ASIAN DEVELOPMENT OUTLOOK

J U LY 2 0 2 3

ROBUST GROWTH WITH

HIGHLIGHTS
MODERATING INFLATION
„ Exports from developing Asia
weakened in the first quarter of 2023
as global demand slowed. However,
consumption and investment are
forecast to boost aggregate regional Recent Developments
growth to 4.8% in 2023, as earlier
Economic activity in major advanced economies remained weak as monetary
forecast, with the projection for 2024
tightening took hold. Although gross domestic product (GDP) growth in the United
revised down only marginally to 4.7%.
States (US) slowed from 2022, it surprised on the upside at 1.3% in the first quarter
„ Given balancing developments, growth
(Q1) of 2023 (box). While the labor market remained tight, inflation declined to 3.0%
forecasts for East Asia are maintained
in June. The euro area contracted for a second consecutive quarter and thus entered
at 4.6% in 2023 and at 4.2% in 2024,
a technical recession, with leading economic activity indicators suggesting continued
for South Asia at 5.5% in 2023 and 6.1%
weakness. In Japan, revived inbound tourism and services boosted growth to 2.7%.
in 2024, and for the Pacific at 3.3% in
Strong services were the main driver of recovery in the People’s Republic of China
2023 and 2.8% in 2024.
(PRC), where GDP growth rebounded to 4.5% but consumer price pressures remained
„ Southeast Asia’s growth prospects are
benign. Oil prices declined from their peak in April as global activity weakened from last
downgraded slightly from 4.7% to 4.6%
year.
in 2023 and from 5.0% to 4.9% in 2024,
reflecting weaker global demand for
Exports and industrial activity in developing Asia continue to decelerate as
manufactured exports.
global demand slows (Figure 1). Year on year in the year to date, exports from key
„ Growth forecasts for the Caucasus and
technology exporters declined sharply, while weaker demand also held down exports
Central Asia are adjusted down from
from the rest of the region. Manufacturing purchasing managers’ indexes (PMIs) across
4.4% to 4.3% in 2023 and from 4.6%
major regional economies show divergence but also general weakness in export-
to 4.4% in 2024 after oil production in
oriented economies (Table 1). PMIs remain below 50 in the Republic of Korea (ROK),
Azerbaijan fell more than expected.
Singapore, and Taipei,China, indicating contraction month on month, especially
„ Headline inflation eased toward pre-
in exporters of semiconductors, electronics, and other high technology products,
pandemic averages as fuel and food
but readings indicate high growth in India, the Philippines, and Thailand buoyed by
prices waned.
strong domestic demand. In the PRC, exports of motor vehicles, lithium batteries,
„ With lower inflation in developing
and solar cells improved in the first half of this year, but exports of furniture, textiles,
Asia and more moderate monetary
tightening in the United States, most
central banks in the region have
kept policy rates steady this year, The Asian Development Bank Regional Economic Outlook Task Force led the preparation of a
with signs emerging of a shift toward revised outlook for this Asian Development Outlook. The task force is chaired by the Economic
easier money. Research and Development Impact Department and includes representatives of the Central and
„ Interest rates in the United States and West Asia Department, East Asia Department, Pacific Department, South Asia Department, and
Southeast Asia Department.
other advanced economies are likely to
shape the regional growth outlook, with
upside and downside risks in balance.
2 ASIAN DEVELOPMENT OUTLOOK JULY 2023

