Asia Pacific Economic Forecast

Economic Snapshot for Asia

February 25, 2015

Falling commodity prices continue to drive growth

According to a more complete set of data, in Q4 GDP expanded 6.3% annually in the ex-Japan Asia region (previously expected: +6.0% year-on-year), which was slightly down from the 6.4% increase tallied in Q3. The upward revision in the quarterly data reflected the modification in India of the national account series and methodology. Although the region’s economic data for January and February have been highly disrupted by the Lunar New Year, recent indicators suggest that growth will broadly maintain Q4 2014’s pace in Q1 2015.

Economic dynamics in ex-Japan Asia continue to be underpinned by falling commodity prices, which are boosting current account figures, as well as by healthy growth in the United States. Going forward, the decline in commodity prices, a more accommodative monetary policy in the region and quantitative easing programs in the Euro area and Japan are expected to support growth in ex-Japan Asia. Conversely, the downside risks to the region’s growth prospects include a severe correction in China’s real estate market, the faltering global economic recovery and a disorderly unwinding of the U.S. Federal Reserve’s monetary policy.

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OUTLOOK | Regional outlook stable for second consecutive month

The outlook for ex-Japan Asia was stable for the second consecutive month this period. FocusEconomics Consensus Forecast panelists expect GDP to expand 6.2% in 2015, which is unchanged from last month’s forecast. This month’s unrevised projection mostly reflected stable growth prospects for 8 of the 15 economies surveyed, including regional powerhouse China. Panelists raised their growth estimates for India, the Philippines, Taiwan and Vietnam, while the outlook for Korea, Singapore and Thailand was revised downward. The upward revision to India mostly reflected the change in the national accounts methodology and the revised historical data for India, which boosted GDP for FY 2013/14 from 4.7% to 6.9%. The regional growth forecast for 2016 was left unchanged at the previous month’s 6.2%.

Myanmar, Cambodia and Laos are expected to be the best performers in 2015. Among the major economies, China, India and the Philippines will grow the fastest, with a projected expansion of 7.0%, 6.5% and 6.3%, respectively. At the other end of the spectrum, Brunei is likely to be the worst performer, followed by Hong Kong and Singapore. Looking at the other major economies in the region, our panelists cut Korea’s 2015 outlook for the third time in the past four months.

CHINA | Signs of weakness at the outset of the year

The minimal data available for the Chinese New Year period suggest that the economy lost some momentum at the outset of the year. The PMI dipped into negative territory for the first time in over two years in January, while both exports and imports deteriorated in the same month. The National People’s Congress is going to meet on 5 March at which time it is expected that Chinese authorities will unveil this year’s economic targets. According to analysts, the growth target could be lowered from the 7.5% that was set for last year to 7.0% for 2015. 

The economy is expected to gradually slow in the coming years in line with the government’s strategy to promote more balanced economic growth. Low oil prices and a stronger-than-expected global recovery promise to spur growth. That said, the main downside risks continue to be a sharp correction in the real estate market and the rising level of local government debt. For this year, FocusEconomics Consensus Forecast panelists maintained their growth projections stable at the previous month’s 7.0%. Next year, the panel sees growth slowing slightly to 6.8%.

INDIA | Revised GDP series show stronger growth, add confusion

India’s economy softened somewhat in the October–December period, expanding 7.5% over the same quarter of the previous year. The result marks a deceleration from the previous quarter’s revised 8.2% expansion. The government significantly revised the data series to reflect a new methodology and a change in the base year. According to the government, the revised data show that India expanded 6.9% last fiscal year versus the 4.7% that was previously reported. The drastic change has raised some doubts regarding the economy’s underlying growth trend and the implications that this will have on policymaking. Looking forward, the government will present the budget for fiscal year 2015/2016 on 28 February. The budget is expected to contain significant tax system reforms and improvements to public infrastructure. 

While the country’s economic prospects remain fairly stable, FocusEconomics panelists raised their forecast by 0.3 percentage points this month. This is mainly due to the modification of the national accounts methodology and the revised historical data. The panel now expects GDP to increase 6.5% in FY 2015/2016. For FY 2016/2017, the panel sees the economy expanding 7.0%.

KOREA | Economy struggles to gain momentum

The Korean economy expanded 2.7% annually in the final quarter of last year, which marked the third straight period of decelerating growth. Recent data suggest that the economy is still struggling to gather momentum in the early months of 2015. Consumer confidence inched up, but remained below its 12-month average in January and business confidence deteriorated to an 18-month low in February. The trade balance registered another surplus in January, although a drastic fall in imports offset slumping exports. Household debt, which stands at more than 85% of GDP, continues to constrain private consumption. Weak global demand and a more competitive Japanese yen are dragging down exports. On a positive note, the PMI returned to positive territory in January. Meanwhile, President Park’s nominee, Lee Wan-koo, was approved as new Prime Minister by a narrow margin. Wan-koo has promised to support Park in reviving the economy although skepticism whether the government will actually be able to do so is still high.

Adverse global conditions will likely keep Korea’s export-driven economy performing below potential this year. Our panel of economists expects GDP to expand 3.5% in 2015, which is down 0.1 percentage points from last month. The panel projects GDP growth of 3.6% in 2016.

INDONESIA | New budget accelerates capital expenditure 

The economy expanded 5.0% in 2014, which was below the 5.6% growth tallied in 2013 and marked the weakest result in five years. GDP increased 5.0% in Q4, which was slightly up from the 4.9% growth tallied in Q3. Whether the economy can build on this result and gather significant momentum depends largely on the effectiveness of the government’s growth policies. On 13 February, the parliament passed the revised 2015 budget, approving many of the proposals initially put forward by President Joko Widodo. The budget calls for IDR 1,984 trillion in spending and IDR 1,761 trillion in revenue, resulting in a 1.9% fiscal deficit. As expected, the budget nearly doubles the government’s capital expenditures. Many analysts, however, are questioning whether the savings generated by the recent fuel subsidy cuts will be enough to fund ambitious infrastructure projects, particularly in light of a drop in oil-related revenues. 

Widodo’s reform agenda and growth-oriented policies are expected to boost the economy. Our panelists see the economy expanding 5.4% in 2015, which is unchanged from last month’s forecast. For 2016, the panel sees GDP growth picking up to 5.7%.

INFLATION | Decline in oil prices exacerbates downward pressure on prices

According to preliminary data, inflation in ex-Japan Asia fell from December’s 2.2% to 1.6% in January, which marked the lowest print since 2009. Weak economic activity and falling commodity prices are behind the downward pressure on inflation. For this year, inflationary pressures are expected to remain contained and our panelists expect regional inflation to average 2.6% in 2015, which is down 0.2 percentage points from last month’s estimate. In 2016, inflation is seen rising to 2.9%.

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