Economic Snapshot for Asia
August 19, 2014
The outlook for ex-Japan Asia was stable for the third consecutive period this month as FocusEconomics Consensus Forecast panelists maintained their growth forecasts for 2014 at 6.2%. The stable outlook mainly reflects unrevised projections for 11 of the 15 economies surveyed, which include regional powerhouses China and India. Projections for Hong Kong and Singapore deteriorated this month, while Brunei and Taiwan saw their prospects improve. Forecasters surveyed by FocusEconomics left their regional growth projections for next year unchanged at last month’s 6.4%.
The stable outlook for the region came amid a strong rebound in economic activity after the harsh winter in the United States and weak economic activity in Japan and the Eurozone. In the United States, GDP beat market expectations in Q2, expanding at a seasonally adjusted annualized rate (SAAR) of 4.0%, which largely contrasted the 2.1% drop tallied in Q1. At its policy meeting that took place on 29–30 July, the Federal Reserve announced that it would continue winding down its asset purchase program. While the Fed acknowledged economic improvements, it refrained from signaling an earlier rate hike. Philadelphia Federal Reserve President Charles Plosser was the only member of the FOMC to show dissent regarding the decision to keep rates low for an extended period of time, but his view reflects the intense debate that is taking place both within and outside the Fed over when and how to raise interest rates.
On the other side of the Pacific, Japanese economic activity plummeted in Q2, mainly reflecting a pullback in demand following the sales tax increase that was implemented in April. Moreover, despite the government’s demands to hike pay for workers, real wages continued to decline in May. This situation suggests that the bold stimulus program that Prime Minister Shinzo Abe launched is failing to revive the country’s ailing economy.
In Europe, economic growth stalled in Q2, with GDP recording flat growth, which was down from the 0.2% increase tallied in Q1. The Eurozone’s feeble recovery remains constrained by the high unemployment rate and weak consumer prices. In addition, ongoing tensions in Ukraine and tit-for-tat sanctions between Moscow and the West may pose further risks to the Eurozone’s economic outlook.
Within the ex-Japan Asia region, China’s economic growth lost some momentum in July despite the government’s recent stimulus measures. Investment growth in July slowed to an over-twelve-year low, while both retail sales and industrial production decelerated in the same month. Although credit data came in much weaker than expected, it is likely to recover sharply in August as July’s reading can be partially explained by seasonality, a base effect and further pressures on shadow banking. Although recent data do not reflect a change in the People’s Bank of China (PBOC)’s monetary policy stance, they cannot be taken lightly as a deterioration in credit conditions represents a de facto tightening. Against this backdrop, analysts reckon that Chinese authorities will have to act further in order to ensure that the 7.5% growth target for this year is achieved.
In recent weeks, the State Council announced that it will continue to roll out targeted supportive measures, while the PBOC reaffirmed its prudent policy stance and stated that it will attempt to lower financing costs. In addition, on 30 July, the State Council shed some light on its plan to reform China’s residential registration system, known as the hukou. Authorities announced plans to fully remove the household-registration system in townships and relax restrictions in mid-sized cities. Strict controls will remain in place in large cities. The government has a set a goal of urbanizing 100 million rural Chinese by 2020. Taking into account recent developments, FocusEconomics panelists left their 2014 growth projections for China unchanged at 7.4% and growth prospects for 2015 were left at the previous month’s rate of 7.3%.
It has been three months since Narendra Modi took office as India’s new prime minister. The landslide victory gave him ample room to push through his promises of rekindling the economy, while the Union Budget for FY 2014/2015 was largely seen as his first step in the right direction. However, Modi’s Bharatiya Janata Party lacks a majority in the upper house of parliament, which could derail Modi’s economic agenda. Meanwhile, on 31 July, Modi vetoed the implementation of a multilateral trade agreement with the World Trade Organization, which would have added USD 1.0 trillion to global trade overall. Modi demanded more leeway to subsidize and stockpile food. Investors took this unexpected move to be a setback to Modi’s market-friendly stance. FocusEconomics panelists left India’s growth outlook for FY 2014/2015 unchanged at 5.3% for the seventh consecutive month. The panel sees FY 2015/2016 GDP growth accelerating to 6.1%.
The Korean government unveiled a USD 40 billion stimulus package to boost economic growth on 24 July. The stimulus entails macro easing in fiscal, financial and exchange rate policies; measures to encourage firms to spend cash on investments and wages. Moreover, the stimulus package includes measures to boost the housing market; rules on mortgage lending will be relaxed, which will allow for higher debt-to-income and loan-to-property value ratios. Although these adjustments are expected to improve the state of the housing market, they are likely to add pressure to the country’s ballooning household debt (see details on page 72). FocusEconomics panelists left Korea’s growth outlook for 2014 unchanged at 3.6%. The panel sees 2015 GDP growth accelerating to 3.8%.
The central banks of India, Indonesia and Thailand have decided to maintain their policy rates unchanged since early August due to stable regional economic growth prospects and relatively contained inflationary pressures. The Central Bank of the Philippines, however, decided to hike its key policy rate for the first time since 2012 in a preemptive move aimed at anchoring inflation expectations. In addition, the Bank opened the door to further rate increases if necessary. Conversely, the Bank of Korea decided to cut the base rate for the first time in over a year amid low inflationary pressures and the government’s presentation of a bold stimulus package on 24 July. The rate cut is expected to create synergy with the government’s stimulus program and foster domestic demand.
According to preliminary data, inflation in ex-Japan Asia inched down from 3.2% in June to 3.1% in July. The monthly moderation mainly reflects that lower inflation in Indonesia and Korea more than offset higher consumer prices in India. Inflation in China was stable this month. FocusEconomics Consensus Forecast panelists left their 2014 inflation projections for ex-Japan Asia unchanged at 3.4%. For 2015, the panel maintained last month’s inflation forecast of 3.6%.
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