East & South Asia: 2017 tailwinds remain going into 2018
February 21, 2018
The economy of East and South Asia (ESA) continued to expand at a healthy pace in the fourth quarter of 2017. The region’s sweet spot was the result of resilient global demand, especially for tech products, strong domestic activity and accommodative financial conditions. An estimate shows that ESA countries expanded an aggregated 6.3% annually in Q4, matching both Q3’s print and a preliminary figure from last month. Building on Q4’s strong result, the ESA economy grew 6.3% in 2017, overshooting the 6.1% expansion in 2016. The acceleration observed in 2017, the first in four years, was the result of a pick-up in growth in China and sharp economic recoveries in Hong Kong, Mongolia and Taiwan.
Alongside the robust Q4 performance in China, available data for the final quarter of the year shows that Taiwan logged the fastest expansion in nearly four years. As in other export-driven economies in the region, the Taiwanese economy benefited from strong global demand for Asian goods, semiconductors and machinery. Robust activity in Taiwan’s factories tightened the labor market, sending unemployment down and boosting real wages. As a result, growth in private consumption accelerated notably in the quarter. In Korea, despite decelerating, growth remained robust in Q4. While private consumption growth picked up to levels last seen over four years ago, exports were hit by a fall in shipments of automobiles. The performance of Korea’s all-important car manufacturing sector was poor in 2017 due to weaker sales at home and sluggish exports to China and the United States, the country’s two largest export markets for automobiles.
Data for January suggests that the ESA economy started 2018 on a good note, with shipments expanding in most countries and manufacturing PMI readings staying in positive territory amid robust global demand. Moreover, imports were strong in January, signaling that domestic activity remains vibrant in the region. That said, economic data for the first two months is normally distorted by seasonal effects related to the Lunar New Year festivities. Therefore, data for the two months combined will provide a clearer picture of the state of ESA economies. Our panel of analysts foresee growth will inch down to 6.2% year-on-year in Q1 2018.
On 1 February, the Indian government presented its budget for Fiscal Year 2018, ending March 2019, which includes a marginally higher fiscal deficit than previously estimated by the country’s authorities. Prime Minister Narendra Modi is trying to strike a fragile balance between supporting the economy via fiscal stimulus and keeping the fiscal deficit in check. In this regard, the budget includes a cut to the corporate tax rate and measures to boost rural development ahead of state and general elections in the coming 18 months. Higher government spending is expected to be partially offset by improved tax collection, especially of the Goods and Services Tax (GST).
ESA’s 2018 economic outlook remains bright
The ESA economy is set to post another year of stellar growth in 2018. Despite the U.S. Fed tightening cycle, global financial conditions remain largely accommodative as the Bank of Japan and the European Central Bank continue with their ultra-loose monetary policies, flooding international capital markets and shoring up capital inflows into the region. Moreover, global demand remains strong on the back of healthy dynamics in both advanced and developing economies. This is building up backlogs of work in Asian factories, generating lower unemployment, higher household spending and stronger demand.
The main downside risks are an abrupt financial deleveraging in China, which could reverberate across the region, and a sustained global sell-off, which could unnerve domestic financial markets and add pressure on interest rates and foreign exchanges. That said, the region enjoys ample financial buffers compared to other periods with financial volatility, such as the 2013 taper tantrum.
FocusEconomics panelists expect the ESA economy to grow 6.1% in 2018, which is unchanged from last month’s estimate. Economic growth for 2019 is seen inching down to 6.0% as China continues its rebalancing towards more sustainable growth levels, and the economic performance of Asian Tigers Hong Kong, Korea and Taiwan will moderate as they reach a more advanced stage of development.
This month’s stable outlook for 2018 reflects unchanged growth prospects for regional powerhouses China and India. Estimates for Bangladesh, Hong Kong and Sri Lanka were also left untouched. Growth forecasts for Mongolia, Pakistan and Taiwan were revised upward, while Korea was the only economy to experience a downgrade this month.
The Indian economy is expected to be the best performer this year, with 7.3% growth, followed by Bangladesh. The Chinese economy is expected to expand a robust 6.5%, while more mature economies of Hong Kong, Korea and Taiwan will likely be the region’s laggards, with growth rates between 2.5%–2.9%
CHINA | Economy enters 2018 on solid footing
Available economic indicators suggest the economy continued to fire on all cylinders at the outset of the year. Domestic demand remains resilient as shown by strong import growth in January, while healthy global demand is propelling exports and activity in the manufacturing sector. That said, data for the first two months of the year is highly distorted by the Lunar New Year holidays. Because of China’s healthy growth momentum and rising confidence about the state of the economy, the yuan has strengthened sharply in recent weeks. With the economy sailing smoothly, the country will hold the annual National People's Congress in early March, in which the main policies and economic targets will be rubberstamped. In the wake of 2017’s strong growth, the government will likely leave the growth target unchanged from last year at 6.5%.
