ASEAN: Economic Snapshot for ASEAN
June 18, 2018
Economic momentum remains solid in Q2 after a positive Q1
The latest indicators suggest that ASEAN’s economy continues to perform well in the second quarter despite swirling global trade tensions, with growth forecast to come in at 5.2% year-on-year. With the exception of Malaysia, manufacturing PMIs for April and May were firmly in expansionary territory across the region, supported by strong domestic demand. In May, Indonesia’s PMI reached a near two-year high, while readings also improved in the Philippines and Vietnam. In Singapore, the indicator has moderated slightly so far in Q2 despite remaining firm, while in April Myanmar’s PMI reached its highest level in the survey’s history before a correction in May.
Other signs corroborate the ongoing momentum, with internal dynamics buttressed by strong labor markets and wage gains. In April, Indonesia saw healthy retail sales growth, while industrial production grew at a robust pace throughout the region. In contrast, the external sector appears to be softening. Import growth is outpacing export growth in many countries, on strong private consumption, higher international oil prices and tough prior-year comparisons for export growth.
The latest GDP readings for the first quarter confirmed regional growth at 5.4%. Comprehensive data for Singapore saw GDP growth revised up, on the back of an expansion in the services sector that was stronger than previously estimated. In addition, the figures point to a broadening of economic momentum towards more domestic-oriented sectors, as well as an incipient recovery in the construction sector. In Thailand, growth was clocked at 4.8% year-on-year in Q1, marking a five-year high and in line with FocusEconomics panelists’ forecasts. The reading was underpinned by higher farming and non-farming incomes, and a recovery in public investment.
On the political front, Malaysia reduced the Goods and Services Tax (GST)—an important source of revenue for the government—to 0% effective 1 June. This should give private consumption a shot in the arm in the short term, at least until a substitute Sales and Services Tax (SST) takes effect from September. However, the move creates fiscal uncertainty. Until the SST is introduced there will likely be a fiscal shortfall, despite the breathing space provided by higher oil prices. In addition, it is unclear whether, once introduced, the SST will raise as much revenue as the GST. To convince investors that it is serious about fiscal discipline, the new administration has moved to reduce infrastructure spending—including scrapping a planned high-speed rail link to Singapore—and trim ministries’ spending and the public sector wage bill.
Thailand is also trying to present a fiscally responsible image; the Junta recently presented a draft budget for FY 2019 aimed at reigning in the budget deficit. Proposed spending is slightly below the FY 2018 budget, although defense spending will receive a notable boost. In contrast, several areas important for future economic development will see spending cuts, including education, agriculture and social development.
Economic outlook looks rosy, but trade concerns are rising
Economic growth should remain solid going forward, as the region continues to benefit from resilient domestic demand. Public infrastructure investment in key economies such as Indonesia and Philippines will support growth, while strong labor markets bode well for private consumption. On the downside, external sectors will likely continue to weaken, as export growth eases after a stellar performance in 2017 and higher crude prices raise the import bill. In addition, tighter financial conditions could weigh on activity, while a further escalation of trade tensions between the U.S. and China would hit the generally open economies of ASEAN hard, particularly given the importance of both countries as key export markets. GDP growth for the region is expected to come in at 5.2% this year, which is up 0.1 percentage points from last month’s estimate and matches last year’s expansion.
This month’s upgrade comes on the back of higher 2018 growth projections for Thailand—following a strong Q1 outturn—and the Philippines. In contrast, growth forecasts for the rest of the economies surveyed in the ASEAN region—including heavyweights Indonesia, Malaysia and Singapore—were unchanged from the prior month. For 2019, our panel sees growth at 5.1%.
Our panel projects that Myanmar will be the fastest-growing economy in the region, with a 7.1% increase expected in 2018. Conversely, Brunei is foreseen logging the weakest expansion this year, at 1.4%. Among the major economies in the region, the Philippines will record the fastest increase, followed by Indonesia and Malaysia.
