Economic Snapshot for ASEAN

August 22, 2018

 Growth slows in Q2, further moderation likely in third quarter

A comprehensive estimate of GDP growth for ASEAN suggests that the region’s economy lost momentum in the second quarter as several countries saw their external sectors weaken. GDP is estimated to have expanded 5.2% in Q2 on an annual basis, matching the preliminary estimate but below the previous quarter’s 5.4% figure.

The slowdown was driven primarily by unexpectedly weak outturns in Malaysia and the Philippines, which both saw growth dive to over one-year lows. In Malaysia, the economy was dragged down by net trade, with imports rebounding and export growth ebbing slightly, which offset stronger domestic demand. A similar picture emerged in the Philippines, where imports surged amid the government’s ongoing infrastructure push, markedly outpacing export growth. In addition, private consumption growth in the Philippines dipped slightly, likely on the back of rising inflationary pressures taking a bite out of consumers’ purchasing power.

Thailand also saw a loss of momentum, on the back of slower government consumption growth and a waning impact from inventories. Meanwhile, a second GDP estimate also confirmed that impetus in Singapore’s economy dimmed in Q2 on slower growth in the services sector, although a resilient manufacturing sector—particularly the electronics, biomedical and transport clusters—propped up the economy.

In contrast, regional heavyweight Indonesia gained steam in Q2, helping to temper the regional slowdown. Stronger private consumption drove the improvement, with consumers likely benefiting from mild inflationary pressures thanks to government price controls. In addition, government consumption saw a boost ahead of regional elections in late June. However, in line with developments in Malaysia and the Philippines, the external sector weakened on higher imported oil prices and greater imports for investment purposes.

The third quarter has begun in muted fashion. ASEAN’s manufacturing PMI—which covers all of the region’s economies with the exception of Brunei, Cambodia and Laos—dipped to a four-month low in July on slower growth in output and new orders, with all countries in the region except Indonesia recording weaker outturns. Worrying for the evolution of the bloc’s manufacturing sector going forward, optimism among firms fell to an all-time low, amid rising trade tensions between the U.S. and China—both key destinations for ASEAN exports.

On the political front, Indonesia’s president announced a fiscally cautious draft 2019 budget on 16 August. The budget aims to further reduce the fiscal deficit next year, and thus reassure markets of the country’s prudent economic management in order to protect the rupiah. This came soon after the government announced measures to reduce imports—and hence demand for foreign currency—in a further bid to support the currency, which had come under renewed pressure following the collapse of the Turkish lira in early August.

See the full FocusEconomics Consensus Forecast ASEAN report

 Economic fundamentals are robust, but trade war fears cast a growing shadow over the region

Economic growth should remain healthy going forward. ASEAN economies are likely to benefit from strong labor markets, which should support private consumption, strong global demand for the region’s exports and healthy public infrastructure investment in economies such as Indonesia and the Philippines. However, an escalation of the trade war between the U.S. and China is a key downside risk to growth, given the importance of both countries as export markets, while tighter financial conditions in the region could drag on domestic demand. GDP growth for the region is expected to come in at 5.1% this year, which is down 0.1 percentage points from last month’s estimate.

This month’s GDP reading reflects lower growth forecasts for the Philippines and Myanmar. In contrast, projections for Thailand were revised up. 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 5.0%.

Our panel projects that Myanmar will be the fastest-growing economy in the region this year, with a 7.0% increase expected in 2018. Conversely, Brunei is predicted to record the weakest expansion, at 1.6%. Among the major economies in the region, Vietnam and the Philippines should record the fastest growth.

INDONESIA | Growth picks up in Q2, president presents fiscally cautious 2019 budget

The economy gained some momentum in the second quarter according to recent figures. Private consumption growth picked up pace, likely aided by a solid labor market, buoyant consumer confidence and government efforts to limit inflation through subsidies. Moreover, the expansion in government consumption accelerated ahead of regional elections in late June. Fixed investment growth, however, ebbed and the external sector continued to subtract markedly from growth on surging imports. The third quarter has begun in mixed fashion. In July, the manufacturing PMI moved further into expansionary territory, while consumer confidence remained positive despite dipping from June’s multi-year high. However, the trade deficit reached a five-year high, and the weak external sector is putting pressure on international reserves and the rupiah. In a bid to strengthen the currency, in mid-August the government announced a fiscally prudent 2019 budget and a range of measures to reduce imports.

