East & South Asia: Economic Snapshot for East & South Asia
May 24, 2018
Growth remains robust in Q1 as trade war looms
The economy of East and South Asia (ESA) continued to fire on all cylinders in Q1 as low inflation allowed largely accommodative monetary policies in the region and strong global growth fueled demand for Asian goods. Moreover, governments in the region appear to be more supportive of growth this year, while improved weather conditions boosted food supply, particularly in South Asia. A preliminary estimate that accounts for over four-fifths of the region’s nominal GDP shows that ESA countries expanded an aggregated 6.3% annually in Q1, matching both Q4’s print and last month’s forecast.
New data revealed that Hong Kong expanded at the fastest pace in nearly seven years in Q1. Private consumption led the acceleration as households benefited from an extremely tight market and a wealth effect stemming from a buoyant stock market. Moreover, growth was buttressed by healthy tourist arrivals, which boosted retail sales and exports. Strong global growth translated into solid shipments of goods and increased investment in export-oriented industries. Economic growth also accelerated in Mongolia, mostly due to higher commodity prices, which spurred exports and increased investment in the mining industry.
The expansions in Korea and Taiwan were less vigorous in Q1 compared to the other economies in the region, although growth remained elevated. GDP growth stabilized in Korea as a surge in government spending, mostly for public healthcare services, was offset by weaker investment growth, particularly in the construction sector. Moreover, tourist arrivals improved in Q1, and visitors from China hit the highest level since the Chinese government enacted travel restrictions to Korea a year earlier. Although growth lost some steam in Q1 in Taiwan, the slowdown was mainly due to surging imports, on higher commodity prices and soaring domestic demand. Resilient private consumption as a result of an increase in wages and a booming equity market bodes well for growth going forward.
While the ESA region is enjoying enviable growth momentum, risks are looming. China and the United States are in talks to reach a deal that avoids a full-blown trade war between the two countries. The U.S. is seeking to encourage China to open certain sectors such as energy to foreign countries; the reduction of Chinese subsidies to some industries, mostly high-tech; and the end of what U.S. President Donald Trump calls “intellectual property theft”. China, in turn, is demanding U.S. authorities lift restrictions on Chinese investments in the U.S. and treat China as a market economy within the World Trade Organization. While there is no formal deadline to conclude the negotiations, uncertainty threatens to erode investors’ confidence in the region and add downward pressure to regional growth.
Along with fears of a trade war, rising inflation expectations in the United States could prompt the Federal Reserve to deepen its tightening cycle, adding pressure on regional central banks to hike interest rates. Moreover, there are signs that the global economy is losing some momentum and that the tech cycle peaked in Q1, which could negatively affect export dynamics in the region. All in all, FocusEconomics panelists only pencil in a small deceleration in Q2, with growth in ESA set to slow to 6.2%.
Prospects remain solid following stellar start to 2018
Strong global growth, solid gains in the region’s labor markets and loose financial conditions are propelling growth this year. That said, ongoing trade disputes between China and the United States, coupled with concerns that global growth could be at a turning point, represent the main risks to the ESA region’s economic performance.
Despite mounting geopolitical threats, FocusEconomics panelists left their growth estimates for the ESA economy unchanged for the fourth consecutive month. Our panel of analysts expect the ESA economy to grow 6.1% in 2018. Reflecting the ongoing economic transition in China and lower growth in the more developed economy of Hong Kong, regional growth for 2019 is seen slowing to 6.0%.
This month’s stable outlook for 2018 reflects unchanged growth prospects for regional powerhouses China, India, Korea and Taiwan. Panelists decided to upgrade the outlook for Hong Kong following Q1’s stronger-than-expected growth figure, as well as for Mongolia. Sri Lanka was the sole economy to experience a downgrade this month. Advance government estimates put growth in Bangladesh and Pakistan at multi-year highs in Fiscal Year 2018, which ends in June.
Bangladesh is expected to be the fastest growing economy in the region this year, if preliminary estimates are confirmed, followed closely by India. The Chinese economy is expected to expand a solid 6.5%. Although the more mature economies of Hong Kong, Korea and Taiwan will likely be the region’s laggards, they are still seen logging strong growth rates of between 2.6%–3.3%.
