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2017/FDM1/005 Session: 1

APEC Regional Trends Analysis: Growth Proceeds As Uncertainty Increases

Purpose: Information

Submitted by: Policy Support Unit, APEC Secretariat

Finance and Central Bank Deputies’ MeetingNha Trang, Viet Nam23-24 February 2017

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Presented by

Denis Hew, DirectorAPEC Policy Support Unit

Copyright © 2015 APEC Secretariat

APEC Regional Trends Analysis (ARTA):Growth proceeds as uncertainty increases

APEC Finance and Central Bank Deputies Meeting (FCBDM)23-24 February 2017Nha Trang, Viet Nam

Outline

1. APEC Regional Trends Analysis• Macroeconomic and trade update• Theme chapter: Skills Development in a Digital Age

2. Structural Reform in APEC• Overview of APEC structural reform initiatives• Renewed APEC Agenda for Structural Reform (RAASR)

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APEC continues to grow amid uncertainties

• The APEC region continued along the path of growth with weighted GDP growth at 3.5 percent in Q3 2016, the same as in Q3 2015, and higher than the previous quarter’s growth of 3.4 percent.

Note: Data not available for Papua New Guinea.Sources: Asian Development Bank (ADB), International Financial Statistics (IFS), the World Bank (WB), The Economist Economic and Financial Indicators, various economy sources, and APEC PSU staff calculations.

GDP Growth Rates, year-on-year (y-o-y), Q3 2015 and Q3 2016

-4.5-3.5-2.5-1.5-0.50.51.52.53.54.55.56.57.5

Aust

ralia

Brun

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g, C

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Q3 2015 Q3 2016

Q3 2015 APEC GDP Q3 2016 APEC GDP

• Private consumption and government spending remained as the bright spots that have propped up growth even as weakness in global trade persisted.

Note: Data on quarterly GDP by expenditure are not available Papua New Guinea; and Russia. Missing bar denotes either unavailability of data or near-zero/zero growth rates.Source: Statistics Offices and Central Banks of APEC member-economies

GDP by Expenditure (y-o-y, in percent), Q3 2016

Solid domestic consumption buoys growth

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Personal Consumption Government ConsumptionGross Fixed Capital Formation Exports of Goods and Services

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Note: Data not available for Papua New GuineaSource: World Trade Organization (WTO), Brunei Darussalam Economic Planning and Development Office, and APEC PSU staff calculations.

• On average, the APEC region’s merchandise trade values contracted by 6.4% for exports and 6.6% for imports in Jan-Sep 2016 compared to Jan-Sep 2015.

Growth in Merchandise Trade Values (y-o-y, in percent), January-September 2016

Trade remains lethargic

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Exports Imports

APEC Average Exports APEC Average Imports

• In 2015, the APEC region attracted USD 953 billion worth of FDI, equivalent to a around 54.1 percent of world FDI and a growth of 42.3% from the 2014 level.

Source: UNCTAD World Investment Report 2016

FDI Flows (in billion US dollars) and APEC Share of World FDI (rhs, in %), 2000-2015

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APEC FDI outflows APEC Share of the world (rhs)

APEC is the largest recipient of FDI in 2015

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APEC economies comprise the top 10 recipients of FDI in 2016

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United States

China

Hong Kong,China

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Estimated FDI inflows (in billion USD): Top host economies, 2016

• Estimated FDI inflows show that five APEC members comprise the top 10 host economies in 2016, along with the UK; Brazil; France; Netherlands; and India.

Source: UNCTAD Global Investment Trends Monitor (1 February 2017)

Estimated FDI inflows in 2016 show mixed developments for some APEC economies

Upward movers:• The United States remained the largest recipient of FDI in 2016.• China remained robust, with a 2.3 percent increase in FDI inflows and a new record in 2016.• Korea’s FDI inflows was higher by more than a hundred-fold at US$ 9.4 billion in 2016 from

the year-ago level of US$ 4.0 billion.• Russia recorded a 62-percent rise in FDI inflows to US$ 19 billion in 2016 from US$ 12 billion

in 2015.• Japan posted inflows of US$16 billion in 2016 from a net divestment of US$ 2 billion in 2015.• Australia’s FDI inflows more than doubled in 2016.

