East & South Asia: East & South Asia
January 22, 2019
Domestic demand buttresses growth in Q4 as external risks mount
The East and South Asia region closed 2018 on a relatively solid footing despite tighter financial conditions, trade tensions between China and the United States, equity-market turbulence and as the global tech cycle appears to be approaching its latter stages. The region benefited from solid domestic demand on the back of low unemployment rates, rising labor participation and wage gains. According to an estimate for the region produced by FocusEconomics, ESA countries grew an aggregated 6.0% year-on-year in the fourth quarter. The print matched both Q3’s expansion and last month’s estimate. Looking at the year as a whole, ESA economies expanded an aggregated 6.2% in 2018 (2017: +6.3%).
China, which accounts for over two-thirds of the region’s nominal GDP, is the only country to have released their national accounts for Q4. Here, economic growth was reported to have decelerated to 6.4% in Q4 (Q3: +6.5% year-on-year), which was in line with expectations. Monthly data suggests that private consumption lost steam in the quarter, likely reflecting growing economic uncertainties. Conversely, policy easing shored up investment, while the China–U.S. trade war likely took its toll on economic growth. In efforts to propel economic activity and avoid a much-feared hard landing, Chinese authorities called for bolder fiscal and monetary support at December’s Central Economic Work Conference, including new tax cuts and a further opening-up of the economy. The top leadership also prioritized protecting intellectual property rights, which was seen as a gesture of goodwill to the United States amid ongoing trade talks between the countries as the 1 March deadline draws ever nearer.
Elsewhere in the region, the manufacturing PMI readings for December suggest that most of the East Asia economies have been affected by the slowdown of the technological sector, which could translate into weaker investment and external demand in the first half of the year. In line with these concerns, export figures worsened in December across the region. Along with a cooling tech cycle, this could also reflect spillovers from the end of some earlier frontloading of orders in anticipation of U.S. trade tariffs on Chinese goods. Although India remains the main outlier in the ESA region, with the composite PMI firmly entrenched in positive territory, private consumption has started to show signs of fatigue and the overall economy could feel the pinch of reduced fiscal room and a battered shadow banking sector.
On the upside, financial markets have stabilized in December, giving a much-needed respite to most currencies in the region. Signs that the U.S. Federal Reserve is ready to pause its tightening cycle and progress in the trade negotiations shored up investor confidence.
Aging tech cycle and global economic uncertainty weigh on ESA’s 2019 growth outlook
The East and South Asia region seems to be in store for a roller-coaster year, with growth expected to decelerate in the first half of the year before rebounding towards the end of 2019. The peaking of the technology cycle will likely hurt all export-driven economies in ESA, which represent the bulk of the region’s nominal GDP. Moreover, the region will suffer from a gradual tightening of global financing conditions, especially in South Asia. While the trade war between China and the United States remains on hold for now, no tangible progress has yet been made and Trump’s threats of yet more tariffs effective 1 March 2019 loom large.
In the second half of the year, global demand will likely recover, supporting regional growth. Furthermore, economic dynamics are expected to pick up briskly in India due to renewed investment momentum as political certainty rises after the May general elections and previous policy reforms start to kick in. Overall, the region should benefit from China’s pro-growth policies, which are expected to partially offset spillovers from higher tariffs on Chinese exports, as well as resilient domestic demand in the remaining countries.
FocusEconomics panelists expect that economic growth in the ESA region will decelerate from a projected 6.2% in 2018 to 5.8% this year. The 2019 estimate for the region was downgraded by 0.1 percentage points compared to last month’s forecast, which, if confirmed, would represent the worst performance in 18 years. In 2020, the ESA region is seen expanding a slightly softer 5.7%.
This month’s downgrade to the 2019 economic outlook for East and South Asia reflects downgrades to powerhouses China and India as well as Hong Kong, Korea, Pakistan and Sri Lanka. Growth prospects were stable in Mongolia and Taiwan, while Bangladesh was the sole country to receive an upward revision this month.
Bangladesh is expected to be the top performer this year, closely followed by India, both with growth rates well above 7.0%. Mongolia, set to expand 6.4%, will complete the podium. China is seen expanding a still-robust 6.2%, while high-income Hong Kong, Korea and Taiwan are forecast to post the softest growth rates, at around 2.3%.
