Economic Snapshot for ASEAN

July 18, 2018

 Growth remains strong in Q2, although momentum likely eased slightly

An advance estimate of GDP growth for ASEAN suggests that the region’s economy continued to power ahead in the second quarter, largely brushing aside rising trade concerns and tightening financial conditions. GDP is estimated to have expanded 5.2% in the second quarter on an annual basis, down from the prior quarter’s 5.4% figure.

Preliminary data showed that Singapore’s economy continued to advance at a healthy clip, powered by ongoing strong growth in high-tech manufacturing sub-sectors such as electronics and biomedicine. The robust performance was likely aided by resilient growth in key trading partners. Services also motored ahead thanks to the finance and insurance, and retail and wholesale sub-sectors, although construction recorded a sharp year-on-year contraction.

Economic dynamics in Vietnam were also positive in the second quarter, building on buoyant growth figures in Q1. In the January–June period the economy was propelled by industry, construction and services, while the agricultural sector grew at a more moderate pace. Surging FDI inflows—likely driven by rising Chinese labor costs, U.S.-China trade tensions and an improved business environment—are also aiding the economy’s performance and helping it move up the value chain.

While firm Q2 GDP data for ASEAN’s remaining economies is still outstanding, available signs are largely positive. Domestic demand appears to have been firm thanks to robust labor markets and wage gains, while strong global trade is buoying the region’s large external sector; with the exception of the Philippines, the bloc’s major economies recorded near double-digit export growth in the quarter according to available data. Looking at a country-by-country picture, in regional heavyweight Indonesia the manufacturing PMI was in positive territory throughout Q2, while in April and May both retail sales and industrial production roared ahead in annual terms. In Thailand, the Central Bank’s private consumption index saw robust year-on-year growth over the same period—likely on the back of rosier consumer sentiment—while the Philippines economy continued to benefit from the government’s stimulus drive.

On the political scene, the new Malaysian government has suspended several key Chinese infrastructure projects worth billions of dollars, including the mammoth East Coast Rail Link, on concerns over the Asian giant’s growing influence in the country. The move could sour relations with China and weaken inward investment, and it comes amid a wider public procurement overhaul designed to cut costs, which recently saw the scrapping of a much-publicized high-speed rail link to neighboring Singapore.

In Singapore, the government also announced measures to rein in excess, in this case in the property market. Following several years in the doldrums, house prices sparked to life in H1; to avert any potential asset bubble, in early July the authorities raised the stamp duty and tightened loan-to-value ratios. The decision will likely depress construction activity in the quarters ahead.

Economic prospects are bright, but trade clouds are gathering

Economic growth should remain healthy going forward, as the region continues to benefit from resilient domestic demand. Public infrastructure investment in key economies such as Indonesia and Philippines will support growth, while strong labor markets bode well for private consumption, and exports should remain buoyant. However, a higher oil import bill and tighter financial conditions will cap the region’s economic performance. Rising trade tensions between the U.S. and China constitute the main downside risk to the outlook, given the importance of both countries as key export markets and ASEAN’s reliance on global trade. GDP growth for the region is expected to come in at 5.2% this year, which is unchanged from last month’s estimate and would match last year’s expansion.

This month’s steady reading reflects higher 2018 growth projections for Brunei, the Philippines and Vietnam, which offset a lower growth forecast for Indonesia. Projections for the rest of the economies surveyed in the ASEAN region were unchanged from the prior month. For 2019, our panel sees regional growth at 5.1%.

Our panel projects that Myanmar will be the fastest-growing economy in the region this year, with a 7.1% increase expected in 2018. Conversely, Brunei is foreseen logging the weakest expansion, at 1.6%. Among the major economies in the region, Vietnam and the Philippines should record the fastest growth.

INDONESIA | The economy remains in good shape in Q2, but the rupiah is under pressure

The latest batch of indicators suggests that the economy grew at a broadly stable pace in the second quarter. In June, the manufacturing PMI declined modestly from the almost two-year high recorded in May, while consumer confidence jumped to the best reading in the survey’s history. Improving consumer confidence, coupled with a faster expansion in retail sales in May, bodes well for private consumption growth in Q2. Although the trade balance posted a surplus in June, the external sector remains an economic weak spot. Monetary policy normalization in developed economies and prospects of a global trade war have shaken investors’ confidence and caused the currency to depreciate 4.1% in the second quarter. While the Central Bank intervened forcefully to stem the rupiah’s depreciation, the currency remains under pressure due to high ownership of government bonds by foreign investors, elevated prices for fuel products and a persistent current account deficit.