Downward movers:• Inflows to Hong Kong, China; and Singapore fell in absolute terms, although they belong to

the top 10 host economies in 2016.• Thailand’s inflows declined in 2016.• Chile’s inflows were lower by 31 percent to US$ 11 billion in 2016 from US$ 16 billion a year

ago.• Mexico experienced a 21-percent reduction in FDI inflows to US$ 26 billion in 2016 from

US$ 33 billion in 2015.

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FDI trends point to a potential rebound in 2017

Highlights on the FDI 2017 outlook from UNCTAD’s Global Investment Trends Monitor (February 2017)

• Following an estimated decline of 13 percent in global FDI flows in 2016, a modest recovery is expected in 2017 with a 10 percent rise in FDI flows.

• The potential rebound in 2017 is hinged on the following projections: A higher trajectory for world economic growth in 2017; Increased global trade volumes; and A rise in commodity prices.

• But, significant uncertainties related to the US monetary policy, the near-term economic policies worldwide, the shape and direction of trade agreements, and election-related developments across Europe, could impact on the scale of FDI recovery in 2017.

Source: IMF, WB, and PSU staff calculations.

Short-term outlook points to a dip in growth in 2016, and a higher, more stable growth in 2017-2019

• APEC is expected to grow by 3.3 percent in 2016, lower than its 2015 GDP growth, but higher than projected world growth.

• Economic outlook for 2017-2018 points to a higher growth trajectory for APEC at 3.6 percent, inching up to 3.7 percent in 2019, generally apace with world economic activity.

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2015 (actual) 2016(f) 2017(f) 2018(f) 2019(f)

APEC World (IMF) World (WB)GDP Growth 2015 (actual) 2016(f) 2017(f) 2018(f) 2019(f)APEC 3.5 3.3 3.6 3.6 3.7World (IMF) 3.2 3.1 3.4 3.6 3.8World (WB) 3.3 3.0 3.5 3.7 3.7

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Downside risks and upside opportunities determine the direction and magnitude of growth ahead

Downside risks

• Policy uncertainties in various economies associated with political transition, which could impact on their trade partners in the APEC region.

• Growing divergence on views about economic integration and globalization, which could influence trade and investment policies of individual economies.

• Higher-than-expected increase in US monetary policy rates which could result in higher foreign debts, tighter credit conditions, and capital flight from economies perceived as risky by investors.

Downside risks and upside potential determine direction and magnitude of growth ahead

• Industrial production is generally improving with more APEC economies exhibiting growth.

-5 -3 -1 1 3 5 7 9 11 13 15

AustraliaBrunei Darussalam

CanadaChile

ChinaHong Kong, China

IndonesiaJapanKorea

MalaysiaMexico

New ZealandPeru

The PhilippinesRussia

SingaporeChinese Taipei

ThailandUnited States

Viet Nam

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• Commodity prices are recovering, which bodes well for global export activity

Upside opportunities

Sources: The Economist Economic and Financial Indicators and Statistics Offices of APEC economies for industrial production growth; IMF for commodity prices.

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Policy reforms boost medium-term growth prospects and fortify resilience against shocks

• Structural reforms that promote innovation, lead to more competitive markets, and facilitates participation of all segments of society could contribute significantly to economic development.

• Allocating resources for infrastructure could improve connectivity and help facilitate trade and investment flows.

• Investing in human capital could bride gaps in skills and education while also addressing vulnerabilities.

What’s next for APEC: Skills development in a Digital Age

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Scatterplots of real per capita GDP and digital technology use, 2000-2014

Note: Fitted curves are generated using nonparametric locally weighted scatterplot smoothing (LOWESS). Source: World Bank, World Development Indicators and Directorate-General for Budget, Accounting and Statistics (Chinese Taipei).

• A higher rate of digital technology use is correlated with per capita GDP. A plausible explanation is that digital technology increases GDP through its impact on consumption and production, while a higher income also increases firms’ and households’ access to digital technology.

• But linkages between digital technology and employment are unclear, suggesting opposing impacts.

