Asia: Unremarkable growth & unfulfilled promises?

Asia: Unremarkable growth & unfulfilled promises?

Is Asia’s economy stabilizing? Will Asia ever fulfill its promise of being the driving engine for global growth? Will China get back to the booming growth of a few years ago or has the last year been a sign of the beginning of the end? Will India usurp China as the darling of the Asia-Pacific economy? These are some of the questions on the tips of tongues of many, and we try to answer those questions and more in our progress report on the Asian economy so far in 2016.

Though the year did start off on a shaky note, it appears that it is now more stable. But, it’s also not exactly making great strides either.

Asia’s wobbly start to the year came mostly against a backdrop of a weak Chinese yuan and lower GDP growth. However, things have changed in recent months.

As China, goes, so does most of the Asia-Pacific region and stronger-than-expected growth in the world’s second-largest economy and the Fed’s decision to postpone interest rate hikes largely explain Asia’s stable growth trajectory.

Concerns over the health of the Chinese economy had resulted in strong capital outflows at the outset of the year, which added downward pressure on the yuan. China’s economy, however, proved to be more resilient than expected, mainly due to policy support, expanding at solid rates throughout this year.

The U.S. Federal Reserve’s decision to delay monetary policy normalization due to mounting global headwinds has also contributed to the economic stabilization in Asia by taking the pressure off the region’s exchange rate and financial markets.

Asia economics progress report

Now we can get down into the nitty-gritty. How are some of the most important economies in Asia doing at the moment? Let’s take a look.

China economy

As mentioned previously, China’s economy fared relatively well this year mainly due to policy support, expanding 6.7% so far this year. Credit-fueled growth and government intervention, however, may be papering over the cracks and have the potential to slow China’s much-needed economic reforms and exacerbate macroeconomic imbalances.

One of the consequences of government-led growth has been a surge in housing prices, particularly in top cities. It has sparked fears from some analysts that the housing market is a bubble getting ready to burst. As a result, some cities have already started to implement home purchase restrictions and higher mortgage down payments to cool their booming real estate markets.

More recently, in an attempt to tackle burgeoning corporate debt, the government unveiled a series of measures on 11 October, which included encouraging mergers and acquisitions, swapping debt for equity and facilitating firms’ bankruptcy.

While the government will have to take more decisive action to cut corporate debt and cool the overheated property market, these guidelines are steps in the right direction. Our analysts expect China’s economy to expand 6.6% this year and 6.3% in 2017.

Japan economy

The Japanese economy has been floundering for some time. Despite still being the third-largest economy in the world, some have commented that it’s been in a tale-spin dating all the way back to the 1990s. More recently, aggressive monetary policy easing and bold fiscal stimulus have failed to jumpstart the economy and revive inflation.

The absence of profound economic and social reforms is behind the lackluster performance. The poor economic performance has been exacerbated by the appreciation of the yen and weak global demand. Prime Minister Shinzo Abe, who holds a comfortable majority in both houses of parliament, will have to launch the “third arrow” of his reform plan in order to assure a sustainable growth trajectory in the future.

Despite the overall negative prognosis, our Consensus forecast sees Japan’s economic growth inching up from 0.5% in 2015 to 0.6% this year. For 2017, we expect the economy to accelerate timidly to a 0.8% rise.

India

India’s economy is outshining most of its regional peers, despite a downtick in growth in Q1 FY 2016 (April to June period).

Tailwinds to consumption from public sector wage hikes and a return to a near-normal monsoon are supporting robust private consumption, the economy’s engine. Moreover, the government’s positive attitude toward economic reforms bodes well for the longer-term growth trajectory and concrete steps have been taken to improve the business climate.

GDP is expected to expand 7.6% this year. However, growth remains lopsided across the economy and reducing stress in banks’ balance sheets is vital to boost credit growth and supporting fixed investment, which was a weak spot in Q1 FY 2016.

Hong Kong economy

Hong Kong’s performance remains subpar, but the economy is shaping up remarkably better than at the outset of this year. Growth picked up in Q2 after recording the weakest reading in four years in Q1. Nevertheless, we expect growth to decelerate sharply from 2.4% in 2015 to 1.3% in 2016 and 1.7% in 2017.

Regional trade flows are stabilizing as Chinese demand steadies, which is fueling a recovery in export volumes. Domestic demand is also benefiting from a resilient labor market and ample fiscal support, though retail sales remain sluggish amid downbeat tourist numbers. Property prices have been steadily growing after bottoming out in March, but the risk of a bubble is brewing with price-to-income ratios at record highs.

Philippines economy

Domestic demand is driving the Philippines’ stellar growth performance this year as a result of strong government infrastructure investment and the impact of election spending on private consumption.

The economy will broadly maintain its pace of growth in what remains of the year, as its fundamentals are strong. However, policy unpredictability associated with controversial President Rodrigo Duterte could threaten the country’s healthy economic outlook, especially as he continues his strong anti-U.S. rhetoric.

His recent comments of a separation from the U.S. and a realignment with China threatens the Philippines economy. Remittances, accounted for 10% of GDP in 2015 and is a primary source of income for many families in the Philippines and thus a driver of private consumption. A large portion of remittances to the Philippines come from the U.S.

Business process outsourcing, an industry that U.S. firms have heavily invested in the Philippines, is also at risk. BPO accounts for 6% of GDP.

Nonetheless, the Philippines will expand a strong 6.5% this year, overshooting last year’s 5.9% growth.

Is your country missing? Have a look at our ASEAN and East & South Asia economic overviews to read more on Asia's other economies.

Which Asian country is most likely to drive growth for the regional economy?

As one might imagine, the answer to this question is likely to be China or India.

Healthy dynamics in India, which we see growing 7.6% in 2016 and 2017, are good news for the region and will certainly contribute to fostering regional growth.

However, despite decelerating, China will remain the main source of growth in Asia given its still rapid expansion rate and the gigantic size of its economy (USD 11.2 trillion in 2016). Our analysts expect China’s economy to expand 6.6% this year and 6.3% in 2017.

Asia’s promise unfulfilled?

As we highlighted previously, although stable now, some analysts believe that Asia is far off from what was once predicted: the driving force of the global economic growth.

In fact, Asia is still the main source of growth for the world economy and is outperforming all the other regions FocusEconomics tracks. Robust domestic demand and an accommodative monetary policy are behind Asia’s surprising resilience.

What’s more, the region’s sustainable debt ratios following years of strong growth and prudent fiscal policies are allowing governments to ease their fiscal stances and shore up overall growth. Despite decelerating, FocusEconomics analysts expect Asia to expand 4.8% this year, which nearly doubles the 2.5% expansion we forecast for the global economy.

Nevertheless, it is true that the region has lost some steam compared to the growth rates recorded in the aftermath of the global financial crisis and that it is performing below what was expected. Weaknesses in the region are mostly related to the slow global economic recovery, which weighs on Asia’s all-important external sector.

Domestic vulnerabilities have also played a role in Asia’s slowdown. These include Japan’s inability to tackle an aging population and long-lasting deflation as well as the slow implementation of economic reforms in China, India, and Indonesia. Ample liquidity has discouraged governments from implementing economic reforms and has fueled asset bubbles in some countries. How these Asian economies deal with these vulnerabilities could be a defining moment on the region's path to becoming the engine of global economic growth in the future.

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Author: Ricard Torné, Head of Economic Research

Date: October 25, 2016


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