Asia Pacific

Economic Snapshot for Asia

July 22, 2014

The outlook for ex-Japan Asia was stable again this month as FocusEconomics panelists maintained their growth forecasts for 2014 at 6.2%. The stable outlook mainly reflects unrevised projections for 9 of the 15 economies surveyed by FocusEconomics Consensus Forecast, which include regional powerhouses China and India. Prospects for Hong Kong, Laos, the Philippines, Singapore and Thailand deteriorated this month. Conversely, the panel revised up its estimates for Taiwan. Forecasters surveyed by FocusEconomics left their growth projections for next year unchanged at the previous month’s 6.4%.

The stable outlook for the region contrasts lower growth prospects for the global economy that were driven by a sharp downward revision to the forecast for the United States. During the Semiannual Monetary Policy Report to the Congress that was held on 15 July, Federal Reserve Chairwoman Janet Yellen warned that the Fed could increase its federal funds rate sooner and more rapidly than expected if the labor market continues its quick improvement and if the economy proves to be stronger than anticipated. 

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On the other side of the Pacific, the Japanese government upgraded its overall assessment of the economy on 17 July for the first time in six months, citing that negative spillovers stemming from the April sales tax increase have started to fade. However, a record drop in machinery orders in May—a leading indicator of capital spending over a three- to six- month period—casts doubts on the country’s recovery path.

The European Central Bank (ECB) left the main interest rates unchanged at its 3 July monetary policy meeting. This decision followed ECB’s bold move in June to adopt a negative rate on its deposits. That said, in the statement that accompanied the ECB’s decision, President Mario Draghi stressed the Bank’s commitment to also utilize unconventional instruments should inflation remain low for an extended period of time.

On 15 July, the BRICS nations took an important step toward reshaping the global financial system that is dominated by the European Union, Japan and the United States. The top leaders of the BRICS countries agreed to launch the New Development Bank (NDB), which will assist developing economies in financing infrastructure projects. The NDB, with headquarters planned for Shanghai, will start with capital of USD 50 billion that will eventually increase to USD 100 billion. In addition, the BRICS set up a USD 100 billion reserve currency pool, which will be activated should a currency crisis occur. 

Within the region, growth gained traction in China in the second quarter primarily due to the government’s mini fiscal stimulus and a more accommodative stance from the Central Bank. GDP expanded 7.5% annually in Q2, which was a tad above the 7.4% growth tallied in Q1. On 16 July, the State Council pledged that this year’s economic growth targets will be met and urged authorities to continue to implement the easing measures that have already been rolled out.

Meanwhile, Chinese authorities continued to push forward their reform agenda. On 15 July, the State-owned Assets Supervision and Administration Commission announced a pilot reform in the ownership, management and supervision of six big state-owned enterprises. On 30 June, the China Banking Regulatory Commission announced that it would ease the loan-to-deposit ratio regulation for commercial banks, which is expected to improve credit conditions and support growth. Furthermore, on 27 June, the People’s Bank of China decided to expand a program that allows financial companies to set foreign-currency deposit rates in Shanghai. Initially the program consisted of Shanghai’s Free Trade Zone, but it now covers the entire city. This move was largely seen as another step toward interest rate liberalization. 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%.

Prime Minister Narendra Modi made his first step toward implementing his economic agenda that carried him into office on 27 May. The government presented the Union Budget for FY 2014/2015 on 10 July. The budget is seen as “growth-friendly” because it includes a strong focus on infrastructure projects, foreign investment, economic liberalization and increasing productivity. However, the long-awaited Goods and Services Tax, which will be discussed this fiscal year, is not expected to be implemented anytime soon. The government ratified the 4.1% budget deficit that was established in the Interim Budget in February. However, most analysts expect that more detailed information will be released in the coming months since the current revenue projections are seen as too optimistic to actually be met (see details on page 43). 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%.

Joko Widodo is expected to become the next president of Indonesia following the 9 July elections. Although the results should be announced on 22 July, most pollsters predict that Widodo will be declared the winner by a margin of around 5% over Prabowo Subianto. Nevertheless, if Widodo does win, Subianto could contest the outcome in a constitutional court, which would prolong the political uncertainty. Widodo has been characterized as a market-friendly candidate who is willing to implement much-needed reforms to reinvigorate the economy and boost growth. During the campaign, Widodo promised that bureaucratic overhaul and infrastructure improvements would be his top priorities. In addition, Widodo also plans to cut the government’s expensive fuel subsidies to boost revenue and finance infrastructure spending. (see details on page 58). FocusEconomics panelists left Indonesia’s growth outlook for 2014 unchanged at 5.3%. The panel sees 2015 GDP growth accelerating to 5.7%.

The central banks of Indonesia, Korea and Taiwan have decided to maintain their policy rates unchanged since late June due to stable domestic economic conditions and a gradual recovery in the global economy. Conversely, the Central Bank of Malaysia decided to hike its key policy rate for the first time in three years in an attempt to counter sticky inflation and mitigate the risk of broader economic and financial imbalances. The majority of the FocusEconomics Consensus Forecast panelists expect that the Central Bank of the Philippines will join Malaysia in a tightening phase as early as this quarter.

The Korean won continued to appreciate in recent weeks and nearly touched the psychological floor of KRW 1,000 per USD on 3 July. However, the won has lost some ground of late amid rumors that the Central Bank stepped in to intervene in the country’s foreign exchange market (see details on page 76).

According to preliminary data, inflation in ex-Japan Asia decelerated in June, falling from 3.4% in May to 3.1%. The monthly moderation mainly reflects lower inflation in China and India. FocusEconomics Consensus Forecast panelists left their 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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