Economic growth in East Asia and Pacific (EAP) reached 5.1% in 2023, higher than other emerging markets and developing economies, despite high inflation, high interest rates, and growing trade tensions (figure 1). Growth remains below pre-pandemic levels, however. Stronger global trade and easing financial conditions are expected to support economies in the region, while increasing debt, protectionism, and policy uncertainty could dampen growth. The region is projected to sustain growth in the face of these global headwinds, but is expected to ease to 4.5% in 2024, according to Firm Foundations of Growth, the April 2024 East Asia and Pacific Economic Update published March 31.
Recently issued projections for 2024 show differences in growth within the region. Growth in developing EAP excluding China is forecast to pick up to 4.6% in 2024, close to pre-pandemic growth rates. Whereas in China, growth was expected to moderate to 4.5%, down from 5.2% in 2023, because of high debt, a weak property sector, and longer-term challenges, such as aging and trade frictions. Output per capita is currently above pre-pandemic levels in major economies in East Asia but remains below pre-pandemic levels in many Pacific Island economies.
External Factors Shaping Regional Growth
Three external developments will shape economic performance in the region: recovering global trade, increasing trade distortions, and tight financial conditions. Global trade is recovering, even though global GDP growth has slowed. Trade in goods and services, which was virtually stagnant in 2023, is projected to grow 2.3% in 2024. Recent years have seen a dramatic rise in the use of potentially trade-distortive industrial policies, including local content requirements, which could hurt exports by developing EAP (figure 2). Inflation has declined in major economies, but core inflation in the United States and the European Union remains high and labor markets tight, suggesting that global interest rates will remain higher than they were before the pandemic for several years.
Domestic Factors Shaping Regional Growth
Debt, constrained fiscal and monetary policy, and increased policy uncertainty also affect growth prospects. Both private and public debt have increased significantly in most of the region’s economies. General government debt as a share of GDP is now 20 percentage points higher in the Philippines and Thailand than it was before the pandemic. Corporate debt in China and Vietnam has increased by more than 40 percentage points of GDP since 2010. Macroeconomic policy has retreated in most economies from the expansionary stance adopted in 2020–22, and policy interest rates have been raised to address the threat of inflation (figure 3). Economic policy uncertainty has also increased, making investors reluctant to invest in new projects or expand their existing businesses.
Micro Foundations of Regional Growth
EAP’s current macroeconomic challenges risk obscuring the microeconomic foundations of longer-term growth. This special focus of the Economic Update presents a foretaste of a report on this topic.
Over the past decade, growth was driven primarily by investment rather than by increased productivity of firms (figure 4). In the long run, total factor productivity - the efficiency with which inputs are transformed into outputs - is the key driver of growth. It needs to rise to generate sustainable long-term growth.
Firms are the foundations of productivity growth. Private investment in the region is weak, and productivity is declining. Some of the less productive firms are beginning to catch up with the more productive ones, but the leading firms in the region are not taking full advantage of new technologies and are falling behind global leaders in terms of productivity growth. Between 2005 and 2015, for example, the productivity of the world’s top 5% of digital-intensive manufacturing sectors, such as electronics, increased 2.5 times faster than it did in the top firms in Indonesia, Malaysia, the Philippines, and Viet Nam. As a result, the productivity gap between the leading firms in EAP and the global leaders widened, especially in digital-intensive sectors (figure 5).
EAP lacks sufficient incentives and capacity. Explicit protection in services and implicit protection in goods dilutes incentives for firms to compete and innovate, and a dearth of adequate of skills undermines the capacity to manage and innovate. The most productive firms in the region identify barriers to trade, lack of skills, and weakness in the transport and telecommunications infrastructure as key constraints. Bold policy action to unleash competition, improve infrastructure, and reform education could revitalize the region’s economy.
Download the East Asia and Pacific Economic Update to read more about the region’s economic outlook, and be on the lookout for the upcoming report on firms and productivity in the region.
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