Economic Snapshot for Asia
November 18, 2014
The outlook for ex-Japan Asia stabilized this month following a deterioration in the previous period. FocusEconomics Consensus Forecast panelists left their regional growth projections for 2015 at the previous month’s 6.3%. The stable growth prospects for the region primarily reflected that a downward revision to China’s forecast was compensated for by an improvement in the outlook for India. In addition, the forecasts for 7 of the 15 economies surveyed were unchanged over the previous month. Panelists surveyed by FocusEconomics left their 2014 growth projections unchanged at 6.2%.
In the United States, economic growth expanded robustly in Q3, mainly due to a jump in government spending and a strong external sector. Healthy dynamics continued in Q4, with the PMI returning to a multi-year high in October. At its 28–29 October monetary policy meeting, the U.S. Federal Reserve announced the conclusion of its massive asset purchase program that began in 2008. Questions remain, however, regarding how the Fed will manage and then unwind its record USD 4.5 trillion balance sheet and when the Fed may start raising the federal funds target rate.
In the Euro area, growth prospects are grim. Although the results of the stress tests released on 26 October provided some relief regarding concerns over the health of the European banking system, weaker global demand and geopolitics are taking their toll on the economy. At the European Central Bank’s 6 November press conference, President Mario Draghi restated that the Bank will increase the size of its balance sheet toward 2012 levels in the next two years and signaled that more stimulus could be in the pipeline if existing measures fall short of reviving the economy and inflation expectations deteriorate further.
On the other side of the Pacific, Japan unexpectedly slipped into recession when the economy contracted for the second consecutive period in Q3. The disappointing performance could delay a planned sales-tax hike and trigger new elections. Although Prime Minister Shinzo Abe and his allies have a parliamentary majority, Abe could seek a broader mandate to push his reforms ahead while his popularity is still high. In an attempt tackle downside risks to the country’s inflation outlook, the Bank of Japan (BoJ) unexpectedly decided to expand its quantitative and qualitative easing on 31 October. The BoJ noted that declining oil prices and weak demand following April’s sales tax hike could revive Japan’s traditional “deflationary mindset”. On a positive note, Abe and Chinese President Xi Jinping met on the sidelines of the Asia-Pacific Economic Cooperation Summit. The meeting represented the leaders’ first formal talks since 2012 and may have been the first step toward achieving some progress on territorial and historical disputes.
Within the ex-Japan Asia region, recent data for regional powerhouse China suggested that Q3’s weak economic dynamics continued into Q4. Domestic demand continues to decelerate due to a severe correction in the housing market, as well as overcapacity in some sectors, and the anticorruption campaign that has impacted consumption. While the government is willing to tolerate a more moderate growth trajectory in an attempt to rebalance the economy, Chinese authorities have unveiled a series of measures to avert a hard landing. The National Development and Reform Commission has sped up approvals for investment in railways and other infrastructures in recent weeks, while the People’s Bank of China has pumped money into the country’s banking system to lower funding costs. Given that the economy is decelerating, FocusEconomics panelists cut their growth projections for 2015 by 0.1 percentage points to 7.1%. For this year, the panel expects the economy to expand 7.4%.
Following the 4th Plenum held on 20–23 October, the Communist Party of China unveiled a comprehensive roadmap to strengthen the rule of law, which includes a more independent, clean and fair judiciary system. While these reforms are set to be gradual, further improvements in this area are expected to boost confidence among investors in the mid- to long-term. In early December China will hold its annual Central Economic Work Conference, in which economic authorities will unveil economic targets and also map out economic and reform plans for 2015. In this meeting, the government is likely to cut its growth target for 2015 to about 7.0%.
China has finally concluded a series of trade agreements with some important trade partners. On 10 November, leaders of China and Korea signed the outline of a free trade agreement (FTA) that is expected to take effect next year. China accounts for 26% of Korea’s exports and this deal will allow for a gradual reduction of trade barriers between the two countries. China also signed a long-awaited FTA with Australia on 17 November. The FTA includes lower trade barriers for Australia’s farm and services industries while China’s private companies will have less restrictions to investing in the country.
In India, growth momentum is losing steam following the initial post-election rebound that boosted businesses sentiment. While weaker growth in Asia and Europe is putting a dent in the country’s growth prospects, the revival of pending infrastructure projects has prompted FocusEconomics panelists to increase India’s growth outlook for FY 2014/2015 by 0.1 percentage points to 5.5%. The panel sees FY 2015/2016 GDP growth accelerating to 6.2%, which is also up 0.1 percentage points from last month’s estimate.
Elsewhere in region, growth in Indonesia and Taiwan was broadly stable in the three months up to September. Economic dynamics in Korea moderated in Q3 on a weaker external sector, while the economy decelerated in Malaysia due to a more restrictive economic environment. Conversely, Hong Kong’s economy accelerated in Q3, following the previous quarter’s dismal performance. That said, growth will likely sputter in Q4 due to disruptions stemming from the pro-democracy protests that peaked in October. In Thailand, economic activity improved timidly in Q3, although growth remained sluggish.
The central banks of Indonesia, Korea, Malaysia, the Philippines and Thailand have decided to maintain their monetary policy rates unchanged since late October. Declining commodity prices and low demand-side pressures have provided leeway for the Central Banks to keep rates at the current level. The State Bank of Vietnam, however, decided to reduce its dong deposit rate cap for terms of one to six months in order to support economic growth and revive lending.
According to preliminary data, inflation in ex-Japan Asia fell from September’s 2.4% to 2.3% in October. The monthly fall mainly reflects lower inflation in India. FocusEconomics Consensus Forecast panelists cut their projections for 2015 from the 3.5% expected last month to 3.3%. The panel lowered its 2014 inflation projections for ex-Japan Asia by 0.2 percentage points to 3.0%.
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