's growth to be 7.0 percent this year and 6.8 percent next year, 0.2 percentage points lower than our forecasts in March.

What are the main factors contributing to the slowdown of the Chinese economy?

Weak external demand from high income countries, a shrinking working age population and rising wages have all contributed to a slackening of China's economic expansion.

A clear sign of growth slowdown is a relatively low investment growth as real estate investment was held back by a large inventory overhang and manufacturing investment was hit by weaker sales growth and excess capacity in some industries.

Going forward, reforms that improve resource allocation, especially reducing the dominance of state-owned firms in the economy and allowing high-productivity private sector firms to obtain necessary funds more easily, are becoming increasingly more important as they are needed to lift overall productivity and growth.

How is China's moderating growth likely to have an impact on the rest of Asia?

Growth deceleration in China matters to the rest of the region. Given its size and close links with its neighbors through regional and global value chains, as well as through its outbound foreign direct investment, slower growth in China is likely to have a noticeable effect on the rest of Asia.

However, the impact will be felt in some parts of developing Asia more than in others. East and Southeast Asia, for instance, have extensive economic links with China, while South Asia's links are much more limited. Therefore, East and Southeast Asia are likely to be hit harder than others. The magnitude of the effect will depend on the depth and speed of China's slowdown and a given country's economic links with China.

Since part of the reason for a slowdown in China is the rise in its wage rate, countries from Bangladesh to Myanmar are working to increase their shares in world markets in industries that China used to dominate. The fact that China is gradually exiting many labor-intensive sectors represents opportunities for them, especially if they can upgrade their infrastructure and make their overall investment climate friendlier to domestic and international investors.

What other factors are slowing down growth in areas such as Southeast Asia?

In Indonesia, the largest economy in Southeast Asia and the third largest developing economy in Asia, we revised down our 2015 growth forecasts from 5.5percent to 5.0percent. There are several reasons. We see delays in government executing its budget; we see lower tax returns than the target; and we see weaker demand from many major trading partners. On top of these factors, the benefits to investment from economic reforms also take time to realize.

In Singapore, the slowdown reflected contraction in manufacturing as biomedical production and transport engineering suffered output declines. Growth also moderated in services, notably wholesale and retail trade and business services. Sector specific factors such as low oil prices could weigh down growth in some sectors, and tourism-related industries may face headwinds from lackluster visitor arrivals for the rest of the year. Consequently, the GDP growth forecast for 2015 is revised down from 3.0 percent to 2.8 percent.

For Thailand, continued deterioration in consumer confidence, a contraction of merchandise exports in the first five months of the year, and less favorable agricultural production due to drought and low commodity prices underpinned our downward revision of this year's GDP growth forecast to 3.2percent from 3.6percent.

To which extent have lower global commodity prices and the recession in the Russian Federation dampened economic performance in Central Asia?

Growth in the region's energy exporters - Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan - is dragged down by low oil and gas prices and consequently lower export revenues. Meanwhile, the energy importers - Armenia, Georgia, the Kyrgyz Republic, and Tajikistan - face, along with Uzbekistan, weaker domestic consumption on account of lower remittances due to the recession in the Russian Federation. Nevertheless, other growth factors are mixed.

Agriculture, mining, services, and construction associated with public investment programs performed well in the first quarter of 2015, offsetting the effects of weak external demand. We are thus maintaining our forecast for Central Asia this year at 3.5percent.

Why isn't India affected by the slowdown and what role do you expect it to play in the driving regional economic growth?

We are maintaining our forecast of 7.8percent for India in 2015. Given that India is less reliant on external demand, the same weak growth in advanced countries does not hit India as hard as it does China. Because Indian firms are less integrated with firms in China and do not sell much to the world market including in China, a slowdown in China also has limited effect on India.

A healthy monsoon extending to early July has seen an increase in summer crop sowing and is expected to boost growth in agriculture. The number of new investment projects announced has continued to increase for the fourth consecutive quarter during the quarter ending June 2015, indicating brighter investment sentiment. Improvements in indirect tax collection in the first quarter of FY2015 similarly point to some recovery in manufacturing.

On the other hand, risks to growth prospects could emerge from further delay in passing some legislation crucial to easing land acquisition for industry and to implementing a uniform goods and services tax.

Because India is the second largest developing economy in Asia and about 30 percent of the Chinese economy in terms of GDP in constant dollars, if it is able to deliver a high growth, it can have a noticeable impact on overall growth in Asia.

What impact is the region's slower economic performance, particularly in relation to China, likely to have on the world economy?

In recent years, developing Asia as a whole has been contributing about 60 percent of global GDP growth. China alone contributes about 30 percent, compared to the US' 10 percent. Even in a mechanical way, the impact of an Asian slowdown could be visible for world growth. A reduction of Chinese growth by 0.4 pct pts (from 7.4 in 2014 to 7.0 in 2015) would lead to a downward revision of the world growth by 0.4 x 1/4 or about 0.1 percentage points. This is quite significant for a single country.

In addition, Asian economies, including China, Japan, Korea, Singapore, Malaysia, and Thailand, are integrated with the economies in Europe and North America via various global value chains. For example, research by ADB economists and others shows that China has been a leading source of foreign car parts and components for auto companies in Germany and the United States. The increasing linkage through global value chains means that the success of one of these economies often helps the success of the others.

Shang-Jin Wei is chief economist at the Manila-based Asian Development Bank (ADB).