Figure 1 Exports from Developing Asia and electronics and components faltered. Tourism continues
After a spike as suppliers filled order backlogs following COVID-19 and supply to recover, with arrivals reaching pre-pandemic levels in many
chain disruption, exports from the People’s Republic of China weakened again. economies.
People’s Republic of China
Developing Asia excluding the People’s Republic of China Headline inflation eased toward pre-pandemic averages as
Key technology exportersa
supply-side pressures waned and monetary tightening took
Index, 2019 = 100 hold. It has trended down in all subregions this year along with
180 fuel and food prices. Core inflation is more mixed. It remained
elevated in many East and Southeast Asian economies because
160
of higher input prices and as revived leisure activities pushed up
140 prices for services, but it started to trend down in the Caucasus
and Central Asia, partly reflecting base effects there.
120
Most central banks have kept policy rates steady this year,
100
but signs have emerged of a shift toward easing. Three-
quarters of monetary policy decisions made since April in
80
developing Asia have left policy rates unchanged. Central banks
60 in Armenia, Georgia, the PRC, and Sri Lanka have actually cut
Jul Jan Jul Jan Jul Jan Jul Jan Jul
policy rates.
2019 2020 2021 2022 2023
COVID-19 = coronavirus disease.
a
the Republic of Korea, Singapore; and Taipei,China. With inflation easing in the region and the US Federal
Sources: CEIC Data Company; CPB World Trade Monitor. Reserve moderating its monetary tightening, financial
conditions have improved since March. After temporarily
rising in March, the volatility index of the Chicago Board
Options Exchange has since steadily declined, tracking market
Table 1 S
 easonally Adjusted Manufacturing Purchasing
Managers’ Indexes normalization and reduced uncertainty, especially for banks. As
market sentiment improved, value-weighted return on equities
These leading indicators continued to diverge in the region as manufacturing
increased by 6.4% from 18 March to 30 June (Figure 2). In
remained weak in key technology exporters.
the same period, the weighted average regional risk premium
2023 narrowed marginally, as measured by J. P. Morgan Emerging
Q1 Q2 Markets Bond Index Global stripped spreads.
Economy Jan Feb Mar Apr May Jun
India 55.4 55.3 56.4 57.2 58.7 57.8 Despite an upgrade for US growth this year, the global
Thailand 54.5 54.8 53.1 60.4 58.2 53.2 outlook for next year is dimmed by lagged effects from
interest rate hikes. The 2023 growth forecast for the US is
Indonesia 51.3 51.2 51.9 52.7 50.3 52.5
revised up from Asian Development Outlook, April 2023 (ADO
Philippines 53.5 52.7 52.5 51.4 52.2 50.9
April 2023) following expansion in Q1 that surprised on the
People’s Republic of China 49.2 51.6 50.0 49.5 50.9 50.5 upside. However, US growth is now projected to slow in 2024.
Singapore 49.8 50.0 49.9 49.7 49.5 49.7 The forecast for growth acceleration next year in the euro area
Republic of Korea 48.5 48.5 47.6 48.1 48.4 47.8 is similarly downgraded because of interest rate hikes. Japan’s
Malaysia 46.5 48.4 48.8 48.8 47.8 47.7 growth forecasts for 2023 and 2024 are revised down in line with
Viet Nam 47.4 51.2 47.7 46.7 45.3 46.2 weakening export demand and capital investment.
Taipei,China 44.3 49.0 48.6 47.1 44.3 44.8
As domestic demand remains robust, the regional growth
Note:Pink to red indicates worsening (<50) and white to green indicates
improvement (>50). The series for Singapore is not seasonally adjusted. Key forecast is maintained at 4.8% for 2023 and revised down
technology exporters include the Republic of Korea; Singapore; and Taipei,China. only marginally to 4.7% for 2024 (Table 2). Aggregate GDP
Source: CEIC Data Company.
growth in the region’s 10 largest economies accelerated from
2.1% year on year in the second half of 2022 to 3.7% in Q1
2023, driven by a strong recovery in services after the PRC
lifted coronavirus disease (COVID-19) restrictions. Subregional
growth forecasts for this year and next are little changed, but with
a notable downward revision for the Caucasus and Central Asia in
 ASIAN DEVELOPMENT OUTLOOK JULY 2023 3

Figure 2 Equity Market Performance

Equity markets recovered from losses inflicted in March by poor investor sentiment during banking turmoil in the United States and Europe.

Developing Asia
S&P 500 Index CBOE Volatility Index

Index, 3 January 2022 = 100 30-day moving average

110 34
November FOMC meeting SVB stock crashes

100 29

90 24

80 19

70 14
Jan Apr Jul Oct Jan Apr
2022 2023
CBOE = Chicago Board Options Exchange, FOMC = Federal Open Market Committee, SVB = Silicon Valley Bank.
Source: Bloomberg.

Table 2 GDP Growth Rate and Inflation, %

GDP Growth Inflation
2022 2023 2024 2022 2023 2024
April July April July April July April July
Developing Asia 4.3 4.8 4.8 4.8 4.7 4.4 4.2 3.6 3.3 3.4
Developing Asia excluding the PRC 5.5 4.6 4.5 5.1 5.0 6.7 6.2 6.2 4.4 4.8