Domestic demand should continue to underpin growth in the second half of the year, with fixed investment supported by public infrastructure spending and higher commodity prices. However, tighter monetary policy could dampen growth, while rising global trade tensions, higher crude oil prices and the possibility of further pressure on the currency pose downside risks. FocusEconomics panelists see GDP expanding 5.2% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is forecast to grow 5.3%.                                                                        

See the full FocusEconomics Consensus Forecast ASEAN report

THAILAND | Domestic demand fuels growth in the second quarter

Economic growth in Q2 moderated from the multi-year high in Q1, driven by slower government consumption growth and a weaker contribution from inventories. However, growth in private consumption and fixed investment accelerated, with private consumption buttressed by higher consumer confidence levels, muted inflationary pressures and higher farm incomes, and fixed investment supported by private machinery and equipment investment. The economy has begun Q3 in muted fashion; in July, business sentiment decreased on weaker order books and production, while the manufacturing PMI dipped slightly, with operating conditions broadly unchanged from June.

Going forward, economic activity is expected to slow on higher oil prices and softening export momentum, due to a large base effect and rising trade tensions. However, the economy is expected to remain strong, on the back of a robust tourism sector and a pick-up in public consumption ahead of elections scheduled for next year. A further escalation of U.S.-China trade tensions remains a downside risk. FocusEconomics panelists expect the economy to grow 4.3% in 2018, which is up 0.1 percentage point from last month’s forecast. The panel projects growth of 3.8% in 2019.

MALAYSIA | Growth slackens in the second quarter on a weaker external sector

Economic growth in Malaysia eased in Q2 on the back of a weaker external sector: The pace of growth in exports moderated, while imports rebounded from a contraction in Q1. As a result, the current account surplus narrowed sharply. However, domestic demand provided some upside. Private and public consumption growth accelerated, and fixed investment growth also increased markedly. Moreover, household consumption benefited from the reinstatement of fuel subsidies in March and the zero-rating of the Goods and Services Tax (GST) on 1 June. Going forward, however, domestic demand should moderate on the heels of expected cuts to government spending in efforts to offset the revenue lost from the GST withdrawal. Meanwhile, economic data for Q3 is still limited and July’s manufacturing PMI gave mixed messages; although the indicator rose to a five-month high, it remained in contractionary territory amid an ongoing fall in new orders.

The economy is expected to grow at a resilient pace this year and next, but growth is likely to moderate due to cooling domestic demand—chiefly because the government will attempt to rein in expenditure. Downside risks include rising trade tensions, tighter global financial conditions and uncertainty over the government’s fiscal situation. 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 stabilizes in July

A preliminary estimate by FocusEconomics shows regional inflation was unchanged at 2.7% in July. Inflation rose in Indonesia, Laos, the Philippines and Thailand, while price pressures in Vietnam eased. July inflation readings for the rest of the region are still outstanding.

Several central banks have been active in recent weeks. In August, Indonesia’s Central Bank increased rates by 25 basis points to 5.50% in mid-August to support the rupiah, while the Philippines’ Central Bank opted for a 50 basis-point hike to 4.00% in order to rein in sharply rising inflation. In addition, Malaysia’s Central Bank recently loosened foreign exchange restrictions in a bid to allow local firms to navigate volatile currency markets more easily and encourage investment.

Going forward, inflation will be supported by higher global oil prices and solid domestic activity. Our panelists expect regional inflation to average 2.8% this year, which is down 0.1 percentage points from last month’s estimate. Our panel foresees inflation ticking up and averaging 3.1% in 2019.

See the full FocusEconomics Consensus Forecast ASEAN report

Oliver Reynolds

Economist