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| Erik Lueth, Senior Asia Economist, RBS |
Asia’s economy is shifting down a gear. The region’s impressive growth rate inevitably had to ease and it seems the slowdown has begun. An RBS study of long-term trends by RBS Senior Asia Economist Erik Lueth suggests regional growth peaked at an average annual 8.4 per cent in the 2000s and will decelerate to 4.3 per cent within 40 years.
Source: RBS
*Asian Tigers include Taiwan, Korea and Singapore
This is no ‘Asian demise’. The global financial crisis had little discernable impact on Asia’s potential growth rate and its economic influence will continue to increase in the coming decades.
Asia’s slowdown has more to do with the inability of any economy to continue reaping the same benefit from each additional unit of capital and improvements in education, technology and productivity.
One drag on economic expansion will be the slowing increase in the workforce. The trend is accelerating and by the 2020s the absolute number of workers will start to shrink in China, Singapore, Taiwan, South Korea and Thailand.
However capital accumulation is one driver that will remain intact. Economies where per capita income is at 70 per cent of US levels can expect capital to make an increasingly small contribution to growth.
So it is important to note that since GDP per head in China, India and three other countries is equivalent to less than 20 per cent of US levels, emerging Asia still has a long way to go - and grow.
In China, a shrinking population will begin to shave off some growth from the 2020s but economic expansion could remain in the high single-digit range through 2030.
India’s growth should remain above 7 per cent over the forecast horizon, thanks in part to a growing population. With game-changing reforms, productivity and overall growth could be higher.
Indonesia is facing headwinds in maintaining growth above 6 per cent. Its demographic dividend will be exhausted by 2030 and capital accumulation needs to recover from 2000-10 levels.
A major reform effort is again an important upside to the forecast.
Within The Asian Tigers*, Korean and Taiwanese growth is likely to fall markedly after 2020 (to around 1.5 per cent). Technological progress, human capital formation and labour growth will all hit natural barriers.
For Thailand and Malaysia, the key challenge will be to overcome weak capital accumulation. If they succeed, growth could be maintained at 5-6 per cent over the forecast horizon.
The Philippines has a poor track record when it comes to capital accumulation and growth could fall to 4 per cent by mid century despite its growing population. Again, the scope for productivity reforms here is substantial.
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