Caucasus and Central Asia 5.1 4.4 4.3 4.6 4.4 12.9 10.3 10.6 7.5 7.8
Kazakhstan 3.3 3.7 3.9 4.1 4.1 15.0 11.8 12.4 6.4 7.2
East Asia 2.8 4.6 4.6 4.2 4.2 2.3 2.3 1.3 2.0 2.1
Hong Kong, China -3.5 3.6 4.7 3.7 3.3 1.9 2.3 2.5 2.1 2.1
People’s Republic of China 3.0 5.0 5.0 4.5 4.5 2.0 2.2 1.0 2.0 2.0
Republic of Korea 2.6 1.5 1.3 2.2 2.2 5.1 3.2 3.5 2.0 2.5
Taipei,China 2.4 2.0 1.5 2.6 2.7 2.9 2.0 2.0 2.0 2.0
South Asia 6.7 5.5 5.5 6.1 6.1 8.2 8.1 8.1 5.8 6.4
India 7.2 6.4 6.4 6.7 6.7 6.7 5.0 4.9 4.5 4.5
Southeast Asia 5.6 4.7 4.6 5.0 4.9 5.1 4.4 4.3 3.3 3.2
Indonesia 5.3 4.8 4.8 5.0 5.0 4.2 4.2 3.8 3.0 3.0
Malaysia 8.7 4.7 4.7 4.9 4.9 3.4 3.1 3.1 2.8 2.8
Philippines 7.6 6.0 6.0 6.2 6.2 5.8 6.2 6.2 4.0 4.0
Singapore 3.6 2.0 1.5 3.0 3.0 6.1 5.0 5.0 2.0 2.0
Thailand 2.6 3.3 3.5 3.7 3.7 6.1 2.9 2.9 2.3 2.3
Viet Nam 8.0 6.5 5.8 6.8 6.2 3.2 4.5 4.0 4.2 4.0
The Pacific 5.3 3.3 3.3 2.8 2.8 5.2 5.0 5.0 4.4 4.4

GDP = gross domestic product, PRC = People’s Republic of China.

Note: Developing Asia refers to the 46 developing members of the Asian Development Bank. Caucasus and Central Asia comprises Armenia, Azerbaijan, Georgia, Kazakhstan,
the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. East Asia comprises Hong Kong, China; Mongolia; the People’s Republic of China; the Republic of Korea; and
Taipei,China. South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. Southeast Asia comprises Brunei Darussalam, Cambodia,
Indonesia, the Lao People’s Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Timor–Leste, and Viet Nam. The Pacific comprises the Cook Islands, the
Federated States of Micronesia, Fiji, Kiribati, the Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.
Sources: Asian Development Bank. 2023. Asian Development Outlook April 2023; Asian Development Bank estimates.
4 ASIAN DEVELOPMENT OUTLOOK JULY 2023

2024. The forecast for regional inflation in 2023 is downgraded continue to support economic recovery, particularly to boost
to 3.6% as the PRC drives a downward revision for East Asia, as domestic demand. In June, the central bank cut three key policy
does Indonesia for Southeast Asia. rates to boost the economy. With a strong rebound in Q1 and
moderating growth in Q2, growth remains largely consistent with
With interest rates in the US and other advanced economies projections made in ADO April 2023. The growth forecast for
likely to shape regional growth, upside and downside risks 2023 is thus kept at 5.0%, and for 2024 at 4.5%.
to the outlook are in balance. If inflation is tamed more
quickly than currently expected in the advanced economies, the Forecasts for Taipei,China are adjusted down for 2023 and
authorities there will likely adopt a more dovish monetary policy, slightly up for 2024. The economy shrank by 2.9% year on year
which would support growth in the region. On the other hand, in Q1 2023 as exports plunged by 10.8% with a continued slump
the regional outlook could be dented by an array of immediate in demand for electronics. Meanwhile, imports fell by just 4.0%,
and emerging challenges. Financial stability risks remain elevated, such that net exports pulled down growth by 5.4 percentage
and fragility in banks and other financial institutions requires points. Investment fell by 3.2% as low capacity utilization and
continued monitoring, particularly in economies with high higher interest rates weighed on firms’ appetite for investment.
obligations denominated in foreign currency and domestic debt On the positive side, private consumption grew by 6.5% as
in such highly leveraged sectors as households, construction, and relaxed COVID-19 restrictions continued to boost the economy.
property development. Some regional economies with high credit With Q1 weaker than expected and global demand still faltering,
risk, poor institutional frameworks, or weak macroeconomic the forecast for 2023 is revised down substantially to 1.5%. The
fundamentals are especially exposed to interest rate risks. projection for 2024 is revised up marginally to 2.7%, the rebound
Uncertainty persists over the Russian invasion of Ukraine, and reflecting recovery in global demand.
any escalation there could renew energy and food security
challenges and rekindle inflation. Finally, changing weather Growth this year in the ROK is projected to be slower than
patterns, including a return of El Niño disruption this year, may previously predicted. The economy slowed from 1.3% year
have macroeconomic consequences. on year in Q4 2022 to 0.8% in Q1 2023. Inertia in information
technology and minimal positive spillover from economic recovery
in the PRC caused exports to shrink by 3.0% year on year in Q1. In
the first 5 months of 2023, exports to the PRC shrank, dragging
Growth and Inflation Outlook all exports down by 13.6% year on year and semiconductor
by Subregion exports down by 39.4%. Private consumption and investment are
expected to remain weakened in 2023 by high interest rates and a
sluggish housing market, but then improve in 2024.
East Asia
Hong Kong, China has its growth forecast raised for 2023 and
The growth forecast for East Asia as a whole is unchanged at
lowered for 2024. Marked upward revision of the forecast for this
4.6% in 2023, slowing to 4.2% in 2024. GDP growth projections
year from 3.6% to 4.7% reflects an unexpectedly strong rebound
for the PRC are sustained as recent developments offset one
in Q1. Inbound tourism is now expected to recover quickly as
another and stay consistent, on balance, with ADO April 2023
pandemic-related disruption to transportation and handling
forecasts. Downward revisions to 2023 projections for the ROK
capacity gradually fades. Continued improvement in economic
and Taipei,China to accommodate weak global demand are offset
conditions and prospects, including recovery in the PRC, should
by an upward revision for Hong Kong, China following surprisingly
further boost consumption and domestic demand despite drag
strong growth there in Q1.
from tight financial conditions. On the downside, slower growth in
advanced economies will continue to weigh on external demand.
PRC growth forecasts for 2023 and 2024 are maintained.
While normalizing external and domestic conditions will underpin
Economic activity bounced back in Q1 2023 with services—
continued recovery in 2024, the growth forecast is revised down
especially contact services such as hospitality, catering, and
to 3.3% primarily to accommodate base effects.
transportation—particularly strong. Despite weakness in key
indicators including retail sales and fixed asset investment,
Inflation forecasts for East Asia are sharply down to 1.3% in
growth in Q2 is expected to pick up further on a base effect.
2023 and slightly higher at 2.1% in 2024. Average consumer
Growth in manufacturing investment is expected to moderate in
price inflation in the PRC was muted in the first half of this year
line with cooling exports, while that of infrastructure investment
at 0.7%. Reflecting softer global commodity prices and weaker-
is likely to remain stable. Monetary and fiscal policies will
than-anticipated domestic demand, inflation is now forecast
 ASIAN DEVELOPMENT OUTLOOK JULY 2023 5

