More supportive growth stance in China likely to shore up regional growth in the short term
March 23, 2016
Growth in East and South Asia (ESA) declined to a 14-year low of 6.3% in 2015 (2014: +6.6%) according to a more complete set of data. The entire region suffered from heightened volatility in the financial markets and weak global growth. That said, the brunt of the pain was unevenly distributed across economies. Countries that had benefited from being deeply integrated into the world’s second largest economy in the past felt the brunt of the pain in 2015 as the fall in Chinese demand and sharp swings in China’s financial and exchange rate markets reverberated across these countries. In this regard, Hong Kong, Korea, Mongolia and Taiwan all recorded softer expansions in 2015. On the other hand, economies that are more reliant on internal demand managed to accelerate in the same period.
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While efforts from China’s policymakers to support growth have started to bear fruit, there are signs suggesting that the economy continues to gradually decelerate and that a pickup in momentum, if any, will be short lived. While the possibility of a hard landing in China is remote, authorities signaled a more growth-supportive stance at this year’s National People’s Congress as they will adopt a “more” proactive fiscal policy and a prudent monetary policy “with flexibility”. This wording will likely translate into a larger fiscal deficit—lower taxes and stronger government investment—and further rate and reserve requirement ratio cuts. Emphasis on boosting demand in China helped to shore up economic sentiment in the region somewhat, yet the gradual rebalancing of the economy will continue to weigh on ESA’s growth, particularly among export-oriented economies.
Along with China’s ongoing slowdown, the region’s economic outlook is facing other significant risks. If the United States Federal Reserve moves to hike rates again, it could trigger further volatility in the region’s financial and exchange rate markets. Moreover, skepticism is growing that Abenomics will not be able to rekindle Japan’s economic growth. Japan is one of the region’s key trade and funding partners, and if its economy enters into recession, it could further dampen regional growth. FocusEconomics Consensus Forecast panelists expect the ESA economy to expand 6.1% in the three months up to March, which would be in line with Q4’s result.
Spillovers from China’s slowdown drive down ESA economic outlook this month
Economic data for the start of the year corroborate that weaknesses that plagued growth in 2015 have likely carried into 2016. Despite signs that government stimulus measures have finally taken off, growth dynamics in China remain weak. This situation is reverberating across the region, mainly through weaker trade and lower foreign direct investment, and is having a negative impact on economies with stronger ties to China such as Hong Kong, Mongolia and Taiwan. FocusEconomics panelists cut the region’s growth projections for 2016 by 0.1 percentage points to 6.0%. For 2017, our panel of analysts foresees the ESA economy slowing further to a 5.9% increase.
This month’s cut the regional economic outlook for 2016 reflects a downward revision to growth estimates for Hong Kong, Mongolia, Taiwan and Sri Lanka. While panelists made no change to their projections for Bangladesh, China, India and Korea, Pakistan was the sole country for which the panel upgraded its view of the economy.
India is expected to be the region’s fastest-growing economy in 2016, with a 7.5% expansion, followed by Bangladesh, with an expected 6.6% increase. At the other end of the spectrum, Hong Kong and Taiwan are projected to be the slowest economies, with an increase of 1.9% and 1.7%, respectively. China’s economy is seen expanding 6.5% in 2016, which is in line with the lower band of this year’s economic target of 6.5%–7.0%.
CHINA | Authorities rubberstamp more easing bias for this year
Recent economic data suggest that policy support is starting to feed into the economy as growth in fixed-asset investment picked up in the January–February period. Investment is gradually recovering on the back of healthier dynamics in the property sector and stronger public investment. Against a backdrop of challenging economic conditions, the National People’s Congress approved lowering the GDP target for this year and top leadership emphasized that 2016 will be a difficult year for growth. In an attempt to meet this year’s 6.5%–7.0% growth target, the government might be tempted to utilize old recipes to support the economy at the expense of curbing the speed of much-needed structural reforms.
Although China is facing tough economic hurdles due to domestic imbalances and faltering external demand, bold support from authorities is expected to cushion any hard landing. That said, support from authorities via cheap credit, strong investment and a loose monetary policy has the potential to exacerbate economic imbalances in the medium and long term. FocusEconomics Consensus Forecast panelists see GDP expanding 6.5% in 2016, which is unchanged from last month's projection. In 2017, the panel sees GDP growth slowing to 6.2%.
INDIA | 2016 budget emphasizes fiscal consolidation
India’s economy lost steam in the October to December period, but is still on track to be one of the fastest-growing economies in Asia this year. Resilient domestic demand and a limited reliance on the external sector are expected to fuel a pickup in growth in fiscal year 2015, however, data for the final quarter are mixed. Industrial production deteriorated in January, while the manufacturing PMI was stable in February. On 29 February, Finance Minister Arun Jaitley unveiled the government’s budget for upcoming fiscal year 2016. The budget continues with the government’s fiscal consolidation path and introduces a number of measures to spur the rural economy and improve the business environment.
Strong private consumption should continue to fuel robust rates of growth going forward. However, slow reform implementation may limit the economy’s trajectory. FocusEconomics panelists expect GDP to increase 7.5% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, the panel sees growth remaining stable at 7.5%.
KOREA | Economy loses momentum in first quarter of the year
Korea’s GDP accelerated toward the end of 2015 as it was fueled by strong domestic demand, which continued to be supported by a fiscal stimulus. In 2015, the economy increased 2.6%, which was below the pace of growth in 2014. Hopes of another strong expansion in Q1 2016 have been dashed by negative news: industrial production contracted for a third consecutive month in January and the manufacturing PMI fell to a six-month low in February. Meanwhile, business sentiment remained low in March, while consumer confidence fell to an four-year low in February despite the government’s decision to extend the fiscal stimulus this year. Moreover, double-digit declines in exports in the first two months of the year continue casting a shadow on Korea’s export-driven economy.
Korea’s economy will continue to grow this year, supported by strong domestic demand. However, downside risks to the outlook persist in the form of prospects for sluggish global growth and the spillover effects on Korea’s exports as well as rising political tensions related to North Korea’s nuclear threats. Analysts expect GDP to expand 2.7% in 2016, which is unchanged from last month’s forecast. The panel sees growth at 2.8% in 2017.
INFLATION | Lunar New Year pushes inflation higher in February
Inflation in East and South Asia continued to accelerate in February, rising from 2.4% in January to 2.7%, according to preliminary data. February’s result marked the highest inflation rate since August 2014 as spending for the Lunar New Year holidays drove prices, particularly for food, higher. Going forward, inflationary pressures are expected to remain largely contained due to low commodity prices and relatively weak regional growth. This situation provides more leeway for the central banks in the region to keep a loose monetary policy and support the economy.
As risks to the inflation outlook remain broadly balanced, analysts project that the region’s inflation will average 2.2% in 2016, which is unchanged from last month’s estimate. Looking at the countries in the region, analysts kept the forecast for six of the nine economies surveyed stable, including all of the region’s big players. Our panel of experts expects inflation to rise to 2.4% in 2017.
Written by: Ricard Torné, Senior Economist
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