Economic Snapshot Asia
March 25, 2014
The outlook for ex-Japan Asia deteriorated this month following four consecutive months of stable prospects. FocusEconomics panelists cut their growth forecasts for 2014 by 0.1 percentage points to 6.3%. This month’s slight deterioration mainly reflects lower projections for regional behemoth China and Thailand. The panel left forecasts unrevised for 7 of the 11 economies surveyed. Prospects for Singapore and Vietnam improved this month. Forecasters polled by FocusEconomics, however, maintained their outlook for 2015 stable at the previous month’s 6.5% increase.
In the United States, the Federal Open Market Committee (FOMC) announced that it would continue winding down its asset purchase program due to the, “cumulative progress towards maximum employment and the improvement in the outlook for labor conditions.” Furthermore, the Fed revamped its forward guidance, stating that future decisions to hike the federal funds target rate would depend on the assessment of a wide range of indicators and not just the unemployment rate. In the press conference that followed the announcement, Fed Chair Janet Yellen vaguely suggested that an increase in interest rates could take place in, “something on the order of around 6 months,” after the conclusion of the bond buying program, which is on track to end in December 2014.
On the other side of the Atlantic, the European Parliament and the Euro area member states reached a deal on 20 March to establish the long-awaited banking union. The union will allow European authorities to shut down failing Euro zone banks in order to prevent contagion and systemic crisis. The agreement includes a common resolution fund of EUR 55 billion from the banks that will be built up over eight years. Meanwhile, in Japan, growth in the last quarter of 2013 was weaker than initially reported, triggering concern over the state of the country’s economic recovery as a sales-tax hike looms on the April horizon.
Within the region, recent developments suggest that China’s leadership is making bold steps in implementing economic reforms. At the National People’s Congress, Premier Li Keqiang unveiled China’s official targets for this year. Although the GDP growth target was maintained at the previous year’s 7.5%, Chinese officials stated that the target would be flexible, signaling that authorities could tolerate lower growth rates. On the monetary policy side, in a joint press conference of China’s financial regulators held on 11 March, PBOC governor Zhou Xiaochuan stated that deposit rate liberalization is on the agenda and that it can be achieved within one to two years. Finally, at the close of the NPC on 13 March, Premier Li stated that future defaults on bonds and other financial products are “unavoidable”. Premier Li’s statement came shortly after a small solar firm failed to meet interest payments on bonds, which marked the first time that a Chinese company has defaulted on an onshore corporate bond.
The People’s Bank of China announced on 15 March that it would widen the yuan’s trading band from +/-1 percentage points to +/-2 percentage points. The widening of the trading band represents another step toward a more market-determined exchange rate. According to the PBOC, it is also aimed at punishing speculators who have been trying to benefit from the yuan’s continued appreciation. That said, the Chinese yuan has been depreciating steadily since mid-February and now sits at the lowest level in a year. The unexpected move represents a change in the Central Bank’s foreign exchange policy; the recent widening of the yuan’s trading band supports this view.
On the economic front, China has been losing steam since the outset of the year, which is fuelling speculation that the government may take action in order to shore up the economy. In the January–February period, growth in industrial production slowed to its lowest level since April 2009, while retail sales expanded at the slowest rate in five years. In addition, urban fixed-asset investment growth moderated to the lowest level since 2002. In this regard, at the State Council meeting on 19 March, Premier Li stated that the government should roll out measures to boost domestic demand and stabilize growth. In light of recent developments, some analysts have started to price in the possibility of Reserve Requirement Ratio cuts in the coming months. FocusEconomics panelists cut their growth projections for this year by 0.1 percentage points to 7.4%. The panel, however, maintained their growth prospects for 2015 at the previous month’s rate of 7.3%.
In India, the economy expanded 4.7% annually in the third quarter of FY 2013/2014, which was a tad below the 4.8% expansion tallied in the second quarter. The print reflected an across-the-board deterioration, with the strongest contraction recorded in the vitally-important manufacturing sector. Moreover, January data for industrial production do not show signs of improvement; industrial output expanded a timid 0.1% over the same month last year. It does seem, however, that good progress is being made in the external sector. The trade deficit totaled USD 8.1 billion in February, which was a marked improvement over the USD 14.1 billion deficit tallied in the same month last year. In the political arena, Narendra Modi, the frontrunner for the April–May general elections, said that he would also run for election in the holy city of Varanasi, the capital of Uttar Pradesh. Analysts see Modi’s decision as a move to maximize the number of votes in Uttar Pradesh, India’s most populous state. FocusEconomics panelists left India’s growth outlook for FY 2014/2015 unchanged at the previous month’s 5.3%. The panel sees GDP for FY 2015/2016 accelerating to a 6.0% increase.
On 19 March, Thai Prime Minister Yingluck Shinawatra lifted the state of emergency that was put in place on 22 January as the anti-government protests in Bangkok let up somewhat. Rice farmers, who have not been paid since October 2013, saw some relief when the government disbursed USD 3.7 billion in funds to them. This, however, did not settle the controversy over the rice subsidy as the amount wasn’t enough to pay all of the farmers. Meanwhile, on 21 March, the constitutional court declared the 2 February elections unconstitutional with no indication of when the new polls would be held. Even if the new elections are carried out without a hitch, Shinawatra’s role as PM is now in jeopardy due to the corruption charges she is facing. If found guilty, she could be removed from office and banned from politics for five years. Against the backdrop of deep political crisis, FocusEconomics panelists shaved off 0.4 percentage points from last month’s growth forecast and now expect Thai GDP to expand 2.9% in 2014, which is only a fraction of the 4.3% increase projected in January. For next year, the panel sees growth at 4.5%.
Regarding monetary policy developments, the central banks of Indonesia, Korea and Malaysia chose to maintain their policy rates unchanged in March. The Bank of Thailand decided to cut the one-day repurchase rate by 25 basis points to 2.00% in an attempt to stimulate growth in the wake of prolonged political turmoil, which has taken a toll on the economy. Similarly, the State Bank of Vietnam (SBV) reduced its key refinancing rate on dong loans by 50 basis points to 6.5%. The SBV argued that slowing inflation provides more room for the Central Bank to ease its stance in order to shore up faltering economic growth.
According to preliminary data, inflation in ex-Japan Asia moderated in February, falling from 3.0% in January to 2.6%. The monthly moderation mainly reflects seasonal effects stemming from the Lunar New Year holidays and lower food prices in India. FocusEconomics Consensus Forecast panelists expect inflation in ex-Japan Asia to average 3.4% in 2014, which is down 0.1 percentage points from last month’s estimate. The panel also cut 0.1 percentage points to the 2015 inflation forecast and now it sees inflation at 3.5%.
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