to slow to 1.0% in 2023, but the forecast for 2024 remains below expectations. Economic growth in the second half of 2023
unchanged at 2.0%. In Taipei,China, inflation slowed as expected will likely be supported by improved foreign exchange liquidity,
to 2.0% in May and is projected to ease further as growth weakens looser monetary policy, and parliamentary agreement in early
and food price inflation slows. Forecasts of 2.0% inflation in July on how to optimize domestic debt. The Sri Lankan rupee
both years are thus maintained. In the ROK, inflation fell from appreciated against the US dollar in the first half of 2023 as
3.7% year on year in April to 3.3% in May with lower prices for remittances and tourism brought in more dollars, import demand
transportation, food, and energy, but forecasts are now raised as weakened, dollar liquidity improved, government securities
inflation remains strong and shows no sign of abating. In Hong recorded net inflow, and the exchange rate guidance peg
Kong, China, inflation is seen gradually picking up in the rest was lifted.
of this year. External price pressures are expected to moderate
somewhat, but inflation is forecast to increase this year, in Growth in Bangladesh is estimated higher than forecast for
tandem with economic recovery, more than projected in ADO fiscal 2023. The higher estimate of 6.0% for FY2023 (ended
April 2023. 30 June 2023) reflects strong net exports as imports fell more
sharply than expected and export growth slowed less than
expected. On the supply side, manufacturing firms of all sizes
leveraged supportive government policies to contribute to
South Asia
growth. Crop losses to floods, cyclones, and droughts were partly
South Asia is on course to achieve ADO April 2023 growth offset by subsidies, incentives, and other measures. The service
forecasts. Downward revisions for Nepal and Pakistan in 2023 sector was buoyed by higher warehouse and support activities
reflect mainly tighter monetary and fiscal policies and are offset and health and social services. On the demand side, growth
by an upward revision for Bangladesh as net exports performed in public consumption outpaced expectations, as did public
better than expected. Growth projections elsewhere in South investment. The ADO April 2023 forecast for growth in FY2024
Asia are largely maintained. is unchanged at 6.5%.

