Robust fundamentals buttress region’s solid economic performance
March 21, 2018
The economy of the Association of Southeast Asian Nations (ASEAN) is expected to have lost some speed but retained solid momentum in the first quarter of the year, weighed down by marginally higher borrowing costs but supported by solid FDI, improving labor conditions and upbeat global trade flows. Building on a notable 2017 performance, the region is seen growing 5.2% year-on-year in Q1, only marginally below the 5.3% increase recorded in the previous quarter.
Behind the bright economic story is a sustained improvement in the region’s macroeconomic fundamentals. Current account dynamics across the countries surveyed in ASEAN were largely positive last year, and, although the region’s aggregate current account surplus is expected to narrow this year, this will partially reflect robust momentum in domestic consumption and an expected pick-up in capital outlays. The regional economy, however, remains exposed to global financial volatility, while a rapidly tightening Federal Reserve could drive capitals out of the region’s economies, leading to rising borrowing costs.
Although threats of trade protectionism from the U.S. also pose a sizeable risk to the region’s economic outlook, other recent developments on this front are encouraging. On 8 March, eleven countries—including Brunei, Malaysia, Singapore and Vietnam—signed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade liberalization deal that removes most tariffs for a bloc representing nearly 500 million people and more than 13% of global trade. The trade bloc, the third-largest in the world, is expected to stir trade flows across a vast stretch of the Pacific and should induce stronger economic growth in all the countries involved.
The landmark deal excludes the United States, which pulled out last year. On the same day the CPTPP was signed, the U.S. furthermore imposed significant tariffs on imports of steel and aluminum. Nonetheless, President Donald Trump has signaled he may be willing to reconsider the agreement, which would have positive effects on the export-oriented economies in ASEAN participating in the deal. Be that as it may, the CPTPP is expected to go into effect two months after a majority of the participants have domestically ratified the agreement.
In the political arena, there are mounting signs from Malaysia that general elections could take place in late April or early May. Incumbent Prime Minister Najib Razak and the scandal-ridden ruling Barisan Nasional coalition are poised to emerge victorious amid a fragmented opposition and the redrawing of electoral maps ahead of the election. Meanwhile, in Thailand, Prime Minister Prayuth Chan-ocha announced that elections would take place no later than February 2019. The military junta had previously set the deadline to November of this year. This represents the latest in a string of delays since the military coup of 2014, and clouds the domestic outlook as political unrest mounts.
Economy set to continue growing at a solid clip in 2018
An upturn in global trade flows, tightening labor conditions and increased public infrastructure programs in some of the region’s largest economies—including Indonesia and the Philippines—should see growth holding up nicely this year following a five-year high of 5.2% in 2017. The ASEAN economy is expected to increase 5.1% this year, which is unchanged from last month’s estimate, and remain stable at a 5.1% rise in 2019.
Solid Chinese demand for goods and services from ASEAN countries will support the region’s outlook, while moderate inflationary pressures and still-supportive monetary conditions should contribute to healthy private spending. Nonetheless, the very gradual path of tightening monetary conditions in the region could be significantly altered if the Federal Reserve hikes rates more than currently signaled, with FocusEconomics panelists increasingly projecting a fourth interest rate increase this year.
The stable 2018 GDP projection this month reflects unchanged growth estimates for a majority of the economies surveyed, including heavy lifters Indonesia, Malaysia and the Philippines. The Vietnamese economy, however, is expected to grow at a slightly slower clip than previously foreseen, while the economies of Cambodia, Singapore and Thailand are seen recording higher rates of growth this year.
Our panel projects Myanmar will be the fastest-growing economy in the region, recording a 7.4% increase in 2018. Conversely, Brunei is expected to be the region’s laggard this year, growing a paltry 2.6%, followed by the more mature economy of Singapore with growth of 3.1%. Among the region’s major players, the Philippines is expected to log the fastest expansion, followed by the Indonesian and Malaysian economies.
INDONESIA | Balance sheets of state-owned enterprises pose downside risk to growth
According to available indicators, the economy continued to perform robustly in Q1. Consumer confidence remained elevated in the first two months of the year: This, together with declining inflation, bodes well for private consumption, a picture only partially obscured by a dip in retail sales in January. Moreover, the manufacturing PMI returned to positive territory in February pushed up by rising output and new orders, suggesting fixed investment continued to expand healthily on the back of the government’s ongoing infrastructure push. However, S&P Global Ratings recently warned that the current increase in development spending risks deteriorating the balance sheets of state-owned enterprises (SOEs) and thus affecting the banking system. As the government aims to lower the fiscal deficit, SOEs are borrowing heavily to finance infrastructure projects, which is translating into higher leverage levels. If protracted, this trend could force SOEs to scale down investment spending or turn to the public coffers for recapitalization.
