East & South Asia: Growth in ESA shoots up in Q1 on strong external demand and investment
May 24, 2017
Comprehensive Q1 data for East and South Asia (ESA) showed that growth momentum strengthened in the first three months of the year due to strong global demand and investment. Our Consensus estimate suggests that the aggregate GDP for the region increased 6.3% year-on-year in Q1 2017 (Q4 2016: +6.2% yoy), which was a notch above the 6.2% expansion that our panel of analysts had projected last month. On top of China’s acceleration, economic dynamics improved in Hong Kong and Korea, while growth softened in Taiwan. Meanwhile, growth in India likely moderated in the January-March period.
Similar to China, Hong Kong and Korea benefited from faster growth in exports of goods and services due to healthy global demand. Moreover, investment growth accelerated in both economies as a brighter global outlook is fostering capital expenditure. Economic dynamics in Taiwan remained strong but growth felt the brunt of the sharp plunge in Chinese tourism. Mongolia’s growth improved notably in Q1 as the IMF-backed deal and higher copper prices have been a welcome respite for the country’s battered economy.
In the political arena, China held the first Belt and Road Forum on 14–15 May, the cornerstone of the country’s efforts to internationalize its economy. The high profile diplomatic event was attended by representatives from more than 130 countries, including nearly 30 heads of state. The One Belt One Road policy was officially launched in 2015 and more than 50 countries have joined the initiative. China is spending around USD 150 billion on infrastructure investment in those countries and the total amount of the program is expected to reach USD 1 trillion in 10 years. The initiative has the potential to open new markets to Chinese companies at a time when many are struggling with overcapacity and to generate higher returns on China’s massive foreign reserves. In turn, the beneficiaries will receive loans with special conditions to finance infrastructure projects. While the direct economic impact for China’s economy will be rather limited, the One Belt One Road initiative will likely reshape the global economic order, drawing economies more tightly into the Middle Kingdom’s orbit.
Global demand and China’s robust growth support this year’s economic outlook
The East and South Asian economies are benefiting from stronger-than-expected growth in China and healthy global demand. Moreover, benign inflation in ESA is allowing monetary authorities to maintain their accommodative monetary policies this year and supporting households’ consumption. That said, the region could start its policy rate normalization as of next year on the back of robust growth, stronger inflation and a widening interest rate differential with the United States. On the political side, the China–U.S. trade agreements announced in May have averted, at least temporary, the possibility of a much-dreaded commercial war between the two global superpowers.
Risks, however, are looming on the horizon. While China’s high corporate debt remains a concern and recent measures to rein in credit are good news, rapid deleveraging could stifle growth and fuel financial turbulences. Against this backdrop, FocusEconomics Consensus Forecast panelists expect the region to expand 6.0% this year, which is unchanged from last month’s estimate. Next year, the ESA economy will expand at a slightly slower pace of 5.9%.
This month’s outlook for 2017 reflects stable growth prospects for Bangladesh, China, India and Pakistan. The economic outlooks for Hong Kong, Korea and Taiwan were revised up this month, while growth prospects Mongolia and Sri Lanka were downgraded.
India and Bangladesh will be the region’s fastest-growing economies in 2017 with expansions of 7.3% and 6.8% respectively. China will expand at a robust rate of 6.5%. At the other end of the spectrum, Mongolia will be the worst performer as the debt-ridden economy is still facing large structural imbalances. Growth in Hong Kong, Korea and Taiwan will be between 2.0% and 2.5%.
CHINA | Will the Belt and Road initiative define a new global order?
Growth momentum has softened at the outset of Q2 following Q1’s surprisingly resilient dynamics, which led the economy to expand at the fastest pace in one and a half years. Weaker external demand and manufacturing activity weighed on growth in April, while investments in the real estate sector and infrastructure remained resilient. In the political arena, on 14–15 May, China hosted the first Belt and Road Forum, which was the most significant diplomatic event in the country so far this year. This program is the cornerstone of China’s internationalization strategy and earmarks more than USD 1 trillion for investments over the coming years in more than 60 countries. Moreover, China and the U.S. unveiled a set of trade deals on 11 May, which are expected to ease tensions between the two superpowers.
The economy will decelerate throughout the rest of the year on the back of tighter financial conditions and weaker growth in the property sector. Nevertheless, the government will continue to shore up growth if necessary via infrastructure investment and credit supply. FocusEconomics panelists forecast that the economy will grow 6.5% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP growth to slow to 6.2%.
INDIA | Government announces new GST tax rates
Recently released data suggest that the economy has gained traction. Higher global demand prompted double-digit export growth in February and March, and industrial output accelerated in March. Moreover, a change in methodology by the Statistical Institute has resulted in large revisions to the industrial production and wholesale price indexes, which now depict a more positive picture. The new data has led some analysts to speculate that GDP figures will also be upwardly revised when new data is released on 31 May. Meanwhile, the government has announced the new GST tax rates for the majority of items ahead of the 1 July rollout. Luxury goods are set to face a 28% tax, while essentials will be exempted and most mass consumption items taxed around 12%. Although in the long-run a simpler tax regime is positive for the country’s business environment, the transition could see a temporary slowdown in economic activity as companies adapt to the new rules.
A healthy monsoon should buttress growth this year. FocusEconomics panelists see GDP expanding 7.3% in FY 2017, which is unchanged from last month’s forecast. For FY 2018, growth should accelerate further to 7.6%.
KOREA | Growth defies political turmoil in Q1
The economy picked up pace in the first quarter of the year despite heightened Sino-Korean tensions, with GDP growth beating all expectations to expand 0.9% quarter-on-quarter. The strong print was driven by a better-performing external sector, which in turn fueled higher facilities investment. This showcased the economy’s outstanding resilience despite mounting woes in some exporting industries and a beleaguered domestic sector. Korean car sales to China continued to plummet in April, while the tourism industry experienced its largest deficit in a decade in March following China’s ban on group tours to Korea. Nonetheless, a record-high trade balance in April suggests that improved global trade flows and China’s unwavering demand for other Korean exports continue to outstrip the spillover effects from politically-motivated retaliatory measures. On the domestic side, things look less upbeat. In April, the unemployment rate crept up while household debt growth continued to run ahead of income growth. These are challenges that Moon Jae-in, who was sworn in as the new president of Korea on 10 May, had promised to address during his campaign.
The economy will expand at an uneven speed this year as the external sector gathers momentum but the domestic economy remains subdued. The latter could nevertheless benefit from the shift to accommodative fiscal policymaking that Moon Jae-in pledged to voters. FocusEconomics panelists expect GDP to expand 2.5% in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, the economy will grow 2.6%.
INFLATION | Inflation stabilizes at low levels in April
Inflation in East and South Asia was stable at March’s 1.6% in April, thereby remaining at relatively low levels. April’s unchanged inflation figure reflected that higher prices in regional giant China and Mongolia were offset by lower inflationary pressures in India, Korea and Taiwan. In fact, inflation in India fell to the lowest value since records began in 2011 on the back of lower food prices.
Inflationary pressures are expected to pick up in the coming months due to hikes in certain taxes, higher food prices, inventory restocking in some economies and higher commodity prices. Nevertheless, price pressures will remain benign throughout the rest of the year, prompting most central banks in the region to keep their monetary policy rates on hold.
Panelists expect inflation in East and South Asia to be 2.6% this year, which is down 0.1 percentage points from last month’s estimate. For 2018, our panel of experts expects regional inflation to rise to 2.8%.
Written by: Ricard Torné, Head of Economic Research