East & South Asia Economic Outlook March 2019

East & South Asia: Economic Snapshot for East & South Asia

February 20, 2019

The clock is ticking on a China-U.S. trade deal

Growth in the East and South Asia region stabilized in the final quarter of 2018, although it remains low by historical standards. Solid private consumption, on the back of declining unemployment rates and wage gains, supported the expansion. Nevertheless, domestic economic imbalances, declining global demand and diminished business sentiment—partially, although not entirely, due to the trade spat between China and the United States—continued to put downward pressure on regional growth. 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.

Contrasting the slight deceleration in China reported last month, economic growth accelerated markedly in Korea in Q4 on the back of bold government spending. The government’s loose fiscal stance also propelled public investment, which helped reduce the contraction in gross fixed capital formation, while the economy benefited from the frontloading of shipments ahead of the planned tariff increases on Chinese goods by the U.S. Further down the road, global trade tensions could hit the performance of the all-important external sector, while the sharp increase in the unemployment rate observed in January and low levels of consumer confidence are threatening to erode private consumption growth.


Economic dynamics in Taiwan softened in Q4 mostly due to a downturn in the tech cycle and lower-than-expected smartphone demand. The domestic side of the economy was also weak in Q4, with gross fixed capital formation moderating on the back of subdued business confidence. In Mongolia, economic growth gained steam in Q4 due to steady commodity exports, solid foreign direct investment (FDI) and improved business sentiment. The political crisis that erupted in early December, however, could undermine economic sentiment in Q1.

Meanwhile, with the 2 March deadline drawing ever closer, all eyes are on the ongoing trade negotiations between China and United States. U.S. President Donald Trump has threatened to increase tariffs from 15% to 25% on USD 200 billion worth of Chinese imports if an agreement is not reached by 1 March. Although both sides stated that progress has been made in the latest round of talks, which ended last week in Beijing, there is no sign that both parties are close to striking a deal before the deadline. In the eyes of U.S. government officials, the large trade surplus that China holds against the U.S., China’s industrial subsidies and intellectual property rights protections in China are the key sticking points. Negotiations will continue this week in Washington.

In India, the government unveiled an expansionary budget for FY 2019 on 1 February ahead of the general elections, which will be held between April and May 2019. It outlines a remarkable increase in spending, which threatens to derail much-needed fiscal consolidation efforts. Meanwhile, as tensions flare between India and Pakistan following a deadly terrorist attack in Kashmir on 14 February, Pakistan is desperately seeking an economic lifeline in order to revive the country’s battered economy. The country secured approximately USD 20 billion in new investment from its ally Saudi Arabia on 17 February, while Prime Minister Imran Khan and IMF officials are also discussing the possibility of a multibillion-dollar support package.

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 The ESA region is taking a wait-and-see approach amid China-U.S. trade negations

An ageing tech cycle, a slowdown in global demand and cooling growth in China are set to hit economic growth in the East and South Asia in the first half of this year. In H2, however, the region’s economy will benefit from an expected recovery in advanced economies as well as positive spillovers from China’s stimulus plans. Moreover, the U.S. Federal Reserve’s decision to adopt a more dovish stance at its January meeting, signaling either zero or only one interest rate hike for this year, will like take pressure off the region’s financial and exchange rate markets. An escalation in the trade war between China and the United States remains a key downside risk, however.

In the second half of the year, global demand will likely recover, supporting regional growth. Furthermore, economic dynamics are expected to pick up 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, unchanged from last month’s forecast. In 2020, the ESA region is seen expanding a slightly softer 5.7%.

This month’s stable 2019 economic outlook for East and South Asia is the result of unchanged projections for Bangladesh, China, Hong Kong, India, Korea, Pakistan and Taiwan. Growth prospects were revised downward for Mongolia and Sri Lanka.

Bangladesh is expected to be the fastest growing economy this year, closely followed by India, both with growth rates well above 7.0%. China and Mongolia are projected to expand a solid 6.2%, while high-income Hong Kong, Korea and Taiwan are forecast to post the softest growth rates, at around 2.3%.