CHINA | Authorities will ease fiscal and monetary conditions further this year to support growth
Economic growth slowed again in the fourth quarter as spillovers from both financial deleveraging earlier in the year and the trade spat between China and the United States continue to weigh on economic activity. Although policy easing is preventing the economy from decelerating sharply and the slowdown appears to be manageable for now, risks are mounting. In order to buttress the economy, Chinese authorities are expected to ease fiscal and monetary conditions further this year as outlined at the December Central Economic Work Conference. Moreover, although trade talks with the U.S. seem to be making progress, the March deadline for new tariffs is looming with no concrete results yet on the table.
Economic growth will remain lackluster this year on the back of moderating domestic growth amid trade tensions between China and the U.S. Although authorities will rely on fiscal and monetary policy support to avoid any sharp slowdown, the scale of the policy stimulus will be rather limited compared to previous initiatives. FocusEconomics panelists see the economy growing 6.2% in 2019, which is down 0.1 percentage points from last month’s forecast, before decelerating slightly to 6.0% in 2020.
INDIA | All eyes on FY 2019 government budget as elections draw nearer
The economy appeared to perform quite well in the third quarter of fiscal year 2018, which ran from October to December, after a slowdown in the second quarter. In Q3, economic activity in the private sector increased at the fastest pace since the current survey data series began in January 2016. However, in the same period, the merchandise trade deficit widened slightly year-on-year. Looking ahead, the government will unveil its interim budget for the 2019 fiscal year on 1 February, which will cover its accounts until a new government is formed after the May general elections. After a spate of poor electoral showings for his party in December, Prime Minister Modi could resort to further populist spending measures, which would have negative ramifications for the already-strained public finances.
Looking to the next fiscal year, economic growth is expected to remain broadly stable, underpinned by strong government consumption. However, government fiscal slippage, global trade protectionism and oil price volatility all cloud prospects. FocusEconomics Consensus Forecast panelists expect GDP growth of 7.3% in FY 2019, which is down 0.1 percentage points from last month’s estimate, and 7.3% again in FY 2020.
KOREA | Economy gathers steam in Q4 after Q3’s weak outturn
The economy appeared to have regained some momentum in the fourth quarter of 2018, after growth slowed significantly in the third quarter. The unemployment rate averaged slightly lower in Q4 compared to Q3, while merchandise exports accelerated in the same period despite slowing global trade. Public spending seems to have picked up in the same period. That said, additional data suggests that the economy remains far from reaching full potential, with both consumer and business confidence posting weak results throughout Q4. In other news, household lending growth slowed for the second consecutive year in 2018, suggesting that the government’s stricter financing rules are having the desired effect. Nevertheless, the rate of increase in 2018 was still higher than its target.
Higher government spending should support economic activity this year. Moreover, although monetary policy will be tighter, it will remain accommodative by historical standards. However, an expected slowdown in export growth and high domestic household debt weigh on prospects. FocusEconomics panelists forecast the economy will grow 2.5% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.5% again in 2020.
INFLATION | Oil price plunge sinks regional inflation to an over one-year low in December
Inflation in East and South Asia declined to a 15-month low of 2.0% in December from 2.3% in November, according to a regional estimate. The print was the result of a sharp correction in global oil prices in December, which weighed on inflation in seven out of the nine economies covered in our East and South Asia report. Inflation was stable in Mongolia, while data is still outstanding for Hong Kong.
In order to shore up economic growth, the People’s Bank of China cut the reserve requirement ratio for financial institutions by 100 basis points in early January. This move is in line with Chinese authorities’ policy guidelines unveiled in December and, looking ahead, analysts foresee further monetary policy easing. Meanwhile, as expected, Taiwan’s Central Bank of the Republic of China left the discount rate unchanged at 1.375%.
A recovery in commodity prices, especially oil following the recent cuts in production, should support price pressures going forward. That said, inflation will remain at relatively low levels. Panelists polled by FocusEconomics project average inflation of 2.6% in 2019, which is down 0.1 percentage points from last month’s estimate, and 2.6% again in 2020.
Head of Economic Research