A comprehensive set of data suggests that growth in the Association of Southeast Asian Nations (ASEAN) accelerated slightly in the second quarter of 2016. GDP expanded 4.7% annually in Q2, which was a notch above Q1’s 4.6% expansion and a larger increase than the preliminary estimate of 4.5% growth. The pickup largely reflected stronger growth in Indonesia, the region’s largest economy, which expanded at the fastest pace since Q4 2013 as government stimulus began to take effect. In addition, private consumption grew at the fastest pace since Q4 2014, boosted by seasonal factors.
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The upturn in the region’s economy also came on the back of faster expansions in the Philippines, Thailand and Vietnam. Growth in the Philippines surged to 7.0%, the largest GDP increase in three years, as the domestic economy fired on all cylinders. Thailand’s growth also hit a multi-year high, while Vietnam saw only a slight strengthening compared to Q1. On the flip side, Malaysia’s growth continued to trend downwards, hampered by a weak external sector.
Meanwhile, domestic political developments have taken center stage in the region in the past month. In Thailand, voters approved the military-backed constitution on 7 August, ending a period of political ambiguity. The new constitution boosts the military’s political influence and has been criticized for curtailing the democratic rights of Thai citizens. The approval of the constitution should at least provide more certainty to foreign and domestic investors, though it is not expected to have a strong impact on the country’s economic prospects. The referendum paves the way for fresh elections, which will likely take place in November next year.
In Indonesia, President Joko Widodo reshuffled his cabinet in late July, shaking up his economic team. The change should strengthen his political position in parliament and aid his reform drive. Following the shakeup, the government presented a pragmatic draft budget for next year on 16 August. The budget sees a slight increase in spending and a slightly slimmer fiscal deficit than the one projected for this year.
Growth prospects improve on solid domestic fundamentals
Following a worsening in economic prospects last month, the outlook for ASEAN improved in this month’s Consensus Forecast report. Analysts polled by FocusEconomics see the region growing 4.6% in 2016, which is up 0.1 percentage points from last month’s forecast. This month’s forecast reflected upward revisions for the Philippines and Thailand, while the majority of the economies surveyed held their ground. Fiscal stimulus policies and solid demand from within the region should support growth this year despite the subdued external backdrop. Malaysia and Vietnam were the only countries for which the outlook was revised down. Next year, our panel of analysts expects the ASEAN economy to expand 4.8%.
Myanmar, Laos and Cambodia, in that order, are expected to be the top performers in 2016, with expansion rates of 7.0% and higher. At the other end of the spectrum, Brunei and Singapore are likely to be the worst performers, followed by Thailand. Among the rest of the region’s major economies, Vietnam and the Philippines will grow the fastest, with projected expansions of 6.1% and 6.3% respectively. Our panel of economists sees regional giant Indonesia expanding 5.0%.
INDONESIA | Fiscal stimulus bears fruit
Indonesia’s economy picked up speed in the second quarter, expanding at the fastest pace since Q4 2013. The result was driven by robust government spending, as President Joko Widodo’s efforts to kick the economy into a higher gear bore fruit. However, data for the start of Q3 suggest that the economy has lost some momentum: the manufacturing PMI fell into contractionary territory and the trade surplus declined in July. In the political arena, Widodo revamped his cabinet at the end of July and brought in Sri Mulyani Indrawati as finance minister. Following the reshuffle, the government presented a draft budget for 2017 to Parliament on 16 August. The budget envisions a fiscal deficit of 2.41% of GDP after an expected deficit of 2.50% of GDP this year and higher spending on infrastructure projects as the government continues to support growth.
Government spending should drive an acceleration in GDP growth this year. The analysts we polled this month see GDP expanding 5.0% in 2016, which is unchanged from last month’s forecast, before speeding up slightly to 5.3% in 2017.
THAILAND | Military-backed constitution approved
Thailand’s economy expanded 3.5% in the second quarter of the year, surpassing the 3.2% expansion in Q1. The strong growth rate was due primarily to solid private consumption growth, but otherwise there is little good news. Manufacturing growth fell sharply in June and consumer confidence remains entrenched in negative territory. Meanwhile, in a referendum held on 7 August a new constitution was approved, which puts the military in control of the Senate and allows for unelected officials to take office. As the military attempts to consolidate political power, a series of fatal bomb blasts across the country have compromised public safety and threaten the country’s important tourism industry. The government has attributed the blasts to separatist insurgencies in the country’s northern provinces.
The new constitution extends the length of time before Thailand transitions back to a civilian government. Much-needed reforms concerning high household debt and contracting exports will continue to go unaddressed as the ruling junta makes implementing the new constitution a priority. FocusEconomics panelists expect the economy to grow 3.1% in 2016, which is up 0.1 percentage points from last month’s estimate. For 2017, the panel projects that the economy will expand 3.2%.
MALAYSIA | Growth falls in Q2 to the slowest pace since Q3 2009
In Q2, GDP increased at the slowest rate since the global financial crisis hit the economy in 2009 and growth is likely to remain sluggish in the coming quarters. The deceleration was within expectations as net exports and the agricultural sector continued to drag on growth in Q2. Domestic demand nevertheless remained resilient, driven by a broad-based improvement in both public and private consumption. Likewise, industrial production registered a sharp improvement in June, growing at the fastest rate since July 2015.
While domestic demand is poised to continue to prop up Malaysia’s economy, the path to recovery is still strewn with risks. External factors such as China’s slowdown, a potential Fed rate hike and depressed energy prices could all affect the growth outlook for Malaysia. FocusEconomics panelists expect GDP to expand 4.1% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel sees GDP growing 4.4%.
INFLATION | Inflation edges down in July
Preliminary data show that inflation in ASEAN fell slightly from 1.8% in June to 1.7% in July. July’s moderation in inflation reflected slightly lower price pressures in Indonesia and Thailand. Historically-low inflation has led many central banks in the region to ease monetary policy rates and a number of our analysts expect rates across the region to be cut further by the end of the year.
Our panelists see price pressures rising meekly in the coming months and inflation averaging 2.5% in 2016, which is unchanged from last month’s forecast. This month’s ASEAN forecast reflects unchanged inflation outlooks for all but one of the ten economies surveyed. Next year, inflation is expected to pick up to 3.4%.
Written by: Angela Bouzanis, Senior Economist