Global Economic Outlook: Implications for Thailand
This morning I would like to share some views on the outlook of the global economy, what it means for East Asia, and what it means for Thailand. We see the global economy recovering; but we expect the recovery will continue to be slow.
The World Bank projects that the global economy will expand by 2.3 % in 2013 to 3.1% in 2014 and 3.4% in 2015. Along with global growth, we expect poverty around the world to decline. In 2010, just over 20 percent of people lived below $ 1.25 per day, in extreme poverty. The World Bank Group has set a global target for that share to fall to only 3 percent of people in extreme poverty by 2030.
Developing countries in East Asia will continue to grow faster than other regions in the world. This year, we expect East Asia to grow by 7.3%, driven largely by China, which we expect to grow by 7.5% . Thailand is projected to grow by 4% this year and 4.5% in 2014.
An important indicator of East Asia’s growth potential is that foreign direct investment (FDI) has surpassed pre-crisis levels. Prior to the Lehman Brothers crisis in 2009, East Asia had attracted around $200 billion of foreign investment per year. Today, foreign direct investment totals around $350 billion per year. China attracts around two-thirds of FDI flowing into the region.
Growing integration within the ASEAN Economic Community (AEC) will also support growth prospects in East Asia. The creation of a single market of almost 600 million people should ensure that Southeast Asia remains one of the most dynamic regions in the world. Of course there is still work to be done to implement the AEC agreements fully, especially on the services side. Still, the AEC will have a positive impact on growth. Just last week, when I met with a group of Thai business people, one shared with me his company’s plans for expansion within ASEAN beyond 2015.
East Asia faces external risks: volatile capital flows and exchange rates
Now, opportunities invariably come with risks. Capital flows to East Asia, indeed around the world, will remain volatile over the next couple of years. Capital flows into bond markets in East Asian developing countries were almost negligible prior to the Lehman Brothers crisis in 2009. They then rose rapidly to around $500 million per week by the end of 2012 – before dropping sharply in September, with outflows of more than $1 billion, triggered by events in the US: the “tapering” of Quantitative Easing announcement, the US government shutdown, and negotiations on the US public debt ceiling. And volatile capital flows have been reflected in the exchange rate movements. The Thai Baht first appreciated in real terms by 10% from April 2012 to April 2013, then depreciated by 5% from April to June this year.
East Asian countries also face home-grown risks. Household debt in Malaysia now stands at 80% of GDP while that in Thailand is at 70%. In China, debt of non-financial corporates has shot up to over 100% of GDP. This raises the vulnerability of those corporations (and banks that lend to them),
In addition to these short and medium term macroeconomic risks, several countries in East Asia increasingly face an important long term challenge: that of high and rising inequality. The available latest data show that income inequality as measured by the GINI coefficient in China is 47.8% and in the Philippines at 44.8%, and inequality has been rising there.