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From mid-August to mid-September the Pacific Economic Cooperation Council conducted its annual survey of the regional policy experts’ views on the state of the region. The findings show a 180 degree turnaround from last year’s results on expectations for economic growth. The percentage of respondents expressing an optimistic view on the prospects for global growth changed from 55 to 17 percent and those with a pessimistic outlook rose from 17 percent to 60 percent. Risks remain heavily tilted to the downside with inflation by far the main concern. While views varied across the Asia-Pacific, there remain continued concerns over the risk of new waves of the Covid-19 virus emerging indicating that the region is not yet fully out of ‘pandemic mode’. Forecast for growth for the region this year have similarly come down from 5.1 percent in October 2021 to 2.6 percent in October 2022.
By far, inflation was considered the top risk to growth with 51 percent of respondents selecting it as a top 5 risk to growth for their economy. This was followed by some margin by a series of inter-related risks: a slowdown in the Chinese economy; fragmenting global economy; climate change; increased protectionism and trade wars; and the Ukraine Conflict.
Trade growth in the region is anticipated to be at about 3.1 percent for 2022, 3.9 percentage points lower than forecasted last year. The recovery from the pandemic-induced recession is slowing with fears of stagflation looming on the horizon and the possibility of a recession.
Regional Inflation (weighted on a GDP basis) is expected to be 5.7 percent, 3 percentage points higher than forecasted a year ago, with a return to a more stable trajectory at about 2.4 percent in 2024.
In spite of the immediate concerns over inflation and a fragmenting global economy, the policy community continues to see climate change as a key risk to growth. Regional initiatives undertaken in APEC and other bodies can go a long way to reducing the risks that emerge from climate change and a focus of cooperative efforts at this time of immense geopolitical uncertainty.
The Ukraine Conflict is the last of the top risks to growth. The conflict has had a substantial impact on energy, food and fertilizer prices although the extent to which economies saw the conflict as a top risk varied across the region. As part of the fallout from the pandemic, there has been a focus on the efficiency and resilience of global supply chains, increasing the appreciation that essential services, especially logistics, play in moving goods across borders. Bottlenecks and delays in production and distribution need to be addressed to reduce the impact that the pandemic is having on supply chains already stretched by shifting demand patterns and constraints on supply. According to our survey results, 62 percent of respondents believe that capacity constraints in port operations and related logistics constraints had a major impact on supply chains.
Looking beyond short-term horizon, the long-term trend for growth in the region is also on the negative side, with growth currently expected to be 1 percentage point lower during the post-pandemic period than the post-GFC era. Some of this may be due to the impact the pandemic has had on education, but also momentum for reform needs to be injected into areas that will help regional economies boost growth. APEC has a long term plan through its work on structural reform to address these issues but respondents were generally ambivalent about progress.
Travel and tourism have been the hardest hit sectors as a result of the pandemic, with international travel closed for much of the 2000-2021 period. The action areas highlighted by the survey were: increasing the percentage of population that are vaccinated; reducing or harmonizing the remaining restrictions on travel due to Covid-19; and reducing postpandemic travel costs (eg cheaper/no need for Covid-19 insurance, fewer testing requirements). The recovery of the tourism sector in the region is lagging behind other parts of the world pointing to a need for further work on this issue. However, while recovery is urgent, care needs to be taken that business models do not return to previous models that tended to be less inclusive and sustainable. The reset presents an opportunity for more sustainable models that preserve and protect the environment and enhance livelihoods for the less well-off.
At perhaps no other time since the foundation of APEC has the region faced a more complex landscape. The region has gone through, and in some respects, continues to face a global pandemic. While the growth experienced in 2021 might have been a rebound given the depths that had been reached in 2020, events this year have not helped to sustain that momentum. It is difficult to not draw comparisons with the Global Financial Crisis and the recovery from it. The recession caused by the pandemic was deeper than the GFC but the recovery in 2021 was also much stronger. Problematic for the region (and the world) is that what one might have hoped to be a transition year to a ‘new new normal’ has been anything but a transition.
