East & South Asia Economic Outlook August 2017

Strong growth momentum continues in Q2

East & South Asia: Strong growth momentum continues in Q2

July 20, 2017

Surprisingly-resilient economic dynamics in China continue to lead growth in East and South Asia (ESA). A preliminary set of data for the region showed that aggregate GDP increased 6.2% year-on-year in Q2 2017 (Q1: +6.2% yoy), which was a notch above the 6.1% expansion that our panel of analysts had projected last month.

The region’s main growth engine, China, posted another stellar result in Q2, with GDP expanding at Q1’s 6.9% rate. As in other countries in the region, exports continued to expand at a solid pace on the back of resilient global demand, while low inflation increased the amount of disposable income in the pockets of Chinese consumers. Moreover, while the property sector has started to show some signs of fatigue following the introduction of cooling measures early in the year, investment remains resilient as the government is buttressing infrastructure projects.

Healthy dynamics in China are reverberating across the region via higher external demand and stronger investment. The main exception is Korea as the deployment of an U.S. anti-missile system led to an economic retaliation by China, which is hurting the external sector. Bangladesh and Pakistan both released GDP data for the fiscal year that ended in June 2017, posting accelerations compared to the previous year. Better weather conditions boosted agricultural output and growth in the service sector accelerated notably in both countries. 

1 July was a historic day for India when the long-awaited Goods & Services Tax (GST) came into force. The GST is an indirect tax that applies throughout India and simplifies taxation. While the new system is expected to increase transparency and boost foreign direct investment, there is a lot of uncertainty surrounding what the short-term impact will be.

China and robust external demand support ESA’s 2017 economic outlook

Strong growth in China and healthy global demand are shoring up economic activity in the East and South Asian economies. Moreover, lower-than-expected inflation is boosting household spending, while looser fiscal policies are reinvigorating infrastructure investments. Against this backdrop, FocusEconomics Consensus Forecast panelists expect the region to expand 6.1% this year, which is unchanged from last month’s estimate. Next year, the ESA economy will expand at a slightly slower pace of 5.9%.

This month’s unchanged growth prospects for 2017 reflect stable estimates for China and Mongolia. Hong Kong, Korea and Taiwan experienced forecast upgrades this month, while the projections for India and Sri Lanka were revised downward. Preliminary figures for the Bangladeshi and the Pakistani economies show that growth in FY 2017, which ended in June 2017, came in above expectations and was 7.2% and 5.3%, respectively.

India will be the region’s fastest-growing economy in 2017 with an expansion of 7.2%. China will rise at a healthy rate of 6.6%. At the other end of the spectrum, Mongolia will be the worst performer as the debt-ridden economy is still facing large structural imbalances. Growth in Hong Kong, Korea and Taiwan will fluctuate around 2.5%.

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CHINA | Stellar performance continues in Q2

Economic momentum remained resilient in Q2 supported by strong domestic dynamics and healthy global demand. The economy expanded 6.9% annually in Q2, matching the result in Q1. Although real sector indicators for the domestic economy moderated at the outset of the quarter, economic data strengthened sharply in June. On the external side of the economy, exports continued to benefit from resilient economic activity, particularly, among developed economies. In the five yearly Finance Work Conference held on 14–15 July, President Xi Jinping stressed that the financial sector must serve the real economy and that the government must contain financial risks and implement bolder economic reforms. With growth set to comfortably meet the 6.5% target for this year, authorities are expected to put more emphasis on addressing economic imbalances and deepening reforms through the end of the year.

The healthy economic performance in H1 will likely allow authorities to push forward structural reforms. While these measures have the potential to hurt economic dynamics in the short term, they are key to assuring a more stable growth trajectory in the future. FocusEconomics panelists forecast that the economy will grow 6.6% in 2017, which is unchanged from last month's estimate. In 2018, the panel sees GDP growth at 6.2%. 

INDIA | Long-awaited GST reform comes into effect in July 

Incoming data suggests that the economy is gradually recovering from the government’s demonetization shock, which dented growth in Q4 FY 2016. The services PMI rose further into expansionary territory in June and the trade balance narrowed from May’s result. However, weakness was seen in the manufacturing sector in the same month, as water shortages and apprehension over the implementation of the GST reform in July weighed on the sector. The landmark reform came into effect on 1 July, and while the move is positive for the economy in the long run, in the short-term it could hurt activity temporarily as firms’ transition to the new system. Meanwhile, on 17 July, lawmakers voted for the country’s next president. The position is largely ceremonial and unlikely to have a significant economic impact. Results are due to be announced on 20 July.

Activity should gain steam in the coming quarters as the economy puts demonetization and GST implementation disruptions behind it. The FocusEconomics panel sees GDP expanding 7.2% in FY 2017, which is down 0.1 percentage points from last month’s forecast. For FY 2018, growth is projected to accelerate to 7.5%. 

KOREA | Government approves minimum wage hike

The external sector continued to perform remarkably well in Q2, with double-digit growth in merchandise exports helping sustain momentum in the Korean economy. Nonetheless, the sector’s contribution to GDP likely swung into negative territory in Q2 as a plunge in Chinese tourist arrivals—the result of China’s ban on group tours to Korea in March—caused the services account deficit to widen in April and May. The dynamics are equally discouraging in the domestic sector, whose robust Q1 performance largely resulted from strong construction activity. However, building permits fell markedly in the first two months of Q2, which suggests a weaker outturn at the end of H1. The Moon Jae-in administration unveiled in late June a first set of measures to rein in household debt and the runaway property market, which will depress construction investment further in H2. Meanwhile, the government reached an agreement in mid-July with business and labor representatives to increase the minimum wage by 16.4% in 2018.

The government’s attempt to crack down on massive household debt levels will put a lid on investment in key sectors. Nonetheless, strong momentum in merchandise trade and the government’s stimulus package will help shore up growth to an extent. FocusEconomics panelists expect GDP to expand 2.7% in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, the economy is forecast to grow 2.6%. 

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INFLATION | Inflation inches down in June

Inflation in East and South Asia inched down from 1.8% in May to 1.7% in June. June’s print reflected that price-pressures remain firmly contained in China, while inflation in India is at record lows. Inflation in Korea and Pakistan also decreased in June, while it rose in Sri Lanka and Taiwan. With relatively solid growth in most of the countries in the region and benign inflation figures, the central banks have little incentive to tweak their monetary policies. Only India and Mongolia could lower interest rates in order to offset negative spillovers stemming from the recent introduction of the GST in the former and shore up economic growth in the latter. 

Panelists expect inflation in East and South Asia to be 2.3% this year, which is down 0.2 percentage points from last month’s estimate. The downward revision was the result of lower inflation projections in Bangladesh, China, Hong Kong, India and Taiwan. For 2018, our panel of experts expects regional inflation to rise to 2.7%.


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