The domestic economy is expected to support healthy growth this year. However, prospects of a global trade war, a modest price outlook for Indonesian commodities, persistent turbulence in financial markets and higher crude oil prices could weigh on growth. FocusEconomics panelists see GDP expanding 5.2% in 2018, which is down 0.1 percentage points from last month’s forecast. In 2019, the economy is seen growing 5.3%.                                                                   

THAILAND | Domestic demand fuels growth in the second quarter

Following a strong first quarter in which the economy grew at a multi-year high pace, second quarter data is also providing some good news, as domestic demand appeared firm in Q2 on the back of household spending. Growth in private consumption was elevated in April–May, while retail sales grew at a near double-digit pace in April. Private consumption is likely being buttressed by wage growth and improving consumer confidence, which reached its highest level in five years in June. Furthermore, manufacturing output expanded at a solid pace in April and May. On the downside, the PMI moderated in June on the back of a fall in new domestic and export orders, suggesting that growth momentum in the manufacturing sector eased in the same month.

Economic growth should accelerate this year thanks to firming domestic demand—with government consumption expected to increase in the lead-up to elections currently set for next year—and a strong tourism sector. However, the external sector will likely soften on higher oil prices and a large export base effect. Downside risks include a possible escalation of trade tensions between the U.S. and China, as well as further monetary tightening in the U.S. FocusEconomics panelists expect the economy to grow 4.2% in 2018, which is unchanged from last month’s forecast. The panel projects growth of 3.8% in 2019.

MALAYSIA | New government’s policy decisions continue to make waves against the backdrop of healthy growth

Data for the second quarter suggests that growth remained robust. Industrial production was healthy in the first two months of Q2, with the average growth reading trending close to the average reading in Q1. Export growth also remained strong in the same period, and in May, the 12-month trade balance reached its highest level since January 2013. Moreover, retail sales expanded at a healthy pace in April–May over a year ago. On a less positive note, the manufacturing PMI remained below the 50-point mark throughout Q2, despite edging upwards in June after four consecutive declines. In June, although operating conditions deteriorated at a slower pace, output and new orders continued to drop. To push back against Chinese influence, the new government recently suspended China-backed projects totaling USD 22 billion. The move could strain relations with China and dampen fixed investment.

Going forward, private consumption should drive economic growth, particularly in the near term given the recent zero-rating of the Goods and Services Tax (GST). However, fixed investment will likely suffer from the suspension and cancellation of previously approved projects in a bid to rein in government expenditure. Downside risks include high household debt servicing costs, policy uncertainty and a shaky fiscal situation which could dent private sector activity and investment. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.3% this year, unchanged from last month’s forecast, and 4.9% in 2019.

MONETARY SECTOR | Inflation unchanged in June

A preliminary estimate by FocusEconomics shows regional inflation was stable at 2.7% in June. Higher inflation in the Philippines and Vietnam was offset by lower inflation in Indonesia and Thailand.

With the U.S. Federal Reserve hiking rates in mid-June, many ASEAN currencies have come under pressure over the last month. This led Indonesia’s Central Bank to hike rates for the third time in quick succession in late June. The Central Bank of the Philippines also tightened its stance, to face down rising domestic price pressures and elevated inflation expectations. In contrast, a rate hike by Malaysia’s Central Bank now appears more distant; at its most recent meeting the Bank cut its inflation forecast for this year following the recent zero-rating of the Goods and Services tax.

Going forward, inflation will be supported by higher global oil prices and solid domestic activity. Our panelists expect regional inflation to average 2.9% this year, which is unchanged from last month’s estimate and marginally above the 2.8% inflation figure recorded for 2017. Our panel foresees inflation ticking up and averaging 3.1% in 2019.

See the full FocusEconomics Consensus Forecast ASEAN report

Oliver Reynolds

Economist