The economies of developing countries in Asia and the Pacific are expected to continue to grow in 2024 and 2025, according to ADB’s July 2024 Asian Development Outlook. Inflation is expected to continue to moderate as well, but risks remain. 

An escalation in Russia’s war in Ukraine and the wider conflict in the Middle East could impair supply chains and lead to rises in oil prices. Other risks include fragility in the property sector of the People’s Republic of China, and adverse weather-related events. Meanwhile, political uncertainty around the election outcome in the United States clouds the outlook.

Attacks on commercial cargo vessels due to the conflict in the Red Sea since the end of 2023, particularly on Europe-Asia routes, led to a spike in shipping costs. These additional costs could also potentially add to inflationary pressures. 

Despite longer shipping times, acute shortages have not yet materialized due to ample stocks and subdued demand. However, this could change if conditions worsen. 

In mid-April of 2024, events related to the conflict in the Middle East led to volatility in oil prices. Although a combination of offsetting factors has kept crude oil prices below $100/barrel, any escalation of the conflict to major oil producers could spike energy prices. 

On US monetary policy, while the Federal Reserve is still expected to lower interest rates during 2024, uncertainty remains. An unexpected increase in US inflation in March resulted in interest rates staying higher for longer, although prices increased more slowly in subsequent months. 

 ADB analysis indicates that if interest rates remain unchanged throughout 2024, it will lead to a depreciation in Asian currencies. Currencies have already depreciated across several economies in the region. 

While currency depreciation would lead to some imported inflation, it would also boost export competitiveness and support growth. The magnitudes of both effects, however, would be small. 

For example, around 0.15 percentage points would be added to inflation in high-income technology exporters and other developing Asian economies relative to the baseline in 2024 and 2025. The effect would subside by 2026. The impact on growth in the region would be less than the impact on inflation.  
 

Another risk relates to property market stress in the People’s Republic of China. A worse-than-expected deterioration in the property market could dampen consumer sentiment and domestic demand. Property-related industries, such as construction and real estate, would suffer, lowering overall economic activity.

 Lower consumption and investment could also reduce global trade flows, harming export-oriented economies.

The fallout might not be as widespread however. With an appropriate policy response by the government, spillovers could be contained. A property market decline would primarily affect the People’s Republic of China. However, if the property market slump drags on longer than anticipated, this could be a problem for the growth outlook. This could trigger a rise in global risk aversion and capital flight, with negative repercussions for other economies in Asia and the Pacific as financial conditions tighten.

Worse-than-expected weather conditions are also a risk factor, potentially amplifying commodity prices and threatening food security. There may be some upside in the latter part of this year, however, with La Niña expected to commence. Cooler temperatures and more rainfall in drier areas such as Southeast Asia will help crop production. 

Policymakers need to remain vigilant in the face of these risks. Fostering resilience to external shocks will be essential, including through enhancing trade, cross-border investment, and commodity supply networks. This can help to mitigate the effects of impaired global supply chains, which could be the result of elevated geopolitical tensions or worsening weather conditions. 

Policymakers in the People’s Republic of China have already implemented a range of policies aimed at stabilizing the property market, including support for affordable housing, easing access to finance, and continued accommodative monetary policy and fiscal stimulus. And there’s always room for supplementary and more targeted policy measures.

 Central banks in Asia and the Pacific should continue to exercise caution given US monetary policy uncertainty. Although interest rate hiking cycles have ended in many economies in the region, monetary policy stances remain tight as central banks continue to address domestic price pressures. Governments also need to remain alert. Prudent fiscal management will be important, particularly given constrained fiscal space and elevated interest rates.