A strong expansion in public infrastructure spending and rising private investment and FDI inflows on the back of higher commodity prices will spur growth this year. Moreover, relatively subdued inflationary pressures and an accommodative monetary policy will support private consumption. However, faster hikes in U.S. interest rates could drive capitals out of the country, prompting a tightening in financing conditions and weakening the currency. FocusEconomics panelists see GDP expanding 5.3% in 2018, unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.
THAILAND | Political turmoil and delayed elections to weigh on sentiment
Last year’s economic momentum seems to have carried over into the new year with merchandise exports and tourism growing solidly in January. This suggests that the strong performance in the external sector continued after having picked up slack from subdued domestic demand last year. Private consumption started 2018 on a strong note with an across-the-board expansion in annual terms although household spending remained fragile. The manufacturing sector was supported in January by private consumption and the external sector, and saw a strong rise in new orders.
Economic growth should remain robust this year on the back of a pickup in government consumption and fixed investment, while private consumption growth is expected to remain solid and export growth will likely moderate due to a large base effect. Although the high level of household debt remains a concern, the chief downside risks to the economy are tense geopolitical situation and U.S. trade policies, which could spark a global trade war. Additionally, Thailand could face greater scrutiny since it met the United States’ criteria as a currency manipulator. Domestic political turmoil in the build up to this year’s elections could also dent investor confidence. FocusEconomics panelists expect the economy to grow 3.9% in 2018, up 0.1 percentage points from last month’s forecast. The panel projects growth of 3.7% in 2019.
MALAYSIA | Elections loom amid a solid economic picture
The economy is showing resilience early in the year, with solid manufacturing wage gains and tight labor conditions buttressing the domestic economy, and robust foreign demand supporting exports. Incoming data, however, has been somewhat patchy: industrial output grew at a much weaker-than-estimated pace in January despite a favorable base effect, while the manufacturing PMI returned to contractionary territory in February. Against this backdrop, economic growth is expected to moderate in the first quarter, a slowdown that will be compounded by rising debt servicing costs and gradual household deleveraging. Meanwhile, the country continues to gear up for a general election this year, and it seems that a dissolution of Parliament may be on the cards by the end of March. This would pave the way for elections in April or early May. The ruling Barisan Nasional (BN) coalition is expected to win a majority of the seats due to a splintered opposition and the contentious redrawing of electoral maps.
A tighter monetary stance and ebbing Chinese demand should cause growth to moderate to an extent this year. Nonetheless, a solid outlook for consumer spending, a pick-up in infrastructure investment and a boost ahead of the elections bode well for this year’s GDP forecast. Our panelists expect GDP to expand a healthy 5.3% this year, unchanged from last month’s estimate, and 5.0% in 2019. The recently approved Trans-Pacific Partnership should boost Malaysia’s long-term economic prospects, opening access to new markets.
MONETARY SECTOR | Inflation stabilizes in February
A preliminary estimate by FocusEconomics reveals regional inflation was stable in February at January’s 2.4% figure, the weakest in over a year. Softer inflation was recorded in Indonesia and Thailand, which offset higher inflation in the Philippines and Vietnam. Inflation was steady in Cambodia; figures at outstanding for the remaining countries in the region.
Central banks across the region are expected to gradually remove monetary stimulus, although the pace at which they will do so remains heavily influenced by developments in the Federal Reserve. A faster interest rate normalization in the United States would require higher rates in the ASEAN region, which could weigh on already meager domestic inflationary pressures. As such, absent major upsets by the Fed, monetary conditions are expected to remain largely supportive of growth this year. In recent weeks, the Bank Negara Malaysia kept its overnight policy rate at 3.25% after increasing it in the previous month to prevent a build-up of financial risks.
The Consensus Forecast for this year indicates that inflation will remain subdued. Inflation is seen averaging 3.0% in 2018, which is unchanged from last month’s forecast and follows average inflation of 2.9% in 2017. For 2019, our panel sees inflation picking up mildly, to 3.2%.
Written by: David Ampudia, Senior Economist
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ASEAN Economic News
March 23, 2018
Consumer prices increased 0.5% over the previous month in February, contrasting January’s 0.2% month-on-month decrease.
March 23, 2018
In February, export growth came down from the prior month’s multi-year high, but beat expectations.
March 23, 2018
At its monetary policy meeting held on 21 and 22 March, Bank Indonesia decided to make no changes to interest rates, holding the BI seven-day Reverse Repo rate at 4.25%.
March 22, 2018
At its meeting on 22 March, the Central Bank decided to leave the Overnight Reverse Repurchase Facility (RRP) rate unchanged at 3.0%.
March 21, 2018
Consumer prices were unchanged from the previous month in February, which followed a 0.3% increase in January.