As frayed as relations have recently become, geopolitical events this year seemingly would have made international cooperation on any issue a distant dream. In this context, the outcomes from the World Trade Organization’s 12th Ministerial Conference (MC12) were an unlikely and highly welcome boost. In spite of placing the need for ameliorating geopolitical and trade conflicts in the region as the highest priority for APEC Leaders to discuss at their meeting in Bangkok, respondents also hope that Leaders will discuss the long-held (but still distant) vision of a Free Trade Area of the Asia-Pacific as well as supporting the WTO and the outcomes from MC12 as 2nd and 3rd highest priority. The outcomes from MC12 including a long discussed agreement on fisheries subsidies; work on the pandemic response and electronic commerce among others reflect areas where international consensus is still attainable.
There was high agreement among our survey respondents on the need to reduce barriers to the growth of the digital economy with this issue ranking 4th most important overall as well as for business and non-government stakeholders but 2nd overall for government respondents. People have become increasingly dependent on the digital economy over the course of the pandemic but governments are finding its cross‐cutting nature a challenge with the traditional industry-specific approach to policy‐setting.
APEC work on sustainability is diffuse, taking place in multiple groups, initiatives to take a more holistic look at the issues and their inter-relations may help get more track on this issue, increasingly seen as a top risk to growth.
Economic cooperation in the Asia-Pacific region constitutes one of the few bright spots in the global trading system today. The Regional Comprehensive Economic Partnership (RCEP) agreement went into effect this year, creating the largest free-trade area (FTA) in the world. It follows the entry into force of the Comprehensive and Progressive Agreement for Transpacific Partnership (CPTPP). The APEC envisioned the TPP (now CPTPP) and “Asian” (now RCEP) as pathways toward the goal of a Free-trade Area of the Asia-Pacific (FTAAP) in the largest and most comprehensive free-trade area (FTA) in the world. Moreover, since APEC approaches to trade and investment liberalization have always been predicated on “open regionalism,” the FTAAP project would also be a means of building an open global marketplace.
But the integration project is incomplete: the FTAAP continues to be a key goal strongly supported by APEC-based regional organizations such as ABAC. Respondents from the PECC 2022 Survey strongly support continuing along the pathways to the FTAAP. Nevertheless, these are challenging times in which to envision an ambitious step forward in economic integration. The global economy is in a state of high uncertainty, perhaps as high at any time since World War II. The economic effects of both agreements are estimated to be significant for the integrating economies with only marginal negative effects on some non-members. There are alternative approaches to reaching the FTAAP, one that involved making the two pathways more compatible in terms of sectoral coverage and depth and the other that involves converging to the FTAAP via enlargements of the pathways. A return of the United States to the CPTPP would be essential, but unfortunately that is difficult to imagine in the short-term. Still, the strategic and economic benefits of staying actively engaged in Asia-Pacific economic integration could be a strong pull. And given that the RCEP agreement has built into it the possibility of improving its template, these processes can be done simultaneously.
Unfortunately, while the economics favor the realization of the FTAAP whatever the process, ranging from US$724 billion to US$1024, the politics do not. Geopolitical, economic and policy uncertainties are rendering ambitious approaches to economic cooperation difficult at all levels. Ongoing conflict in the areas of technology and US-China relations, inwardlooking industrial policy, and a populist backlash against globalization are creating strong headwinds. Hence, APEC leaders will have their work cut out for them. But the potential gains from working toward the creation of “open, dynamic, reliant and peaceful Asia-Pacific Community” are high not only for the region but for the world.
In spite of APEC being an economic forum, respondents selected ameliorating geopolitical and trade conflicts as the top priority for Leaders’ discussions this November. This follows from previous year’s results when similar issues received the same level of priority. As indicated by respondents’ views on what impacts attitudes towards trade – 73 percent believe that geopolitical tensions have either a serious or very serious impact on attitudes towards freer trade and investment. Taken together these findings might be interpreted as meaning that the policy community believes that working together on these issues can be a way to help to resolve longstanding trade issues and led to greater tensions over the years. Another interpretation or factor behind these results might be that even though APEC is an economic forum, the Leaders’ Meeting provides an opportunity for side meetings and establish a better, more predictable atmosphere which is well-appreciated by survey respondents. In other words, the regional policy community emphasizes the value of dialogue on issues of substantive mutual concern.