CHINA | Trade fears start to weigh on Q2’s economic performance
Early data for the second quarter suggests that economic activity is losing some steam, following stronger-than-expected growth in the first quarter. A weakening property sector and reduced fiscal incentives to buy cars are putting downward pressure on retail sales. Moreover, investment in fixed assets is suffering from the ongoing financial deleveraging and the government’s campaign to curb housing prices in tier-one cities. On the upside, manufacturing output continues to perform well on the back of solid external demand. While momentum appears to be fading, strong import growth suggests that domestic demand remains strong overall and that the country should still post a solid growth rate in Q2. Meanwhile, in a joint statement on 19 May, China and the United States decided to put the proposed tariffs on hold and continue working on a new trade framework.
The economy is successfully transitioning towards a model less reliant on credit and investment to sustain its elevated growth. That said, trade tensions between China and the U.S., fears of abrupt financial deleveraging and a cooling housing market threaten to derail an otherwise stellar growth trajectory. FocusEconomics panelists forecast the economy will grow 6.5% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 6.3%.
INDIA | Leading indicators point to a robust start to FY 2018
The economic recovery that took hold in Q3 of FY 2017, the last quarter for which GDP data is available, appears to have continued through early FY 2018, which began in April. Business activity in the manufacturing and service sectors increased in April compared to the previous month, after also registering gains in Q4 of FY 2017. Stronger demand led to increased orders for companies in both sectors, helping to drive the improvement. Moreover, in early April, India’s international reserves hit an all-time high of USD 426 billion. However, in the same month, the merchandise trade deficit remained stubbornly large, and the cost of long-term government debt reached a two-year high. The higher cost of government debt suggests that investors are beginning to doubt that official fiscal targets, which include bringing the deficit down to 3.0% of GDP by March 2021, can be achieved.
A normalization in cash conditions following the demonetization of late 2016 and the fading of disruptions from last year’s launch of the Goods and Services Tax should facilitate the economic recovery this year. A FY 2018 budget skewed to benefit rural incomes should also boost private consumption. Nonetheless, risks of fiscal slippage and concerns over India’s banking sector cloud prospects. Our panel expects GDP growth of 7.3% in FY 2018, which is unchanged from last month’s estimate, and 7.4% in FY 2019.
KOREA | Domestic demand leads growth in Q1
The economy got off to a good start in 2018. According to preliminary data released by the Bank of Korea, GDP growth was unchanged in the first quarter from the previous quarter, indicating that growth momentum was sustained. Despite increased unemployment and a slight dip in consumer confidence in Q1, resilient private consumption, exceptionally strong government consumption due to increased healthcare spending, and solid fixed investment more than outweighed the external sector’s drag on growth in the quarter. At the start of the second quarter, however, the economy has flashed warning signs. In April, merchandise exports fell for the first time in 18 months. Although this was primarily due to an adverse base effect, in the same month consumer confidence decreased for the fifth consecutive month on concerns over future income and spending levels. This was despite the higher minimum wage, which came into effect in January. Moreover, survey data showed that business activity in the manufacturing sector fell in April.
The economy should be supported by increased government spending in 2018, along with the possibility of reduced geopolitical tensions on the Korean peninsula. However, high household debt and recent government measures to tame increasing housing prices could weigh on growth prospects. FocusEconomics panelists forecast the economy will grow 2.9% in 2018, which is unchanged from last month’s forecast, and 2.9% again in 2019.
INFLATION | Inflation declines in April
Inflation in East and South Asia moderated for the second consecutive month in April, according to an estimate produced by FocusEconomics. Regional inflation inched down from 2.4% in March to 2.3% in April. That said, the moderation mostly reflected lower inflation in China on the back of more moderate food prices. Inflation also eased in Bangladesh, Mongolia and Sri Lanka. Conversely, price pressures increased in India, Korea, Pakistan and Taiwan.
Subdued inflationary pressures in the region are allowing central banks to maintain largely accommodative monetary policies amid rising trade tensions between China and the United States.
Reduced economic slack and higher commodity prices, especially for oil and oil-related products, are expected to push up inflation. Moreover, a widespread currency depreciation in the region, if sustained, could add further upward pressure to prices. Panelists polled by FocusEconomics project average inflation of 2.7% this year, which is unchanged from last month’s estimate. Inflation is expected to stabilize at 2.7% in 2019.
Head of Economic Research