Accommodative monetary policies by regional central banks, decisive support from governments and a more benign external sector caused growth in East and South Asia (ESA) to remain robust in the three months up to June. A comprehensive set of data corroborated that the region had expanded 6.2% in Q2, which was in line with the result tallied in Q1. A boost in both infrastructure and the real estate sector prompted growth in China to stabilize following three quarters of slow but steady deceleration. While the government’s fiscal stimulus plan propelled growth in Korea, Hong Kong’s acceleration was mostly attributable to inventories and the external sector. In Taiwan, the economy expanded for the first time in four quarters due to a mild rebound in exports. Finally, Mongolia’s economy slowed down sharply as the country is mired in a deep fiscal crisis.
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Despite Q2’s result, the economic situation remains fragile. Although China’s government-led growth bodes well for regional economic dynamics in the short-run, it has the potential to delay much-needed economic reforms and exacerbate domestic imbalances. Should these vulnerabilities materialize, they could deal an enormous blow to the region given China’s central role in ESA. In Hong Kong, Q2’s unexpected acceleration is expected to be short-lived as the economy faces lingering downside risks such as a strong Hong Kong dollar, a correction in the property market and volatile global financial markets.
While economic data are not showing a clear trend in ESA’s second-largest economy India, reform is gaining momentum. On 3 August, the Parliament passed the long-awaited Goods and Service Tax (GST) Bill following months of political dispute. The new bill will streamline, unify and simplify the current indirect tax structure. The bill has still to clear some serious hurdles before it becomes a law and this may be difficult to achieve by the April 2017 implementation target. Nevertheless, it represents one of the most important reforms in decades and is expected to improve India’s long-term fiscal sustainability.
Overall, tepid international demand and uncertainty in the global financial markets continue to drag on the region’s economic outlook. On the flip side, the delay in the United States Federal Reserve’s tightening cycle will allow central banks in the region to adopt a more accommodative monetary policy. Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA economy expanding 6.0% in Q3.
Economic outlook for 2016 remains stable on resilient domestic dynamics
Risks to ESA’s economic outlook appear to be broadly balanced. Decisive policy support in China and other countries including Korea, coupled with a general loose monetary policy, are boding well for growth, at least in the short term. Yet domestic challenges and weak global demand continue to dent ESA’s prospects. As a result, our panel of analysts decided to maintain ESA’s 2016 growth estimate stable for the third consecutive month at 6.0%. For 2017, the Consensus from our panel of analysts is for the ESA economy to moderate slightly to a 5.9% increase.
This month’s stable regional economic outlook for 2016 reflects unchanged growth prospects forChina, India and Taiwan. Estimates for Hong Kong, Korea and Mongolia were revised upward, while Sri Lanka was the sole country for which analysts downgraded their view of the economy. Preliminary figures for the Bangladeshi and the Pakistani economies show that growth in FY 2016, which ended in June 2016, was 7.1% and 4.7% respectively.
India is expected to be the region’s fastest-growing economy in 2016 with a 7.5% expansion, followed by China, with an expansion of 6.6%, respectively. At the other end of the spectrum, Taiwan, Hong Kong and Mongolia, in that order, are projected to be the slowest-growing economies, with growth rates equal or close to 1.0%. Korea’s economy is seen expanding 2.6% in 2016.
CHINA | Further policy action in the pipeline following weak start to Q3
The economy entered Q3 on a weaker footing following Q2’s resilient growth fueled by decisive policy support. The downward trend in fixed-asset investment persisted in July as the rebound in the real estate sector continued to fade and infrastructure investment decelerated sharply. In July, the manufacturing PMI dipped into negative territory, while retail sales moderated. Analysts warn that floods in some provinces also played a role in the deceleration observed at the outset of H2. Against this backdrop, the Chinese authorities will likely resort to further stimulus to ensure that the economy meets this year’s growth target of between 6.5% and 7.0%. Growth in fiscal spending nearly doubled that of government revenue in the first seven months of the year, highlighting the government’s proactive fiscal policy.
Policy stimulus and a weak yuan have the potential to boost growth throughout the rest of this year. On the downside, a rapid cooling in the property sector could prompt the Chinese economy to slow sharply. In a longer-term perspective, credit-fueled growth has the potential to slow China’s economic transition and exacerbate macroeconomic imbalances. FocusEconomics panelists forecast that GDP will rise 6.6% in 2016, which is unchanged from last month's projection. In 2017, the panel expects GDP growth to slow to 6.3%.
INDIA | Parliament passes crucial GST Bill
India’s economy grew at the fastest pace in six years in FY 2015 as surging private consumption offset slowing fixed investment and a weak external sector. Data for the first half of FY 2016 suggest that the economy remains on an uneven footing: industrial production picked up pace in June, while exports swung back to contraction in July. Meanwhile, the government has accelerated reform momentum, creating the foundations for a higher growth trajectory going forward. On 3 August, the upper house of Parliament approved the Goods and Services Tax Bill, one of the most significant economic reforms in decades. The bill will streamline the country’s complex tax system, reducing business costs, and it should widen the tax base going forward. While the GST Bill has cleared the largest hurdle towards implementation, a number of steps remain to be taken and analysts are skeptical that it will be implemented by the government’s target of April 2017.
The country is set for another year of solid growth as consumption benefits from a healthy monsoon and a rise in public sector salaries. FocusEconomics panelists held their FY 2016 GDP forecast unchanged this month at 7.5% growth. For FY 2017, the panel sees growth stable at the robust pace of 7.5%.
KOREA | Policy stimulus propels growth in Q2
A notable pickup in domestic demand spurred faster GDP growth in the second quarter, owing to supportive fiscal and monetary stimulus. The government’s efforts to stimulate the economy through higher public spending continued to be reflected in strong activity in construction, particularly in public works. Exports of goods and services grew faster in Q2, buttressed mainly by exports of services. Conversely, Korea’s merchandise exports in U.S.-dollar terms declined for the 19th consecutive month in July. Survey-based data for Q3 sent mixed signals, which suggests that the economy remains vulnerable to headwinds. In July, the manufacturing PMI declined, while consumer confidence improved. Meanwhile, confidence among Korean businesses moderated in August.
Although the government announced a massive stimulus program to boost economic growth this year, analysts remain skeptical about whether the program will be successful. Moreover, economic headwinds from Brexit and slower Chinese growth are casting a shadow on Korea’s outlook. Forecasters expect GDP to grow 2.6% in 2016, which is up 0.1 percentage points from last month’s forecast. Next year, analysts expect growth to stabilize at 2.6%.
INFLATION | Inflation stabilizes in July
Inflation in East and South Asia was stable at June’s 2.4% in July according to comprehensive data. Higher inflationary pressures in India, Pakistan and Taiwan were mainly offset by softer inflation readings in the rest of the region including China, Hong Kong and Korea. Although inflation will remain broadly stable in the coming months, the recent decline in commodity prices will exert downward pressure on regional inflation. Conversely, volatile food prices could fuel inflationary pressures. Against this backdrop, central banks are likely to keep an accommodative monetary policy stance.
The 2016 inflation projection for the region is stable at 2.4% for the third consecutive month. Looking at the countries in East and South Asia on an individual basis, analysts left the forecasts stable for four out of the nine countries surveyed, including China and Korea. Projections for Hong Kong, India and Sri Lanka were upgraded, while estimates for Bangladesh and Mongolia were revised downward. Our panel of experts expects inflation to increase to 2.6% in 2017.
Written by: Ricard Torné, Senior Economist