The Indian economy, supported by upbeat domestic GDP projections for Nepal and Pakistan are adjusted down
demand, is set to meet earlier projections. In fiscal year 2023 for FY2023 and maintained for FY2024. Growth in Pakistan
(FY2023, ending 31 March 2024), consumption demand in India in FY2023 (ended 30 June 2023) was weighed down by tighter
is expected to recover with improvement in both rural and urban monetary and fiscal policies to safeguard macroeconomic
demand as reflected in such indicators as consumer confidence, stability, pervasive inflation, and significant damage from
urban unemployment, and motorbike sales. Investment growth flooding. In Nepal, significant growth moderation in FY2023
will remain robust, underpinned by strong bank credit growth and (ended mid-July 2023) reflected unexpectedly sharp effects
demand for housing, and supported by fewer interest rate hikes from a number of factors, notably tighter monetary policy driving
by the central bank. However, the global economic slowdown has up interest rates, high fuel prices, and import restrictions imposed
suppressed merchandise trade, which will be a drag on growth. to manage declining foreign exchange reserves. Forecasts for
On the supply side, growth will be buoyed by manufacturing FY2024 in both economies are maintained on the assumption
as input prices cool. The service PMI has remained above 60, that external and domestic conditions improve. The ADO
indicating resilient growth in the sector. Assuming normal rainfall April 2023 projection for Pakistan in FY2024 assumes that the
and other weather factors, and no further geopolitical shocks, government will continue reform as recommended by the IMF
India is expected to grow by 6.4% in FY2023 and 6.7% in FY2024, under a new policy-support program approved on 12 July.
as projected in ADO April 2023.
Growth projections for Maldives are sustained, and little
Sri Lanka’s GDP growth projections for 2023 and 2024 are changed for Bhutan. Recent news suggests a weaker year
maintained at 3.0% contraction followed by 1.3% growth. than expected for industry in Bhutan. With credit to finance
The economy contracted by 11.5% year on year in Q1 2023, construction suspended, the sector is now expected to contract
with both services and manufacturing sharply down. Agriculture by 4.0%, not grow by 1.0% as projected in ADO April 2023. In
grew by 0.8% as fertilizer availability improved. A positive Maldives, buoyant tourism and construction are expected to
development is that Sri Lanka has met some key benchmarks continue to drive growth.
under an International Monetary Fund (IMF) program using
its Extended Fund Facility, notably implementing a payment The 2023 inflation forecast for South Asia is kept at 8.1%,
scheme for social safety net welfare benefits and reaching its and the 2024 projection revised up markedly to 6.4%. The
primary balance target for Q1 2023 despite revenue collection inflation projection for India in FY2023 is reduced slightly from
6 ASIAN DEVELOPMENT OUTLOOK JULY 2023

5.0% in ADO April 2023 to 4.9% and maintained at 4.5% in GDP growth projections for the Philippines are maintained.
FY2024. As food and oil prices moderated, inflation eased below Robust investment and private consumption drove growth by
the 6.0% upper bound of the monetary policy target. Expected 6.4% year on year in Q1 2023, supported by rising employment,
softening of Brent crude prices in 2023 should lower headline expanding production and retail sales, and brisk private and
inflation, but core inflation, which excludes food and fuel, is public construction. Net exports weighed on GDP. Merchandise
expected to be stubbornly high. The Bhutan inflation projection export declined, partly offset by expansion in service exports.
for 2023 is revised down after fuel prices dropped more than Tourism bounced back, and growth remained strong for business
expected. Similarly, the inflation forecast for Sri Lanka is revised process outsourcing and information services. GDP forecasts are
down on account of declining prices for food, transportation, and maintained at 6.0% in 2023 and 6.2% in 2024.
utilities, as well as base changes for the consumer price index. In
contrast, 2023 inflation projections for Bangladesh and Nepal are Thailand experienced in the first half of 2023 surprisingly
revised up, and actual inflation in Pakistan in FY2023 was higher strong private consumption and service exports. The GDP
than projected, leaving the subregional forecast unchanged. growth forecast is therefore revised up from 3.3% to 3.5% for
Continued demand-side pressures in Pakistan play an outsized 2023 but maintained at 3.7% for next year. Private spending has
role in the upward revision to the subregional inflation forecast risen on improved crop yields and higher income, in particular
for 2024. from tourism and related businesses. While household debt
remains high, financial institutions continue to ease the debt
repayment burden for retail borrowers to sustain economic
recovery. The forecast for international tourist arrivals is revised
Southeast Asia
up from 28 million to 30 million in 2023 and from 35 million to
Southeast Asian growth is now projected somewhat lower. 36 million in 2024.
GDP growth forecasts are downgraded marginally, from 4.7%
to 4.6% in 2023 and from 5.0% to 4.9% in 2024. Weaker global Singapore’s growth forecast for 2023 is revised down from
demand for manufactured exports has slowed growth even 2.0% to 1.5%. In May, the manufacturing PMI dropped to
as domestic demand remained intact. Private consumption 49.5 and the electronics PMI to 49.1, signaling contraction.
continued to be the primary driver of economic growth in the first Lingering uncertainty about financial risks and monetary
half of 2023, buoyed by improved labor market conditions and tightening in the US still suppresses financial services, and
income across Southeast Asia. Revenge travel continues to lift the trade-related cluster is expected to contract further.
tourist arrivals and related activities. In addition, PRC recovery, Growth in private consumption is expected to slow as higher
while still subdued, supports demand for agricultural exports consumer prices restrain spending and higher borrowing costs
from the subregion. further dampen investment growth. The 2024 GDP growth
forecast is maintained at 3.0%, supported by public spending,
The growth forecast for Indonesia in 2023 is kept at 4.8%. a strong pipeline of government housing projects, and private
GDP grew by 5.0% year on year in Q1 2023, little changed from investment commitments.
Q4 2022 but lower than the pre-pandemic quarterly average
of 5.3%. Despite normalization, domestic demand grew only The Viet Nam growth forecast is revised down from 6.5% to
modestly, as is expected in the full year. Consumption has shown 5.8% in 2023 and from 6.8% to 6.2% in 2024. Growth slowed
no signs of revenge spending, and investment growth is held from 6.5% year on year in the first half of 2022 to 3.7% a year
down by businesses’ wait-and-see attitude. Export growth slowed later as external demand weakened and growth in manufacturing
on base-year effects and lower demand from trade partners, output braked to only 0.4%—the lowest half-year figure in a
which is expected to persist. dozen years. The manufacturing PMI has languished below
50 since March 2023 as weaker trade growth closed many
Private consumption underpinned economic growth in businesses, notably in export-driven manufacturing. Industrial
Malaysia. Notable trends are improved labor market conditions, production was hit as well by recent power outages in the north
investment, and construction. Still, Q1 2023 GDP growth was, and trouble in the real estate sector. A credit crunch in response
at 5.6% year on year, much lower than 7.1% in the previous to corporate bond market and bank exposure to elevated
quarter. Private investment rose by 4.7% in Q1 2023 as firms property risk squeezed construction. Meanwhile, though,
continued to increase their capacity and construction revived. recovery in domestic travel boosted consumption, with retail
Public investment also grew, by 5.7% in Q1 2023, as government sales up by 11% year on year in the first half of 2023.
corporations lifted capital expenditure. With quarterly GDP
growth expected to ease further in the coming quarters, ADO The inflation forecast for Southeast Asia is revised down
April 2023 forecasts for 2023 and 2024 will likely be met. for both years. Downgrades from 4.4% to 4.3% in 2023 and
 ASIAN DEVELOPMENT OUTLOOK JULY 2023 7