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Skills needed in a modern economy

• literacy, numeracy, and cognitive skills• Problem-solving ability• Verbal ability, memory, and mental speed

• literacy, numeracy, and cognitive skills• Problem-solving ability• Verbal ability, memory, and mental speedCognitive

• Socioemotional skills and personality• Openness to experience, conscientiousness,

extraversion, and emotional stability• Self-regulation, mindset and interpersonal skills

• Socioemotional skills and personality• Openness to experience, conscientiousness,

extraversion, and emotional stability• Self-regulation, mindset and interpersonal skills

Social and behavioural

• Knowledge of methods and tools• General technical skills from schooling and training• Occupation-specific skills

• Knowledge of methods and tools• General technical skills from schooling and training• Occupation-specific skills

Technical

What’s next for APEC: Skills development in a Digital Age

• Employment in the digital age requires basic cognitive skills, such as literacy and numeracy, while a well-equipped worker needs skills that are easily transferable across jobs and occupations.

• A worker needs to be adaptive and flexible, being quick to learn new skills as they are required by the job market. As the World Bank (2016) put them, workers in the digital age require higher-order cognitive, socioemotional, and technical skills.

Source: World Bank, World Development Report 2016

Structural reform: what is it?

Policy change related to institutional frameworks, regulation and design of government policy, so barriers to market-based incentives, competition, regional economic integration and improved economic performance are minimized (PSU, 2011; APEC, 2013).

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From structural reform to (inclusive) growth

Lower cost of doing business Unlock significant productivity gains

Increase labor pool /economically active population with diverse set of skills

Increase opportunities and prospects

Minimize negative impacts of open trade and investment

More open, well-functioning, transparent and competitive

markets

Deeper participation by all segments of society,

including MSMEs, women, youth, older workers, and

people with disabilities

Sustainable social policies that promote the other

pillars, enhance economic resilience, and are well-

targeted, effective and non-discriminatory

(Inclusive) Growth

APEC structural reform initiatives through the years

• Leaders’ Agenda to Implement Structural Reform (LAISR)

Adopted in 2004

5 priorities to focus through to 2010:• Regulatory reform• Competition policy• Corporate governance• Public sector governance• Strengthening economic and legal infrastructure

Stock-take indicated progress across 5 priorities, with regulatory reform being the most significant

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APEC structural reform initiatives through the years

• APEC New Strategy for Structural Reform (ANSSR)

Adopted in 2010

Expanded scope and broader pillars aimed at promoting:• More open, well-functioning, transparent and competitive markets• Labor market opportunities, training, and education• Sustained SME development and enhanced opportunities for

women and vulnerable populations• Effective and fiscally sustainable social safety net programs• Better functioning and effectively regulated financial markets

Final review showed hundreds of individual projects undertaken with majority focusing on competitive market and labor market pillars

Renewed APEC Agenda on Structural Reform (RAASR)

• Announced in September 2015

• 3 pillars identified

• Mid-term review in 2018 and final review in 2020

More open, well-functioning, transparent and competitive

markets

Deeper participation by all segments of society,

including MSMEs, women, youth, older workers, and

people with disabilities

Sustainable social policies that promote the other

pillars, enhance economic resilience, and are well-

targeted, effective and non-discriminatory

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PillarsConcrete Actions

Individual economy level (IAPs)

APEC-wide level

Renewed APEC Agenda on Structural Reform (RAASR)

• All 21 economies have submitted their Individual Action Plans (http://publications.apec.org/publication-detail.php?pub_id=1789)

• Economies are responsible for implementing their IAPs, but to support their endeavor:• RAASR sub-fund – 2017 session 1 application is now open.• RAASR workshop – economies were encouraged to propose baseline

quantitative and qualitative indicators to monitor their progress.

• APEC-wide progress to be monitored and analyzed by PSU, based on agreed external quantitative indicators.

• A total of 17 external indicators are proposed.

• Majority are associated with more than one pillar.

• 10 can be considered as policy indicators:o 5 based partly or mostly on assessment of economies’ policy framework.o 5 based on perceptions and therefore provide insights on how policies are

perceived by relevant stakeholders.Remaining 7 are outcome indicators.

• Data for all proposed indicators are available for at least half of APEC economies since 2011 (or 2008 for OECD PMR).

Measuring APEC-wide progress:Summary of indicators

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Data availability for each indicator since 2011 and latest available year by economy

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