Economic Snapshot for Asia
September 23, 2014
The outlook for ex-Japan Asia was stable for the fourth consecutive period this month. FocusEconomics Consensus Forecast panelists left their growth forecasts at 6.2% for this year. The stable outlook mainly reflects unrevised projections for 5 of the 15 economies surveyed, which include regional powerhouse China. Projections for Brunei, Hong Kong, Indonesia, Laos, Singapore and Vietnam deteriorated this month, while India, Malaysia, the Philippines and Taiwan saw their prospects improve. Forecasters surveyed by FocusEconomics maintained their regional growth projections for next year unchanged for the fifth consecutive month at 6.4%.
The steady growth projection for the region came amid healthy economic dynamics in the United States and deteriorating prospects for Japan and the Eurozone. In the United States, the ISM manufacturing PMI jumped to the highest level in over three years in August, while the unemployment rate ticked down in the same month. The Federal Reserve did not make remarkable changes to its previous statement at its policy meeting that took place on 16–17 September, and reaffirmed that, “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.” That said, two members of the FOMC dissented regarding this decision, thus reflecting 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, Prime Minister Shinzo Abe announced changes to both the Cabinet and top positions of the Liberal Democratic Party on 3 September. Abe reshuffled 12 of the 18 Cabinet members, but left key economic officials in their posts, thus signaling his commitment to push his reform agenda ahead. At the same time, this move is intended to revamp the image of Abe’s Cabinet, which was negatively affected by Q2’s disappointing economic data. According to revised figures, GDP contracted 7.1% in Q2 over the previous quarter in seasonally adjusted annualized terms, which was below the 6.8% decline initially reported.
In Europe, tussling between the West and Russia over the conflict in eastern Ukraine dominated the headlines in September. The European Union imposed a new wave of sanctions against Russia on 12 September, which targeted state banks, oil firms and the defense sector. The sanctions, however, excluded the Russian gas industry, which is crucial to Europe. Nevertheless, European authorities stated that these measures could be lifted if the 5 September ceasefire between the Ukrainian government and the rebels holds. Against a backdrop of persistently low inflation and dim economic growth, the European Central Bank cut the three main interest rates, including the deposit rate, which was already negative, and confirmed that it will begin outright purchases of asset-backed securities starting in October. The detailed modalities of these measures will be announced after the Governing Council meeting on 2 October.
Within the ex-Japan Asia region, China’s economic growth continued to lose momentum in recent weeks, which triggered concerns about the country’s ability to achieve the 7.5% growth target set for this year. In August, industrial production expanded at the slowest pace since the trough of the global financial crisis and investment growth weakened to an over-twelve-year low. Slower credit extension, lackluster activity in the real estate sector, and the waning effects of the mini-stimulus that was launched this spring are behind the current weakness of the economy.
Although Chinese authorities signaled that they are willing to tolerate slower growth, August’s disappointing economic data increased the probability of further monetary easing and new targeted stimulus measures. In this regard, in mid-September, the People’s Bank of China (PBOC) injected CNY 500 billion of liquidity into the country’s five largest banks through the Standing Lending Facility. This move is roughly equivalent to a 50 basis-point cut to the reserve requirement ratio. On 18 September, the PBOC also cut its 14-day repo rate by 20 basis points to 3.50%. Moreover, at its regular meeting on 17 September, the State Council extended the number of small companies that do not have to pay value-added or business tax. Taking into account recent developments, FocusEconomics panelists left their 2014 growth projections for China unchanged at 7.4%. Growth prospects for 2015, however, were cut by 0.1 percentage points over the previous month’s estimate to 7.2%.
More than one hundred days have passed since Narendra Modi was sworn in as India’s prime minister. While Modi’s victory was widely welcomed by the business community due to his purported market-friendly stance, his administration’s results have fallen short of investors’ high expectations. In this vein, market analysts warn that Modi must deliver much-needed and far-reaching economic reforms in order to increase India's growth potential. The economy did perform remarkably well in the first quarter of FY 2014/2015, with GDP expanding 5.7% annually, which represented the fastest growth in more than two years. FocusEconomics panelists raised India’s growth outlook for FY 2014/2015 by 0.1 percentage points to 5.4%. The panel sees FY 2015/2016 GDP growth accelerating to 6.1%.
In Thailand, General Prayuth Chan-ocha was appointed as prime minister on 25 August. Shortly after, Prayuth unveiled his cabinet in which most relevant ministries will be run by senior military officials. Prayuth’s cabinet is expected to write a new constitution and announced that general democratic elections will be held no earlier than late-2015. In order to revamp the country’s economy, Prayuth vowed to accelerate budget disbursement and speed up infrastructure projects. In addition, Finance Minister Sommai Phasee urged members of the Central Bank to work together to shore up the economy and the currency.
FocusEconomics panelists left Thailand’s growth outlook for this year unchanged at 1.5%. The panel sees 2015 GDP growth accelerating to 4.3%.
The central banks of Indonesia, Korea and Thailand have decided to keep their policy rates unchanged since early September due to moderate growth in the region and relatively contained inflationary pressures. The Central Bank of the Philippines, however, increased its key policy rate for the second consecutive meeting in a preemptive move aimed at anchoring inflation expectations. While the Central Bank of Malaysia stayed put at its 18 September monetary policy meeting, most panelists predict that there will be a 25 basis-point hike at the next meeting scheduled for 6 November.
According to preliminary data, inflation in ex-Japan Asia fell from 3.1% in July to 2.9% in August. The monthly moderation mainly reflects lower inflation in China and India. FocusEconomics Consensus Forecast panelists cut their 2014 inflation projections for ex-Japan Asia by 0.1 percentage points to 3.3%. For 2015, the panel also cut its projections by 0.1 percentage and now it expects inflation to rise to 3.5%.
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