ASEAN Economic Outlook May 2018

ASEAN: Economic Snapshot for ASEAN

May 25, 2018

Economic momentum continues unabated in Q1


A more comprehensive estimate of aggregate GDP growth in the Association of Southeast Asian Nations (ASEAN) shows that the regional economy expanded robustly in the first quarter, benefiting from solid domestic demand and accommodative monetary conditions. However, many countries’ external sectors appear to have softened in annual terms, due in part to tough prior year comparatives following a surge in exports last year. The region’s economy expanded 5.4% in Q1, up slightly from last month’s preliminary estimate of 5.3% and the prior quarter’s figure of 5.3%.


After Singapore and Vietnam reported robust Q1 outturns last month, recent weeks saw other regional heavyweights take center stage. Indonesia—ASEAN’s largest economy—chalked up robust growth thanks to a surge in investment. However, the figure was slightly below market expectations on mediocre private consumption, which was in line with soft retail sales figures in the quarter. This was likely driven in part by subdued credit growth, despite monetary loosening in recent years.


Solid growth in the Philippines was underpinned by the government’s infrastructure drive. This dynamic will likely be maintained going forward as part of President Rodrigo Duterte’s plan to spend USD 180 billion to overhaul dilapidated roads, bridges, railways and airports. In addition, private consumption was supported by buoyant remittances and a tight labor market. On the flipside, the construction push is raising capital imports, moderating some of the growth impetus and causing the current account deficit to widen. 


In Malaysia, growth moderated for the second consecutive quarter but remained solid, underpinned by resilient private consumption. However, private investment was likely dampened by pre-election jitters. Economic uncertainty has only deepened following the outcome of the vote, which saw the incumbent Barisan Nasional party ousted and the Pakatan Harapan coalition winning a majority in parliament. The economic impact of the result is still uncertain. While the announced abolition of the Goods and Services tax and the possible reintroduction of subsidies would likely boost private spending, such moves could generate concerns over fiscal discipline and dampen business investment. A review of public procurement could hamper government spending in the near term.


Available indicators for April, although limited, point to a solid start to Q2. Manufacturing PMIs were firmly in positive territory in virtually all countries, with the indicator rising to a near two-year high in Indonesia. 


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Economic outlook looks upbeat, but trade concerns linger


Economic growth should remain robust 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 are likely to soften, as export growth eases after a stellar performance in 2017, and tighter financial conditions weigh on activity. In addition, a possible 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 5.1% this year, which is unchanged from last month’s estimate and only slightly below the 5.2% expansion recorded last year.


The stable 2018 GDP estimate for this month reflects steady growth projections for virtually all of the economies surveyed in the ASEAN region, including Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. The economies of Brunei and Myanmar are projected to expand less than estimated last month. For 2019, our panel sees growth stable at 5.1%.


Despite this month’s downgrade, our panel still projects 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 | Domestic economy remains robust, but the external sector shows signs of softening


A muted performance by the external sector caused year-on-year GDP growth to decelerate in the first quarter. While waning trade momentum and subdued prices for Indonesian commodities weighed on export growth, imports soared at a double-digit rate, underscoring that the domestic economy was in good shape. More recent data from Q2 is mixed and suggests that the domestic economy continues to perform strongly while weakness lingers in the external sector. In April, the manufacturing PMI reached an over one-year high, and consumer confidence edged higher. However, the trade balance posted the largest deficit in four years. The weak trade figure put pressure on the currency, which crossed the 14,000 IDR per USD threshold on 15 May amid heightened volatility due to growing concerns that faster-than-expected monetary tightening in the U.S. will result in capital outflows from the economy.


The economy is expected to accelerate marginally this year on the back of solid growth in government consumption and fixed investment. Risks, however, are tilted to the downside as prices for key commodities remain depressed and declining external demand growth could weigh on the external sector. Likewise, the economy is vulnerable to capital outflows, which could be a source of financial instability. FocusEconomics panelists see GDP growth of 5.3% in 2018, unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.                                                                       


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THAILAND | Private consumption picks up, while the manufacturing sector loses momentum


Available data suggests that last year’s strong economic momentum carried over into this year. Export growth was robust throughout Q1, propelled by buoyant global growth. Moreover, monthly data shows private consumption picked up in the period thanks to low unemployment and elevated consumer confidence; sentiment among consumers averaged higher in Q1 than in Q4, and it reached the highest level since December 2014 in April. On a less positive note, business confidence dropped into pessimistic territory for the first time in a year in April. In the same month, the manufacturing PMI remained in contractionary territory, while manufacturing output eased for the fourth consecutive month in March.


Domestic demand is expected to increase this year and next on the back of a pick-up in public sector consumption and fixed investment ahead of elections scheduled for no later than February 2019. Export growth, however, is likely to moderate due to a large base effect, while increasing trade tensions between the U.S. and China continue to pose a significant downside risk to the external sector. Domestic risks include the high level of household debt, which could drag on private consumption. Political uncertainty in the lead up to the elections could moreover dent investor confidence. FocusEconomics panelists expect the economy to grow 3.9% in 2018, which is unchanged from last month’s forecast. The panel projects growth of 3.7% in 2019.


MALAYSIA | Pakatan Harapan wins the elections, ushering in a period of economic policy uncertainty


In a surprise result, the Barisan Nasional coalition was ousted from power for the first time since Malaysia gained independence in 1957. In the 9 May national election, the opposition coalition Pakatan Harapan (PH), led by former prime minister Mahathir Bin Mohamad, won a majority in parliament. The PH victory has increased policy uncertainty against a backdrop of moderating economic momentum. In the first quarter of the year, the economy decelerated for the second consecutive quarter, weighed down by pre-election uncertainty as fixed investment virtually came to a standstill. Private consumption, however, remained resilient. Although fundamentals remain robust, economic activity in Q2 will likely be dampened by political uncertainty. In April, the manufacturing PMI dropped to a six-month low, and business conditions deteriorated for the third consecutive month.


Economic growth should remain solid this year despite a moderation in demand from China. Private expenditure would likely be boosted if the new government reinstates fuel subsidies and abolishes the Goods and Services Tax, although households’ higher debt servicing costs could hold back growth. Furthermore, uncertainty over the new government’s fiscal stance could dampen fixed investment and threaten the country’s credit rating, while government consumption could suffer from disruptions to previously planned projects. 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 April


A preliminary estimate by FocusEconomics shows regional inflation accelerated to 2.5% in April from 2.4% in March, largely on the back of stronger inflation in the Philippines, Thailand and Vietnam. Price pressures were unchanged in Indonesia and Laos, and inflation figures are still outstanding for the remaining countries in the region.


Monetary conditions in ASEAN are expected to become more restrictive this year amid higher interest rates in the U.S. After the Monetary Authority of Singapore tightened its stance slightly in April, in May it was Indonesia’s turn; the Central Bank increased interest rates for the first time in several years to support the rupiah and stem capital outflows. A few days earlier, the Central Bank of the Philippines had also hiked rates in the face of rising domestic inflation and higher U.S. yields. Monetary policy in Malaysia and Thailand was left unchanged on low domestic price pressures.


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 down 0.1 percentage points 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.


Oliver Reynolds


Economist

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