ASEAN: Domestic demand drives growth in Q2, ASEAN leaders focus on boosting trade
September 21, 2016
Growth in the Association of Southeast Asian Nations (ASEAN) picked up moderately in the second quarter as the region’s largest economy, Indonesia, kicked into a higher gear. The ASEAN economy expanded 4.7% over the same period of last year, just above Q1’s 4.6% increase. Faster growth in the Philippines, Thailand and Vietnam also contributed to the acceleration, while Malaysia’s economy lost steam and growth stagnated in Singapore. Overall, the boost came on the back of improved performance in domestic demand, while the external sector continues to suffer from weak global trade flows.
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The pick-up in growth is expected to be short-lived and the FocusEconomics panel sees a smaller expansion in the third quarter. High frequency indicators suggest that the manufacturing sectors of Malaysia, Singapore and Thailand have underperformed over the quarter. Data for Indonesia’s manufacturing sector was more positive, although the weak external environment continues to hurt exports. Meanwhile, changing market sentiment in regards to the timing of the next U.S. interest rate hike is adding volatility to the foreign exchange markets. Overall, our panel sees the ASEAN economy decelerating to a 4.5% expansion in Q3.
In the face of an underperforming economy and a weak global trade outlook, leaders from across the region gathered in Laos in early September for the 28th and 29th ASEAN summits. The meetings marked the first large-scale talks since the launch of the ASEAN Economic Community (AEC) on 31 December 2015, which was designed to spur intra-ASEAN trade and establish a more globally competitive single market. At the September meetings, leaders from ASEAN reiterated their commitment to greater regional integration and made some steps towards strengthening ties, but a number of hurdles remain. One key hurdle to facilitating greater trade is removing non-tariff barriers. While tariffs have fallen across ASEAN in recent years, a number of non-tariff barriers are impeding flows.
Growth prospects stabilize
Following an improvement in economic prospects last month, the outlook for ASEAN is unchanged in this month’s Consensus Forecast report. Analysts polled by FocusEconomics see the region growing 4.6% in 2016, just above 2015’s reading. Fiscal stimulus policies and solid demand from within the region should support the uptick in growth.
This month’s forecast reflects that upward revisions for Indonesia, the Philippines; and Thailand were balanced by downward revisions for Brunei, Cambodia, Laos and Vietnam. The forecasts for the remaining economies, including Malaysia and Singapore, were kept unchanged. Next year, our panel of analysts expects the ASEAN economy to expand 4.8%.
Myanmar and Laos, in that order, are expected to be the top performers in 2016, with expansion rates of over 7.0%. At the other end of the spectrum, Brunei and Singapore are likely to be the worst performers, followed by Thailand. Among the rest of the region’s major economies, the Philippines and Vietnam will grow the fastest, with projected expansions of 6.4% and 6.0%, respectively. Our panel of economists sees regional giant Indonesia expanding 5.1%.
INDONESIA | Tax amnesty set to fall far short of target
Indonesia’s economy accelerated in the second quarter as government stimulus plans came to fruition. Robust public spending is expected to keep the economy on an even footing in Q3, although high-frequency indicators are pointing in different directions. Manufacturing growth was robust in July and the manufacturing PMI returned to expansionary territory in August. However, the trade balance fell and growth in retail sales more than halved in July. Meanwhile, concerns over the government’s accounts persist despite the launch of the tax amnesty program. In September, Central Bank Governor Agus Martowardojo stated that the program will likely generate only a fraction of the earning targeted, which could jeopardize the government’s fiscal targets.
Government spending should boost growth this year, despite the weak outlook for the external sector. FocusEconomics panelists see GDP expanding 5.1% in 2016, which is up 0.1 percentage points from last month’s forecast, before speeding up slightly to 5.3% in 2017.
THAILAND | Post-referendum data show improved confidence
Thailand’s economy accelerated in Q2, driven by a pick-up in private consumption and a positive contribution from the external sector. While private investment was sluggish, public investment expanded strongly amid the government’s plan to provide fiscal stimulus. The administration’s continued support of the economy is one of the implications of August’s referendum. The military’s draft constitution was accepted at the ballot box not only because of the fiscal stimulus package, which has been in place since the military junta took over in 2014, but also because keeping the same government guarantees a certain degree of political stability. Thai citizens seem to have welcomed the prospects of stability—consumer confidence rose to a five-month high in August—but the political implications are less obvious. Political analysts have criticized the constitution as it strengthens the junta’s power and curtails free speech.
The budget for the fiscal year 2017, starting on 1 October 2016, was approved in early September. It includes a detailed plan aimed at boosting Thailand’s competitiveness with a broad range of investment projects. FocusEconomics panelists expect the economy to grow 3.2% in 2016, which is up 0.1 percentage point from last month’s estimate. For 2017, the panel projects that the economy will expand 3.3%.
MALAYSIA | Changing market sentiment hits assets
The ringgit has recorded drops in recent days, reacting to a decline in oil prices on news that the supply glut will persist until 2017 and due to prospects of a Fed hike, which has stymied demand for emerging-market assets. Likewise, Malaysia’s Development Bank, the 1MDB, is stuck in an arbitration battle over a USD 6.5 billion claim with an Abu Dhabi-based sovereign wealth fund, which has weighed on market sentiment towards Malaysian assets and thus added further pressure on the ringgit. Although Malaysia’s fundamentals are still solid, recent economic data have not helped the country improve its outlook. In July, exports fell for a 22nd consecutive month and industrial production growth was disappointing.
While domestic demand is expected to continue supporting Malaysia’s economy, the path to recovery is still vulnerable to external factors such as lackluster demand from Malaysia’s key trading partners, prospects of Fed rate hike this year and depressed energy prices. FocusEconomics panelists expect GDP to expand 4.1% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP growing 4.4%.
INFLATION | Inflation inches down in August
Preliminary data show that inflation in ASEAN fell slightly from 1.7% in July to 1.6% in August. If confirmed, August’s reading would mark the lowest rate since December. Historically-low inflation has opened the door for many central banks in the region to ease monetary policy rates and a number of our analysts expect rates to be cut further by the end of the year. That said, risks to easing policy endure as a hike in U.S. interest rates could spark capital outflows and depreciate currencies.
Our panelists see price pressures rising meekly in the coming months and inflation averaging 2.4% in 2016, which is down 0.1 percentage points from last month’s forecast. This month’s ASEAN forecast reflects downward revisions to the inflation outlooks for six of the ten countries surveyed, including major player Indonesia. Next year, inflation is expected to pick up to 3.3%.
Written by: Angela Bouzanis, Senior Economist