ASEAN Economic Outlook February 2018

ASEAN: Solid Q4 2017 economic momentum to carry over into Q1 2018

February 21, 2018


Robust external demand, tightening labor markets and accommodative monetary policies boosted the economy of the Association of Southeast Asian Nations (ASEAN) in the last quarter of 2017. A more complete set of data shows regional GDP increased 5.3% in annual terms in the fourth quarter, the second-highest expansion since Q1 2013 and below the 5.6% expansion recorded in the third quarter. The fourth-quarter print puts full-year growth at 5.2% in 2017, the strongest expansion in five years and above 2016’s 4.7% rise.

The solid economic performance in the fourth quarter reflected strong, albeit decelerating, growth in most of the region’s economies. In Thailand, GDP grew at a slightly slower clip in Q4 from Q3 as government spending nearly stagnated, offsetting stronger growth in private consumption and exports, and a robust contribution from inventories. Nonetheless, Thailand’s economy expanded in 2017 at the fastest pace in five years on solid exports and a healthy tourism sector. In Malaysia, growth also decelerated from the previous quarter in Q4 on the back of lower public capital outlays; however, it remained solid overall, buttressed by a higher contribution from the external sector and resilient private consumption.

The economy of the Philippines also decelerated to some extent from the previous quarter in Q4. Growth in the domestic sector was supported by upbeat consumer confidence, healthy credit growth and a tighter labor market, but the external sector weighed on the economy’s overall performance as imports outpaced exports. In Singapore, growth decelerated more sharply in the fourth quarter compared with its regional peers, as activity in the manufacturing sector plunged in quarter-on-quarter terms. Conversely, growth in Indonesia, the region’s largest economy, ticked up in Q4 from the previous quarter, driven by robust fixed investment growth and increased government spending.

Incoming data for the first quarter of 2018 remains largely upbeat, with higher manufacturing PMIs for most countries in the region in January, and robust trade reports signaling that external demand remained healthy early in the year. That said, the entry in force of a new tax scheme in Philippines on 1 January seems to have disrupted domestic demand in the country, with car sales growth moderating and the PMI softening. Nonetheless, a strong pick-up in government revenues because of higher taxes bodes well for publicly-funded infrastructure projects. All told, regional growth is expected to clock in at 5.2% year-on-year in the first quarter of 2018.  

Economy to continue growing at a solid clip in 2018

Regional growth is seen expanding 5.1% in 2018, which is unchanged from last month’s estimate. The economy of the ASEAN region will continue benefitting from the same tailwinds that were in place last year, including solid demand from abroad for high-tech goods, improving labor dynamics and robust growth in capital outlays. A sizeable downturn in Chinese demand for ASEAN goods and services has yet to materialize, while monetary conditions are likely to tighten only very gradually through the course of the year. In addition, general elections in some of the region’s largest economies bode well for increased public spending. For 2019, economic growth is expected to remain broadly unchanged, decelerating marginally to 5.0%.

The steady growth estimate for 2018 reflects unchanged projections for all but three of the economies surveyed in the region. Malaysia, Singapore and Vietnam were the economies for which our panel upgraded their views of the economies. Although monetary conditions remain accommodative, mounting price pressures in the U.S. have raised concerns that the Federal Reserve will tighten more than currently signaled, which has likely put panelists on a wait-and-see approach regarding the outlook for the ASEAN region.

Myanmar is projected to be the region’s best performer in 2018, expanding 7.4%, followed by Cambodia. On the other end of the spectrum, Brunei is forecast to grow 2.6%, and the more mature economy of Singapore is expected to increase 3.0%. Looking at the region’s heavy lifters, the Philippines will lead the pack, expanding 6.6% this year. The Indonesian and Malaysian economies are both expected to grow 5.3%. Thailand is seen growing a more moderate 3.8%.

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INDONESIA | High-frequency data for Q1 suggests economic momentum persisted early in the year

Growth ended 2017 on a solid note, accelerating for the second consecutive period in the final quarter of the year. Booming investment and greater public sector spending drove the uptick, while soaring imports eroded the external sector’s contribution. A pipeline of infrastructure projects caused investment in the construction sector to grow at a particularly strong pace; overall, growth was more broad-based in the quarter. Incoming data for the first quarter of 2018 revealed that economic dynamics are likely to be unchanged. The manufacturing PMI edged up in January, while imports soared in the same month—suggesting continued growth in investment. However, the trade balance recorded its third deficit in the past two years. Meanwhile, the rupiah fell to the lowest level in nearly two years on 8 February, amid heightened volatility in global stock markets.

