Asia Pacific outlook: A slow road ahead

We hope for policy progress under Modi, but will not alter the forecast until we see some results

May 28, 2014 9:14 IST | India Infoline News Service

First quarter GDP figures show the Asia-Pacific economy is growing, on average, a little faster than expected. But with the global economy still in post-crisis slow motion, we have not adjusted our 2014 forecasts as we expect growth to remain soft through the rest of the year. Asia’s economies will not be growing at potential until 2015.

GDP growth in China and Japan surprised to the upside in the opening quarter, causing the region to outperform expectations, as the two countries make up two-thirds of the regional economy. Yet growth rates in both countries were distorted by domestic policy, while the region's usual drivers, particularly exports, have lately begun to waver.

Modi’s opportunity

In India, a resounding election win gave Narendra Modi and his Bharatiya Janata party a mandate for change. Business leaders and investors view Modi favourably—the Sensex jumped 6% as the election results were released—given his no-nonsense approach and success in boosting the economy of Gujarat, where he was chief minister.

We hope for policy progress under Modi, but will not alter the forecast until we see some results. Modi has suggested, predictably, that he will be less beholden than his predecessor to vested interests, but he may be constrained by India’s institutional weaknesses, including an inefficient bureaucracy and an obstinate national parliament. Modi's Hindu-nationalist leanings also constitute a risk.

India was already in line for a cyclical upturn, as downside risks seen in 2013, mainly on the fiscal and external account, have diminished. But we will not raise the forecast for India without concrete evidence that Modi is pursuing substantive, pro-business reforms. The economy is not expected to reach its potential growth rate of 7% per year until 2017. 

The author is Senior Economist, Moody's Analytics

(The above is an extract from a detailed report)

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