East & South Asia Economic Outlook September 2017

Growth momentum to slow somewhat in Q3

East & South Asia: Growth momentum to slow somewhat in Q3

August 23, 2017

The main forces that have been propelling growth among the East and South Asia’s (ESA) economies in the last few quarters continued firmly in place in Q2. A preliminary set of data for the region shows that ESA’s aggregate GDP increased 6.2% year- on-year in Q2 2017, matching the result in the previous three quarters. However, some alarming signs have started to emerge and our analysts expect growth in the region to slow to 6.1% in Q3.

China’s  economy is not wavering and continues to be the main driver of growth in the region. The economy expanded at a robust 6.9% rate again in Q2 due to healthy global growth, rising disposable income and government support. That said, the economy showed some signs of fatigue at the start of Q3 as weather-related disruptions, a cooling property market and authorities’ efforts to curb shadow banking and enforce financial deleveraging are gradually impacting economic growth. While growth in China will remain elevated, slightly-weaker dynamics will exert downward economic pressure on the region.

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In Korea, domestic demand was robust in Q2, but overall growth was badly hit by the economic sanctions  China imposed in response to the deployment of a U.S. anti-missile system in the peninsula. With no resolution to the China-Korea dispute in sight and important investment projects having been completed in H1, the economy is set to slow in the second half of the year. Economic dynamics in Hong Kong and Taiwan were negatively affected by slower export growth in Q2. As both economies are ultra-reliant on trade, if sluggishness in external demand continues, this could derail both countries’ economic recoveries.

In India, GDP data is still outstanding for the April-June period, but high-frequency economic indicators suggest that economic activity accelerated as the country is recovering from the demonetization shock that plagued growth in the January-March period. Further down the road, while the introduction of the long-awaited Goods & Services Tax (GST) is appearing to have hit growth in July, the extent of the impact has yet to be seen and more data will be needed to evaluate the true consequences of the measure on the economy.

China continues to support ESA’s 2017 economic outlook 

The region continues to benefit from resilient dynamics in China, solid wage growth across the region and strong global demand. Moreover, improved weather conditions are boosting economic growth in a number of economies, particularly in South Asia. While ESA’s economy is sailing smoothly, some downside risks could derail the region’s stellar performance. Although an open war in the Korean peninsula is highly unlikely, persistent diplomatic tensions and military threats have the potential to erode business sentiment in Korea. Incoming data for China shows that the economy entered H2 on a weaker footing. While a managed deceleration is beneficial for the country and, consequently, for the region, an abrupt downturn would reverberate across ESA. Against this backdrop, FocusEconomics Consensus Forecast panelists expect the region to expand 6.1% 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 stable outlook for 2017 reflects unchanged growth prospects for five of the economies surveyed. China and Hong Kong were the sole economies to receive an upgrade this month. Meanwhile, in FY 2017, which ended in June 2017, the Bangladeshi and the Pakistanieconomies expanded 7.2% and 5.3%, respectively. 

This year’s fastest-growing economy will be India with an expansion of 7.2%. China will rise at a strong rate of 6.7%, matching 2016’s result. At the other end of the spectrum, Mongolia’s debt-ridden economy will be the poorest performer. Among the rest of the major regional players, Hong Kong, Korea and Taiwan will expand 2.8%, 2.7% and 2.1%, respectively. 

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CHINA | Economy loses some steam in Q3 

Incoming data for July suggests that momentum is moderating in H2 following the stellar performance in H1 driven by strong property sales and export activity. July’s slowdown reflects weather-related disruptions, supply adjustments in some sectors and lower property sales. On a positive note, a brighter economic outlook, a weaker U.S. dollar and the People’s Bank of China’s (PBOC) controls led capital outflows to ease and international reserve to stop falling. Authorities’ success in curtailing capital flight prompted the yuan to strengthen in recent months. With the economy sailing smoothly and risks to growth broadly balanced, the government tightened fiscal expenditure in July after H1’s strong growth in spending. Moreover, a report from the PBOC released on 11 August showed that effective lending rates are gradually increasing as a result of tighter financial conditions related to the Bank’s effort to promote financial deleveraging. 

Growth will likely slowdown in the second half of the year due to weaker global demand and easing activity in property sales and related activities. Nevertheless, the economy is on track to comfortably meet the 6.5% growth target set for this year. FocusEconomics panelists forecast that the economy will grow 6.7% in 2017, which is up 0.1 percentage points from last month’s estimate. In 2018, the panel sees GDP growth at 6.3%. 

INDIA | Fiscal consolidation remains as key challenge 

Incoming data points to a disruption in economic activity following the 1 July implementation of the new GST. Both the manufacturing and services PMIs fell into contractionary territory in July, while no relief came from abroad as exports growth slowed in the same month. Confusion over the new tax procedures and how to price products are chiefly behind the slowdown, but the blip in momentum is expected to be short-lived overall. Meanwhile, the government presented its Economic Survey to Parliament in August. Chief Economic Advisor Arvind Subramanian warned that fiscal slippages could interfere with the economy’s momentum and voiced concerns over farm loan waivers by states, while at the same time reiterating the government’s commitment to hitting budget targets. 

The economy is seen picking up in H2 FY 2017 as it puts demonetization and the GST implementation firmly in the rearview mirror. The FocusEconomics panel sees GDP expanding 7.2% in FY 2017, which is unchanged from last month’s forecast. For FY 2018, growth is projected to accelerate to 7.6%. 

KOREA | Tensions heats up in the peninsula 

The country is in the eye of the storm amid escalating geopolitical tensions in the Korean Peninsula. Preliminary data show that a contraction in exports caused GDP growth to decelerate in the second quarter. The decline in exports largely reflects China’s ban on group tours following the deployment of a controversial anti-missile system in the country earlier this year. Despite the slowdown, the government is fairly optimistic about the country’s growth outlook and raised its 2017 forecast to 3.0% in late July, the highest in three years. The revision reflects the view that the approval of an almost USD 10 billion supplementary budget will give the economy the extra boost although it is uncertain how the government could actually implement concrete measures without a parliamentary majority. The upward revision came despite an escalating war of words between the United States and its rival in the North which could dampen fixed investment and private consumption in the short-term. 

The government’s attempt to crack down on massive household debt levels will put a lid on investment in key sectors. Nonetheless, strong momentum in merchandise trade and the government’s stimulus package will help shore up growth to an extent. FocusEconomics panelists expect GDP to expand 2.7% in 2017, which is unchanged from last month’s forecast. In 2018, the economy is forecast to grow 2.6%. 

See the Full FocusEconomics East & South Asia Report     

INFLATION |  Inflation steadies in July 

Inflation in East and South Asia stabilized at low levels in July as commodities prices remained in check and favorable weather conditions kept food prices contained. Inflation was 1.7% in July, matching June’s result. July’s print reflected that higher inflation in India, mainly due to the introduction of the GST, Korea and Mongolia was offset by lower price pressures in most of the remaining countries in the region, including regional behemoth China. 

Benign inflation and an economy negatively affected by demonetization and the implementation of the new tax scheme prompted the Reserve Bank of India to cut its main policy rates at its 1–2 August meeting. 

Panelists expect inflation in East and South Asia to be 2.2% this year, which is down 0.1 percentage points from last month’s estimate. The downward revision was the result of lower inflation projections in China and India. For 2018, our panel of experts expects regional inflation to rise to 2.6%.

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