Strong investment growth and higher government spending due to upcoming regional and general elections should fuel higher growth this year. That said, faster and larger increases in U.S. interest rates are a risk to the economy’s prospects, as they could lead to capital outflows and put pressure on the rupiah. FocusEconomics panelists see GDP expanding 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.

THAILAND | Economy decelerates more than expected in Q4

Recently released data indicated the economy grew at the fastest rate in five years in 2017, closing the year on a strong note despite slower growth in the final quarter. Growth was supported by a strong external sector throughout the year, and in Q4 the manufacturing sector also performed admirably. The external sector’s recovery was further boosted by robust tourism activity. The manufacturing PMI for January hinted at a positive start to 2018. It marked the second consecutive month in which the PMI remained in expansionary territory, and the highest reading in nearly a year. Business confidence strengthened as improving economic conditions and activity, as well as a recovery in private consumption, fed into an optimistic outlook.   

This year the economy will likely be supported by a rebound in fixed investment and government consumption ahead of elections scheduled for November. Private consumption should remain solid but will be weighed down by high levels of household debt. Export growth is expected to moderate due to a larger base effect. November’s elections could lead to social unrest and dent investor confidence. Elections have been postponed several times, leading to protests. FocusEconomics panelists expect the economy to grow 3.8% in 2018, unchanged from last month’s forecast. The panel projects growth of 3.7% in 2019.

MALAYSIA | Economy continues to grow at full steam as general elections loom

The economy maintained solid momentum in the fourth quarter, with GDP expanding 5.9% in annual terms from a 6.2% increase in the previous quarter. The mild deceleration reflected slightly softer domestic demand growth, particularly in public capital outlays, which was partially offset by a larger contribution from the external sector. Incoming data for Q1 suggests growth continued to be solid in early 2018, with the January PMI moving back into expansionary territory, showing business confidence was at its joint-highest in over four years. Meanwhile, the country is gearing up for a general election to be held before August. The opposition remains splintered, and it is likely the ruling Barisan Nasional (BN) coalition will emerge victorious. The likelihood of a BN victory is also being compounded by the redrawing of electoral boundaries ahead of the general election, which critics claim favor the BN.

Economic growth will moderate slightly this year on the back of higher borrowing costs and weaker export growth. Nonetheless, an improving labor market and firmer wage growth, a pro-cyclical 2018 budget and ample infrastructure spending will ensure growth continues at a solid clip. FocusEconomics Consensus Forecast panelists expect GDP to expand a healthy 5.3% this year, up 0.1 percentage points from last month’s estimate, and 5.0% in 2019.

MONETARY SECTOR | Inflation moderates in January

Preliminary figures reveal that inflation eased marginally in ASEAN in January, softening from 2.5% in December to 2.4%. The small deceleration reflected weaker inflation in Indonesia, Laos and Thailand, which more than offset stronger price pressures in Malaysia, the Philippines and Vietnam.

Inflation remained subdued last year due to moderate food price pressures, allowing a majority of the region’s central banks to maintain accommodative stances. Nonetheless, a U.S. Federal Reserve in full tightening mode and stronger economic growth in the region is narrowing central banks’ ability to maneuver. In recent weeks, the banks of Indonesia, the Philippines and Thailand kept their interest rates unchanged, moves warranted by soft price pressures and well-anchored inflation expectations. The Bank Negara Malaysia, however, increased the overnight policy rate by 25 basis points to 3.25% on 25 January in a bid to prevent financial risks from arising due to prolonged monetary accommodation.

Regional inflation averaged a modest 2.9% in 2017. The Consensus Forecast for this year indicates that price pressures will remain tamed but will strengthen slightly from last year. Inflation is seen averaging 3.0% in 2018, which is down 0.1 percentage points from last month’s forecast. For 2019, our panel sees inflation broadly stable at 3.2%.


Written by: David Ampudia, Senior Economist

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