from 3.3% to 3.2% in 2024 reflect easing global commodity Inflation in the subregion is forecast to remain elevated at
prices and tighter monetary policy. In Indonesia, inflation is 10.6% in 2023 and 7.8% in 2024. Both projections are higher
projected to average 3.8% in 2023, lower than 4.2% projected in than in ADO April 2023 mainly because of high inflation in
the ADO April 2023 after headline inflation came down steadily Kazakhstan and especially Azerbaijan, where inflation held up at
from its peak a whisker short of 6.0% in September 2022. In Viet 11.5% in the first 5 months of 2023 despite tightening monetary
Nam, the inflation forecast is trimmed to 4.0% in 2023 and 2024 policy. In Kazakhstan, external inflationary pressures eased, but
on declining global energy prices and stable food supply. Inflation tamping down inflation will be hampered by recently announced
forecasts for 2023 and 2024 are maintained for Malaysia, the augmentation to expansionary fiscal policy in both 2023 and
Philippines, Singapore, and Thailand. 2024. By contrast, inflation decelerated significantly in Georgia,
from 13.1% year on year in the first 5 months of 2022 to 5.4%
a year later, and in Armenia from 7.7% to 5.2%. Central banks
in both countries have thus lowered their policy rates for the
Caucasus and Central Asia
first time since 2020. Inflation forecasts in this report are thus
The GDP growth forecast for the subregion is downgraded revised down for both countries in both years, as they are for
by 0.1 percentage points in 2023 and by 0.2 points in Turkmenistan as well.
2024. Both changes reflect downgrades for Azerbaijan and
Turkmenistan. In Azerbaijan, oil and gas production declined
more than expected in the first 5 months of 2023, while global
oil prices sank. Production is expected to slow further to the The Pacific
forecast horizon. While growth forecasts are upgraded slightly for The Pacific is still projected to grow by 3.3% in 2023 and 2.8%
Georgia, Kazakhstan, and Tajikistan in 2023 following stronger in 2024. Expectations for expansion remain broadly in line with
performance in the first 5 months of the year, this is insufficient ADO April 2023. Growth prospects vary across the subregion.
to offset the downgrades to Azerbaijan and Turkmenistan Among tourism-dependent economies, Palau is projected to
projections. Growth forecasts are unchanged for Armenia, the accelerate growth steadily on continued tourism recovery,
Kyrgyz Republic, and Uzbekistan. Vanuatu is seen to bounce back from multiple disasters that
occurred in March 2023, strong visitor arrivals are expected to
The 2023 growth forecast for Kazakhstan, the subregion’s help keep growth elevated in the Cook Islands, and expansion
largest economy, is revised up to 3.9%. The upgrade is seen to moderate in Fiji as economic activity reverts to pre-
accommodates higher growth in Q1 2023 and expanded pandemic trends. As resource exports play a diminished role in
domestic demand after budget revision in March added 10% Papua New Guinea, other output is expected to drive growth,
to fiscal stimulus. GDP growth accelerated to 5.0% year on while in Solomon Islands one-off events such as the Pacific
year in Q1 2023, with manufacturing increasing by 5.4% and Games and national elections promise to support recovery.
services by 5.3%, reflecting sustained domestic demand. Private Economic activity will revive in the small island economies to
consumption will likely continue to accelerate as inflation slows varying degrees in line with capacity constraints, particularly for
and households enjoy higher real incomes. Sustained social implementing projects and accommodating tourists.
spending and longstanding expansionary fiscal policy will support
public consumption. Large infrastructure projects included in Inflation is still forecast to moderate to 5.0% in 2023 and
2023 fiscal stimulus will boost investment. Export growth will be 4.4% in 2024 in the Pacific subregion as a whole. Considering
buoyed by a gradual increase in oil output, which at 1.6 million individual economies, 2023 projections are revised up for
barrels per day in April 2023 approached Kazakhstan’s quota Samoa on unexpectedly high prices for food and transportation
under arrangements with other petroleum exporters. Improved and for Palau, where a value-added tax change has pushed up
demand from Kazakhstan’s trade partners will further support food and fuel prices, and electricity and wastewater tariffs have
exports. The growth forecast for 2024 is unchanged at 4.1%. been raised. The 2024 projection for Palau is adjusted down to
accommodate a consequent base effect.
8 ASIAN DEVELOPMENT OUTLOOK JULY 2023