This year, economic growth will moderate, mostly due to slightly weaker domestic demand as authorities continue enforcing financial deleveraging via tighter financial regulations. That said, the deceleration will be only gradual and managed by the government. FocusEconomics panelists forecast that the economy will grow 6.5% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is expected to grow 6.3%.
INDIA | FY 2018 budget includes lower taxes for companies and a boost in social spending
The government unveiled on 1 February its FY 2018 budget, which envisages a fiscal deficit of 3.3% of GDP. The bill mainly benefits low-income earners and rural demographics ahead of a busy election cycle, but also slates higher infrastructure spending and lower corporate tax rates for medium-sized corporations. Meanwhile, the economy continued to make solid progress in the second half of the fiscal year following a lackluster performance in H1, when GDP growth was weighed down by lingering effects of demonetization and the implementation of the Goods and Services Tax. Industrial production growth remained buoyant in December, while both the services and manufacturing PMIs pointed to improving economic conditions in January; auto sales also firmed up in the month.
Economic growth is expected to strengthen in FY 2018, with high-frequency indicators showing households are recovering from demonetization and GST-induced distortions. In addition, strong global sentiment, improving business sentiment and robust capital outlays in the FY 2018 budget will lift fixed investment growth next year. The external sector is also expected to drag less on growth on softer import growth and a recovery in export-oriented sectors as GST-related problems fade. Our panel expects growth of 7.3% in FY 2018, which is unchanged from last month’s estimate. In FY 2019, panelists see a GDP expansion of 7.4%.
KOREA | January brings positive economic news following Q4’s growth deceleration
Economic growth slowed in the fourth quarter of last year, after reaching a nearly four-year high in the third quarter. According to preliminary data released by the Bank of Korea, year-on-year growth decelerated to 3.0% in the fourth quarter, down from 3.8% in the third. Overall, the economy expanded 3.1% in 2017, higher than 2.8% in 2016. In Q4, fewer exports and weaker fixed investment slowed growth, even though private and government consumption dynamics were positive. Indications from January bode well for Q1: Exports grew thanks to strong shipments of semiconductors, improved operating conditions were signaled in the manufacturing sector as businesses reported stronger domestic and overseas demand, and consumer confidence was high in the month. Meanwhile, the ongoing PyeongChang Winter Olympics have led to an apparent warming in relations between North and South Korea, although it remains to be seen if this will translate into reduced geopolitical tension on the peninsula.
The economy is expected to be supported by increased government spending, a healthy global economy and a boost from the PyeongChang Winter Olympics this year. However, recent government measures to tame housing prices and household debt could weigh on the short-term growth outlook. FocusEconomics panelists forecast economic growth of 2.9% in 2018, which is down 0.1 percentage point from last month’s forecast. In 2019, they foresee an expansion of 2.8%.
INFLATION | Inflation falls from December’s 11-month high in January ahead of Lunar New Year
Inflation in East and South Asia declined from December’s nearly one-year high of 2.4% to 2.1% in January, according to an estimate by FocusEconomics. The print was the result of lower price pressures in China, India, Korea, Pakistan, Sri Lanka and Taiwan. Inflation increased in Mongolia. That said, the moderation in inflation across most East Asian countries mostly reflected a base effect due to the Lunar New Year holidays, which fell in late January last year but came in mid-February this year. Meanwhile, in India price pressures remain elevated, although they receded in January on the back of a moderation in fresh food inflation.
Despite acknowledging that upside risks to the inflation outlook remain high, the Reserve Bank of India decided to leave its policy rates unchanged at the 7–8 February meeting. In Pakistan, the Central Bank hiked its key policy rate on 28 January, citing downward pressure on the rupee.
While inflationary pressures are expected to pick up going forward due to high commodity prices and reduced economic slack, readings for January came in at lower-than-expected levels, suggesting that price pressures could remain subdued this year. If these concerns materialize, central banks in the region will have more room to keep their largely accommodative monetary policies unchanged. Panelists polled by FocusEconomics project average inflation of 2.7% this year, which is unchanged from last month’s estimate. Inflation is expected to remain stable at 2.7% in 2019.