Economic Snapshot for ASEAN

November 14, 2018

Regional economy records a strong showing in the third quarter

According to a more complete estimate by FocusEconomics, ASEAN expanded 4.9% in the third quarter of 2018, buttressed by strong domestic demand. However, this still marks a loss of momentum from the second quarter’s 5.2% expansion.

After Singapore and Vietnam released GDP readings in October, this month it was the turn of regional heavyweight Indonesia, which accounts for over a third of ASEAN’s nominal GDP. Indonesia’s economy grew at a solid pace in Q3 thanks to buoyant private consumption—boosted by employment growth and mild inflation—and expansions in government consumption and fixed investment. The external sector, however, continued to drag on the economy on surging imports.

Growth in the Philippines moderated in Q3, although it remained the envy of most other economies in the region. The intensification of price pressures took the edge off private consumption growth, while the government’s infrastructure drive—despite buoying fixed investment—sucked in imports, leading to a negative contribution from the external sector.

Firm third-quarter GDP figures for regional powerhouses Thailand and Malaysia are still outstanding, although high-frequency indicators give an approximation of the economies’ performances. Economic momentum in Thailand appeared to ebb, on the back of softer export growth and a weaker tourism sector which was dented by a deadly boat accident in July. In contrast, Malaysia should have expanded at a robust pace, with the zero-rating of the goods and services tax boosting consumers’ purchasing power and retail sales. Among the region’s smaller economies, growth was likely fairly brisk, supported by strong regional economic activity and FDI inflows, and Brunei should have benefited from higher oil prices.

Although hard data is still limited, the region’s economy appears to have started the final quarter on a slightly weaker footing. In October, the ASEAN manufacturing PMI slipped into contractionary territory for the first time since December last year, on the back of lower new orders and weaker external demand.

On the political front, the new Malaysian administration unveiled its first budget in early November. The expansionary 2019 budget follows several years of fiscal consolidation by the previous government, and outlines a double-digit rise in expenditure and a higher fiscal deficit compared to 2017.

At the end of October, Australia became the sixth signatory of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to ratify the agreement domestically—followed soon after by Vietnam. With most signatories now having ratified the deal, the CPTPP will enter force at the end of December, paving the way for tariff cuts by January 2019. ASEAN economies Brunei, Malaysia, Singapore and Vietnam, which are part of the deal, stand to benefit from stronger trade flows and increased market access for exports.

See the full FocusEconomics Consensus Forecast ASEAN report

Economic fundamentals are healthy, but trade war concerns linger

Looking ahead, growth should be buoyant across ASEAN. Private consumption will be supported by wage gains and strong labor markets, and fixed investment ought to expand robustly—particularly in the Philippines, as part of President Duterte’s “Build, Build, Build” program. Moreover, global demand for the region’s exports should remain healthy, despite a moderation in the pace of export growth next year. An escalation of the trade war between the U.S. and China is the significant downside risk to growth, given that both countries are key export markets. In addition, the likely fallout—coupled with the ongoing tightening cycle in the United States—could put further pressure on the currencies of countries with weaker external positions, such as Indonesia, Myanmar and the Philippines. GDP growth for the region is expected to come in at 4.9% in 2019, which is down 0.1 percentage points from last month’s forecast, and 4.8% in 2020.

The lower 2019 GDP reading reflects downgraded forecasts for Indonesia, Myanmar, the Philippines and Thailand. The region’s remaining economies saw their 2019 GDP forecasts unchanged from the previous month.

Our panel projects that Myanmar will be the fastest-growing economy in the region next year, expanding 7.1% thanks to gradual economic liberalization. Among the major economies in the region, Vietnam and the Philippines should record the fastest growth. Conversely, high-income Singapore is expected to record the weakest expansion at 2.6%, reflecting a moderation of growth towards potential.

INDONESIA | Growth momentum largely maintained in Q3; 2019 budget approved without major changes

Economic growth dipped slightly in the third quarter but stayed solid, supported by domestic demand. Private consumption expanded robustly, likely supported by mild inflation, a healthy labor market and the Asian Games in August–September, while government consumption and fixed investment also grew at a fast pace. However, the external sector contributed negatively to growth. Looking at Q4, growth should remain robust thanks to ongoing strong private consumption. That said, the manufacturing PMI declined in October, while the recent tsunami and airplane crash could dampen tourist arrivals. At the end of October, parliament approved the 2019 budget—which had originally been presented in August—without major changes. GDP and inflation assumptions were unchanged, and the fiscal deficit target remained at 1.8% of GDP. However, estimates for expenditure and revenue, and the IDR/USD exchange rate, were raised slightly.