INDONESIA | Economic growth appears firm in the second quarter
The most recent indicators from Q2 suggest that economic activity is picking up from Q1’s muted performance. Retail sales growth accelerated to a ten-month high in April and should remain elevated, as consumer confidence in May improved markedly. The manufacturing PMI increased in May to the best print in almost two years, underscoring the improving health of the sector. Against this positive backdrop in the domestic economy, S&P Global Ratings affirmed the country’s BBB- rating and stable outlook on 31 May. The ratings agency applauded the government’s prudent handling of fiscal accounts and the recent reform that has increased tax collection. Nevertheless, it warned that increasing external financing costs because of faster-than-expected monetary tightening in the United States and modest increases in the prices of Indonesian key exports could cause external buffers to deteriorate and expose the country to economic shocks.
The economy is expected to accelerate slightly compared to last year on faster growth in government consumption and fixed investment. Higher crude oil prices and a modest price outlook for Indonesian commodities, however, are weighing down growth prospects. FocusEconomics panelists see GDP growth of 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.
THAILAND | Growth hits a multi-year high in Q1, data for Q2 suggests continuing momentum
National accounts data showed the economy continued to enjoy a strong run in the first quarter, growing at the quickest pace in five years. This was largely due to strong activity in the domestic economy as private consumption benefitted from an increase in non-farming income. In addition, the external sector remained solid despite a moderation in export growth and a pick-up in import growth on the back of a strong domestic economy. Data for Q2 continues to suggest that the domestic economy is gaining traction, while the external sector is softening slightly. In April, manufacturing growth accelerated, while the country recorded its second trade deficit of the year, owing to strong import growth outpacing double-digit export growth.
Although growth is expected to moderate in the coming quarters, economic growth should remain robust this year due to healthy domestic demand. Export growth is, however, likely to ease due to a large base effect. Looking to 2019, a tight fiscal stance as outlined in the recent draft budget could drag on growth. Risks to the outlook stem from rising trade tensions, mostly coming out of the United States. Furthermore, high household indebtedness and political uncertainty in the lead up to elections to be held no later than February 2019 could drag on economic prospects. FocusEconomics panelists expect the economy to grow 4.2% in 2018, which is up 0.3 percentage points from last month’s forecast. The panel projects growth of 3.8% in 2019.
MALAYSIA | Economic signs are positive, although fiscal concerns emerge following tax change
Following a robust Q1, the economy appears to have gotten off to a solid start to Q2: Exports jumped and industrial production growth accelerated in April. On the downside, the manufacturing PMI moved further south of the neutral 50-point threshold in May due to weakening domestic demand. The new government reduced the Goods and Services Tax (GST) to 0% effective 1 June. This should provide a boost to private consumption in the short term until the Sales and Services Tax (SST) is introduced on 1 September. However, slashing the GST creates a sizable gap in the budget, raising questions about the government’s finances and whether it will be able to stick to the 2.8% deficit target for 2018. To rein in spending, Prime Minister Mahathir Bin Mohamad has cancelled big infrastructure projects and told ministers to implement austerity measures.
GDP should remain resilient this year on the back of strong private consumption growth, although government consumption is likely to suffer in the near term from the cancellation of previously approved projects and expenditure cuts. Risks are, however, titled to the downside: High household debt servicing costs could drag on private consumption, while uncertainty over government policy and the fiscal situation could dent private sector activity and investment. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.3% this year, unchanged from last month’s forecast, and 5.0% in 2019.
MONETARY SECTOR | Inflation picks up marginally in May
A preliminary estimate by FocusEconomics shows regional inflation accelerated to 2.6% in May from 2.5% in April, on the back of stronger inflation in Laos, the Philippines, Thailand and Vietnam. Price pressures dipped in Indonesia and are still outstanding for the remaining countries in the region. In an unscheduled meeting on 30 May, Indonesia’s Central Bank raised its policy rate from 4.50% to 4.75%, mere weeks after a similar rate hike to 4.50%. The move was designed to support the depreciating currency, particularly given the prospect of the Federal Reserve raising interest rates in mid-June.
Inflation will be supported this year by higher global oil prices and solid domestic activity, although price pressures will remain relatively muted. Our panelists expect inflation to average 2.9% this year, which is unchanged from last month’s estimate and marginally above the 2.8% inflation figure recorded for 2017. Our panel foresees inflation ticking up and averaging 3.1% in 2019.