ASEAN: Growth unfazed by headwinds in 2016
January 25, 2017
Growth in the Association of Southeast Asian Nations (ASEAN) moderated in the final quarter of 2016, according to a preliminary set of data. The economy expanded 4.7% annually, a notch down from Q3’s 4.8% increase. Growth for the whole year came in at 4.7% in 2016, a slight pick-up from 2015’s 4.5%. 2016 was a tumultuous year for the ASEAN region—as well the world—in terms of political events, and financial markets experienced heightened volatility in the final quarter due to the U.S. election. Yet growth in the ASEAN economy has remained on track, despite the backdrop of weak external demand, political events in Malaysia, the Philippines and Thailand, and swings in financial markets.
Examining the fourth quarter result, the reading was likely the result of weaker growth in Malaysia, the Philippines and Thailand, which was compensated by a notable pick-up in activity in Singapore amid improving external demand and a better performance from the electronics industry. Vietnam’s economy also accelerated as the agricultural sector continued to recover from the drought earlier in the year and manufacturing activity was solid. The FocusEconomics panel expects the region to start this year on a downbeat note, with growth decelerating to 4.6% in H1, before entering a sustained upward trajectory.
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Activity to moderate in 2017
This year, developments in the external sector and global politics will continue to influence ASEAN’s growth story. The policy decisions of a more protectionist U.S. under President Donald Trump have the potential to reverberate throughout the region. Trump’s decision on 23 January to pull out from the 12-country Trans-Pacific Partnership (TPP) has created uncertainty over the future of the deal, which was seen as particularly beneficial for Vietnam’s economy. At this stage, it is unclear whether the agreement will move forward without the U.S. or if a new alliance could take its place. Brexit will also continue to play a role in ASEAN’s growth story as Singapore is particularly exposed to the potential fallout. Domestically, the timing of elections in Malaysia and Thailand will continue to be monitored, and early votes could take center stage.
Economic dynamics are expected to weaken slightly this year on slower growth in Singapore and the Philippines. The FocusEconomics panel sees the ASEAN region growing 4.7%, which is down 0.1 percentage points from last month’s forecast. Reduced headwinds from less monetary and fiscal stimulus will limit the economy’s momentum, but domestic demand should still remain solid overall. In 2018, the ASEAN economy is seen growing 4.9%.
This month’s 2017 growth forecast reflects a sizeable downward revision to Myanmar’s economic outlook. Estimates for 7 of the 10 economies in the region, including Indonesia, Malaysia, Singapore and Thailand, were left unchanged. The only economies to see brighter prospects were Brunei and the Philippines.
Growth trends are expected to be divergent in the region. The Philippines and Vietnam will be among the top performers, with projected expansions of 6.4%. On the other side of the spectrum, Singapore will grow a slow 1.6% as the country is highly vulnerable to global events and is facing a cooling property market. Our panel of economists sees regional giant Indonesia expanding a healthy 5.2%, while Malaysia should grow 4.3%.
INDONESIA | Government tweaks mining policy
Economic data for Indonesia has been a mixed bag lately, but points overall to steady momentum in the last quarter of 2016. GDP growth is likely to have matched Q3’s 5.0% figure and the available data point to steady private consumption but slow investment growth. Retail sales accelerated in November, but the manufacturing PMI ended the year on a downbeat note. In the external sector, gains were seen at the end of 2016, and the trade surplus rose to a five-year high in 2015. Exports are likely to continue to improve, after the government announced a shift in mining policy on 12 January. The government eased a 2014 ban on unprocessed ore shipments and changed rules on exports of semi-processed metals.
Indonesia’s economy should pick up slightly this year, led chiefly by domestic demand. The government’s reforms and infrastructure drive have led to an improvement in the business environment and should continue to support growth, while private consumption remains resilient. Our panel sees growth of 5.2% in 2017, which is unchanged from last month’s forecast. In 2018, GDP growth is expected to pick up to 5.4%.
THAILAND | Growth gains momentum at the end of 2016
Thailand saw moderate activity last year, with subdued private investment and manufacturing virtually stagnating for the second consecutive year. Moreover, the death of King Bhumibol Adulyadej in October cast a cloud on consumer sentiment, especially due to an official year-long mourning period. However, there is a silver lining as recent indicators suggest a slight uptick in activity in Q4: exports rebounded strongly in November and manufacturing growth rose at a multi-year high, lifting the subpar annual performance. The political state of affairs is unlikely to gain momentum anytime soon: a recent request from new King Vajiralongkorn to amend the military draft constitution is expected to delay the elections planned for 2017 to 2018. However, the changes requested are not pivotal: they only represent a slight shift of power from the King to the yet-to-be-elected government.
With political uncertainty looming and wages stagnating, private consumption will likely shift into lower gear in 2017, but both monetary and fiscal policy are expected to ease the headwinds, and therefore the economy should remain on a steady growth path. FocusEconomics panelists project that the economy will expand 3.2% in 2017, which is unchanged from last month’s estimate. For 2018, the panel expects growth of 3.3%.
MALAYSIA | Central Bank moves to support ringgit
Malaysia’s economy shifted into a higher gear in Q3, when GDP expanded a robust 4.3%—the strongest performance in three quarters. The momentum is likely to have carried over into Q4: in November, industrial production beat market expectations and grew at the fastest rate since July 2015 and exports rebounded and grew a strong 8.4%, after contracting in October at a double-digit rate. On 4 January, the ringgit tumbled to an almost 20-year low as prospects of higher U.S. interest rates triggered capital outflows from emerging markets. Malaysia is particularly vulnerable to sudden capital outflows as a large share of its government bonds is held by international investors.
Stronger export figures should support Malaysia’s economy this year thanks to rising oil prices, a weaker ringgit and robust consumption growth in the U.S. However, the country will remain vulnerable to external developments such as a slowdown in China, Malaysia’s second largest trading partner. FocusEconomics panelists expect GDP to expand 4.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel also sees GDP growing 4.3%.
INFLATION | Inflation eases in December
Preliminary data show that inflation in ASEAN fell slightly from 2.4% in November to 2.3% in December. The result was driven primarily by lower price pressures in Indonesia—the region’s largest economy. Despite moderate price pressures, central banks in the region have found their hands tied, with little space to ease monetary conditions as the U.S. Federal Reserve continues on a tightening cycle. Indonesia’s and Malaysia’s central banks kept their monetary policies unchanged in January.
Our panelists see price pressures picking up in 2017, after tepid inflation of 2.4% last year. Our panel sees inflation averaging 3.2% in 2017, which is unchanged from last month’s forecast. In 2018, our panel sees inflation of 3.4%.
Written by: Angela Bouzanis, Senior Economist