Domestic demand should continue to underpin the economy, with private consumption supported by a strong labor market and government consumption likely receiving a boost ahead of elections in April 2019. However, tighter monetary policy, delays to public investment projects, cooling Chinese demand and a possible resurgence of U.S.-China trade tensions pose downside risks. FocusEconomics panelists see GDP expanding 5.2% in 2019, down 0.1 percentage points from last month’s forecast, and 5.2% again in 2020.                                                                   

See the full FocusEconomics Consensus Forecast ASEAN report

THAILAND | Private consumption supports the economy, while the external sector softens

Economic activity is expected to have moderated in the third quarter, following strong growth in H1. Momentum in the manufacturing sector ebbed somewhat, as demonstrated by the manufacturing PMI, which averaged slightly lower than the previous quarter. Moreover, the external sector appeared to soften, with the trade surplus narrowing to a four-year low on soft export growth and surging imports. In addition, the all-important tourism sector took a hit from the Phuket boat accident. More encouragingly, growth in private consumption accelerated in the third quarter on the back of still-muted inflationary pressures and improving non-farm incomes, while consumer and business confidence were solid. Looking at Q4, the picture remains mixed: Business confidence and the PMI fell below the crucial 50-point mark in October, while consumer confidence remained elevated. In early November, the government announced a series of measures to reignite the tourism sector, including visa fee waivers for citizens of some countries for two months.

Economic growth is expected to moderate next year on slower private consumption and export growth. However, private consumption will still be resilient, likely benefiting from rising income levels and a tight labor market, while fixed investment should pick up amid high capacity utilization. A further escalation in the U.S.–China trade spat and possible political uncertainty in the build-up to next year’s elections pose downside risks. The panel projects that the economy will grow 3.8% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.5% in 2020.

MALAYSIA | New government pauses fiscal consolidation in 2019 budget

Although national accounts data for the third quarter is still outstanding, monthly indicators suggest that the economy picked up speed. Average annual growth in retail sales increased noticeably in Q3—benefiting from weak inflationary pressures following the zero-rating of a goods and services tax. Moreover, the manufacturing PMI averaged higher in Q3 than in the second quarter. On the other hand, export growth in the July–September period moderated notably—despite a robust performance in September—on tough prior-year comparatives and rising global trade tensions. Moreover, despite a strong manufacturing sector, annual industrial output growth averaged lower in Q3 compared to the previous quarter, due to a poor performance from the mining sector. The fourth quarter got off on the wrong foot, with the manufacturing PMI falling into contractionary territory in October on lower new orders. In early November, the new government presented an expansionary draft budget signaling a move away from the previous years of fiscal consolidation.

Next year, the economy is expected to be supported by strong private consumption growth and a solid manufacturing sector. However, risks are tilted to the downside and include a possible flare-up in trade tensions, heightened volatility in financial markets, and concerns over the impact the more expansionary fiscal stance could have on the health of government finances. FocusEconomics Consensus Forecast panelists expect the economy to grow 4.7% in 2019, which is unchanged from last month’s forecast, and 4.4% in 2020.

MONETARY SECTOR | Inflation ticks up in October

A preliminary estimate by FocusEconomics suggested regional inflation inched up from 2.7% in September to 2.8% in October, on the back of higher inflation in Indonesia. Inflation was constant in the Philippines, dipped in Thailand and Vietnam, and is still outstanding for the region’s remaining economies. All was quiet on the monetary policy front over the last month, with the region’s central banks which held meetings keeping rates unchanged.  

Going forward, inflation will be supported by higher global oil prices and solid domestic activity. Our panelists expect regional inflation to average 3.1% in 2019, which is unchanged from last month’s forecast, and 3.1% again in 2020.

See the full FocusEconomics Consensus Forecast ASEAN report

Oliver Reynolds

Economist