In an update of its flagship annual economic publication, titled Asian Development Outlook (ADO) 2017, ADB forecasts gross domestic product (GDP) growth of 5.9 percent in 2017 and 5.8 percent in 2018 for developing Asia.

“Growth prospects for developing Asia are looking up, bolstered by a revival in world trade and strong momentum in the PRC,” said ADB Chief Economist Yasuyuki Sawada. “Countries in developing Asia should take advantage of favorable short-term economic prospects to implement productivity-enhancing reforms, invest in badly needed infrastructure, and maintain sound macroeconomic management to help increase their long-term growth potential.”

Growth across developing Asia is buoyed by a revival in trade. The dollar value of the region’s exports surged by 11 percent in the first five months of 2017 over the same period in the previous year, and the value of its imports rose by 17 percent. The pickup follows two consecutive years of contracting export values caused by falling commodity prices and subdued external demand for manufactures. Excluding the PRC, the eight largest regional developing economies saw real manufacturing exports rebound.

Industrial economies' growth will reach 2 percent in 2017 and 2018, up by 0.1 percentage points from the April 2017 forecast. Consumers are keeping the world’s largest economy on track, as the United States’ expansion enters its ninth year. Growth in Japan surprised on the upside, spurred by a combination of improving consumer confidence and business sentiment. Expansive fiscal and monetary policies, easing political uncertainty, and robust market confidence are driving the recovery in the euro area, the report said.

Expansionary fiscal policy and unanticipated external demand helped the PRC exceed expectations in the first half of 2017. Output will increase 6.7 percent in 2017, an increase of 0.2 percentage points over the previous forecast. In 2018, growth will slow to 6.4 percent as anticipated reforms to trim industrial overcapacity and reduce financial risks kick in.

India continues its strong showing, although demonetization and implementation of the new goods and services tax regime have dented consumer spending and business investment. These short-term disruptions are expected to dissipate, allowing these initiatives to generate growth dividends over the medium term. India’s GDP growth is downgraded to 7 percent in FY2017, a 0.4 percentage point drop from the April forecast. In FY2018, the forecast is adjusted down to 7.4 percent from 7.6 percent.

Southeast Asia, meanwhile, is set for stronger growth as output accelerates steadily from 5 percent in 2017 to 5.1 percent in 2018, an upgrade from 4.8 percent and 5 percent in the previous forecast. Regional growth will be led by rising exports from Singapore and Malaysia, while the forecasts for regional leaders Indonesia and Thailand are maintained.

Growth forecasts for Central Asia are revised up this year and next amid stable oil prices, improving prospects for the Russian Federation, and rising remittances. The Pacific outlook, on the other hand, is retained for 2017 but adjusted slightly downward for 2018 as prospects for the largest Pacific economies - Papua New Guinea and Timor-Leste - are unchanged.

Risks to the region have become more balanced. Loose fiscal policy in the US and lower oil prices are potential upside risks to the region, while downside risks include tighter global liquidity, economic disruption from a geopolitical event, or a weather-related disaster. While the region remains better prepared for potential risks from the US unwinding its quantitative easing, high debt levels in Asia and the Pacific now pose a risk to financial stability. Because long-term interest rates in many Asian economies are closely linked to those in the US, policy makers need to strengthen their financial positions further and monitor debt levels and asset prices.

This article was first published by the Asian Development Bank