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CHINA | Q4’s soft momentum carries over into 2019

Although the bulk of the regular economic information for January and February will be released in March, available data for this year suggests that the Chinese economy has continued to cool. The manufacturing PMI improved marginally in January although still hovered in negative territory, while export growth surpassed expectations in the same month. That said, analysts warn that January’s surge mostly reflect distortions related to the Lunar New Year (LNY) holidays. The Ministry of Commerce revealed on 10 February that growth in consumer spending moderated over the LNY festivity, signaling that household spending will be sluggish in Q1. In an attempt to revive consumers’ mood, on 29 January, the government announced subsidies on purchases of cars and appliances. Meanwhile, trade talks between China and the U.S. intensified in recent weeks as the 2 March deadline looms.

Economic growth is set to decelerate this year on the back of previous efforts to tackle financial deleveraging and moderating global demand. However, fiscal and monetary easing are expected to cushion the economy against any sharp slowdown. Conversely, a further deterioration in relations between China and the U.S. is the main downside risk. FocusEconomics panelists see the economy growing 6.2% in 2019, which is unchanged from last month’s forecast, before decelerating further to 6.0% in 2020.

INDIA | Government presents an expansionary budget for FY 2019 ahead of the general elections

On 1 February, the government unveiled an expansionary interim budget for fiscal year 2019, which will run from April 2019 to March 2020, that was later passed by parliament on 13 February. The budget is considered as interim because the government that emerges from general elections in April and May could make modifications to it upon assuming power, while its fiscal sustainability has been brought into question despite the largely healthy macroeconomic backdrop. In January, economic activity in the private sector increased at a strong pace due to a stellar showing from manufacturing businesses; on the other hand, activity among service businesses grew at a slower pace than in December. Meanwhile, in October–December, the economy likely grew at a robust pace. This was partly thanks to lower oil prices, which should have supported consumption growth, although lending constraints in the financial sector could have hampered household spending. In other news, a terrorist attack in Kashmir on 14 February severely hit India-Pakistan relations.

Economic momentum is expected to remain steady in FY 2019. Strong government spending should support growth, as could a possible sustained lull in oil prices, although weak public finances and global trade protectionism could weigh on prospects. Our panelists expect GDP growth of 7.3% in FY 2019, which is unchanged from last month’s estimate, and 7.3% again in FY 2020.

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KOREA | Economic outlook darkens in Q1

The economy regained momentum in the fourth quarter of 2018, after growth slowed significantly in the third quarter. Stronger government spending growth, which surged to a near-decade high due to the government’s accommodative fiscal approach, led the upturn. Meanwhile, private consumption expanded at a steady pace and the external sector contributed significantly to the headline reading in Q4. On the other hand, fixed investment fell due to lower investment spending on construction projects. Turning to 2019, the year began on a sour note: In January, the unemployment rate rose to a multi-year high, although consumers were slightly less pessimistic, while merchandise exports fell for the second straight month. Compounding matters, the U.S. could soon hike its automobile import tariffs in the coming months, which would further drag on Korean exports.

The economy should benefit from higher government spending this year. Moreover, although monetary policy should be tighter, it will likely remain accommodative by historical standards. An expected slowdown in export growth and high domestic household debt weigh on prospects, however. FocusEconomics panelists forecast the economy will grow 2.5% in 2019, which is unchanged from last month’s forecast, and 2.5% again in 2020.

INFLATION | Price pressures remain subdued in January

Inflation in East and South Asia declined to an 18-month low of 1.8% in January from 2.0% in December, according to a regional estimate. This was the result of yet another drop in inflation in powerhouses China, India and Korea. Meanwhile, consumer prices returned to growth in Taiwan in the same month, although they remained at an extremely low level. Moreover, inflation accelerated in Pakistan and Sri Lanka. Data is still outstanding for Bangladesh and Hong Kong.

At its 7 February meeting, the Reserve Bank of India cut all monetary policy rates by 0.25 percentage points on the back of slowing global growth and falling inflation. Conversely, the State Bank of Pakistan raised its key rate in an attempt to rein in mounting inflationary pressures. Meanwhile, the Bank of Korea left its base rate steady at its 24 January meeting. This followed a cut at its previous meeting in November amid an uncertain global trade outlook and subdued growth at home.

A recovery in commodity prices, especially of 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 2.5% in 2019, which is down 0.1 percentage points from last month’s estimate, and 2.6% in 2020.

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Ricard Torné

Head of Economic Research

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