Box Global Assumptions

As growth slows this year, forecasts for major advanced (PMI). Retail sales have remained relatively steady since the
economies are revised marginally up for 2023 and beginning of the year, but some signs of weaker consumer
significantly down for 2024 (box table). Following a confidence materialized in Q2, which is likely to slow
decent first quarter (Q1) in the US, interest rate hikes and consumption growth.
weaker consumer confidence have stalled the economy and
undermined investment, and will continue to do so. The euro A strong labor market and persistent inflation suggest
area having entered a technical recession, weakness there is continued monetary tightening. Nonfarm payrolls rose by
expected to persist longer than forecast in Asian Development a robust 339,000 jobs in May, much better than expected,
Outlook, April 2023 (ADO April 2023), while the global and the unemployment rate stayed low at 3.7% despite rising
economic slowdown further restrains exports and investment slightly along with the labor participation rate. Declining
in Japan. Aggregate growth is now expected at 0.8% in 2023 energy prices brought the consumer price index down to 3.0%
and 0.9% in 2024. in June, though core inflation remains stubbornly high at 4.8%.
The US Federal Reserve paused its interest rate hikes at its
June meeting but is expected to raise rates one or two more
Baseline Assumptions on the International Econonomy times in the coming months.

2022 2023 2024 The growth forecast is revised up to 1.1% for 2023 and
Actual April July April July down to 0.8% for 2024. The upward revision for 2023
GDP growth, % reflects unexpectedly strong growth in Q1, moderated
by slower growth expected in the rest of the year. Slower
Major advanced 2.5 0.7 0.8 1.3 0.9
economies growth is expected to extend to 2024. Inflation forecasts are
unchanged as the Fed is expected to continue its focus on
United States 2.1 0.9 1.1 1.3 0.8
bringing inflation down to its target rate of 2.0%.
Euro area 3.5 0.5 0.5 1.4 1.0
Japan 1.0 0.8 0.6 0.8 0.7 The euro area entered a technical recession in Q1 2023.
Prices and inflation Following contraction by a seasonally adjusted annualized rate
of 0.5% in Q4 2022, the bloc contracted again by 0.4% in the
Average Brent 100 88 80 90 84
crude spot prices, following quarter. High inflation and interest rates continued
$/barrel to restrain domestic demand enough for private consumption
CPI inflation, 7.5 4.4 4.5 2.4 2.3
and investment to subtract from growth, as did falling
major advanced government consumption. Net exports mitigated the decline
economies’ as imports contracted more than exports.
average, %
CPI = consumer price index, GDP = gross domestic product. Leading economic indicators suggest continued weakness
Note: Average rates are weighed by GDP purchasing power parity. in Q2. The economic sentiment indicator stayed below
Sources: Bloomberg; CEIC Data Company; Haver Analytics; IMF World Economic its long-term average of 100, sinking from 99.0 in April to
Outlook; Asian Development Bank estimates. 96.5 in May with lower confidence in industry, services,
and retail trade. The composite PMI fell from 52.8 in May
to 50.3 in June, signaling that expansion, indicated by a
value above 50, has all but stalled. Index subcomponents
reveal widening divergence among sectors. The service PMI
The US economy continued to expand in Q1. While halved
remained expansionary at 52.4 as the manufacturing PMI
from 2.6% growth in Q4 2022, GDP growth by 1.3% in Q1
plunged to a 37-month low of 43.6, weighed down by souring
was stronger than forecast in ADO April 2023. Deceleration
export demand.
reflected 11.5% contraction in investment driven mostly by
inventory, which was compensated by rebounds in private
The growth forecast for the euro area is unchanged at
consumption and government spending. Strong imports
0.5% for 2023 but trimmed to 1.0% for 2024. Growth
completely offset export growth, muting net exports.
is expected to remain weak this year as high inflation and
tight liquidity dent consumer and capital spending, and as
Interest rate hikes began to slow the economy. Investment
softening external demand drags down exports. Owing to
is likely to weaken further, as suggested by continued
the persistence of these headwinds, activity in 2024 is seen
contraction in the manufacturing purchasing managers’ index
improving more slowly than projected in ADO April 2023.
continued on next page
 ASIAN DEVELOPMENT OUTLOOK JULY 2023 9

Box Continued
The inflation forecast is maintained at 5.7% this year and 2.5% Despite expected market tightening under such factors
next year. Headline inflation eased by 0.9 percentage points as higher seasonal demand for gasoline, broadly stronger
to 6.1% in May, but core inflation fell by only 0.3 percentage demand in Asia, and production cuts in the bloc led by the
points and remains elevated at 5.3%. As such, the European Organization of the Petroleum Exporting Countries (OPEC+),
Central Bank followed up a 25-basis-point interest rate hike prices were constrained by subdued industrial activity, high
in May with another by the same amount in June, lifting the interest rates, and unexpectedly high oil exports from the
main refinancing operations rate to 4.0%. Russian Federation.

Japan surged in Q1 2023. Growth at a seasonally adjusted OPEC+ moves to support oil prices. OPEC+ agreed on
annualized rate to 2.7% was fueled by revivals in inbound 4 June to extend oil production cuts through 2024, with
tourism and domestic services. The number of international combined oil production restricted to 40.463 million barrels
tourist arrivals from most regions except the People’s Republic per day (mbd) and some quota reallocation among members.
of China (PRC) and Taipei,China regained pre-pandemic Saudi Arabia announced a further voluntary, open-ended cut
levels in April. Increased private inventories also boosted of 1 mbd beginning in July. The market reacted positively at
growth in the quarter with an annualized contribution of 1.6 first, but elation quickly faded, allowing Brent crude to slide by
percentage points. 6 June below $76/barrel, where it hovered for the remainder
of the month.
For the whole year, growth is projected at 0.6% in 2023
and 0.7% in 2024. Expected expansion in airline operations Brent crude forecasts are revised down to $80/barrel
with the resumption of tourism from the PRC will likely for 2023 and $84/barrel for 2024. While crude oil prices
further increase foreign tourist arrivals in the coming quarters. are expected to climb in the remainder of this year, steep
The removal of special treatment for COVID-19 in May price drops in April and May will depress the average price.
should buoy consumer confidence in older households and Growing demand in the PRC and tight supply in the second
contribute to sustained recovery in services. However, the half of the year will be countered by the Russian Federation’s
global economic slowdown will likely restrain Japan’s goods oil export resilience and concerns about US demand. Crude
exports and capital investment throughout the year. oil prices are expected to recover more slowly in 2024. The
International Energy Agency expects global oil demand to
Consumer inflation is forecast at 2.5% in 2023 and 1.5% in rise by 0.86 mbd in 2024. This is less than in 2023 because
2024. While policy interventions kept energy inflation muted, a rebound in the wake of COVID-19 has largely run its
pass-through will nevertheless be broadly felt this year. course and economic activity will be dampened by monetary
Lagged inflation in services accounts for a higher forecast than tightening this year. However, supply growth is similarly
in ADO April 2023. With inflation now seen likely to hover at expected to slow, from 1.4 mbd in 2023 to 1.0 mbd in 2024
around 2% this year and next, the Bank of Japan may reassess as US shale growth slows and OPEC+ curbs bite.
monetary policy after its July meeting.

Oil prices resumed their year-long decline. As of 30

This box was written by Matteo Lanzafame, Yuho Myoda, Pilipinas
June, Brent crude stood at $75.68/barrel—down by 14.4%
Quising, Arief Ramayandi, and Dennis Sorino of the Economic
from a recent peak in April and by 40.5% from a peak in Research and Development Impact Department (ERDI),
June 2022—as concerns about global economic health and, Asian Development Bank, Manila, and Michael Timbang,
consequently, demand for oil dampened market sentiment. ERDI consultant.
10 ASIAN DEVELOPMENT OUTLOOK JULY 2023

Asian Development Outlook July 2023

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