East & South Asia Economic Forecast

Economic Snapshot for East & South Asia

July 17, 2018

East Asian economies are expected to decelerate in 2019

Growth in East Asia is set to decelerate this year as export-driven economies will feel the pain from weaker global demand amid escalating trade tensions between China and the United States. Economies in East Asia are also highly susceptible to a Chinese economic slowdown.

South Asia economic growth to expand at the same rate as last year

In 2019, the regional economy is expected to expand at the same rate as last year. After falling to a five-year low in 2018, quicker growth in Bangladesh and India, should drive the acceleration. Economic dynamics in Pakistan and Sri Lanka, however, will moderate sharply, reflecting spillovers from the IMF-sponsored deal and the devastating Easter bombings, respectively. 

China Economic Outlook

In the second quarter of the year, the Chinese economy expanded at the weakest pace since at least 1992, as the trade war with the United States continued to undermine the external sector and investment. Nominal merchandise exports contracted in Q2, mostly reflecting weak global demand and spillovers from the China-U.S. trade spat. Moreover, trade disputes dragged on investment throughout the quarter despite increased bank lending causing a notable uptick in June. Volatility in China’s economic data is expected to continue further down the road until the trade dispute settles. In this regard, June’s strong economic data for the domestic economy should be taken with a pinch of salt until additional data can corroborate that growth has indeed effectively bottomed out. In late June, China and the U.S. agreed to restart trade negotiations, while the U.S. canceled new tariffs on Chinese exports.  

Uncertainty regarding the China-U.S. trade war will continue to weigh on growth this year, while weak global demand and domestic economic imbalances are additional downside risks. That said, the government’s commitment to support the economy via fiscal stimulus and accommodative monetary policy should make the 6.0–6.5% growth target for this year attainable. 

FocusEconomics panelists see the economy growing 6.2% in 2019, which is down 0.1 percentage points from last month’s forecast, before decelerating to 6.0% in 2020.

India Economic Outlook

Economic momentum appeared subdued in April‒June, although it was still likely stronger than in January‒March. The private sector PMI averaged markedly lower in April‒June than it did in the previous three-month period on weaker demand growth, in addition to disruption stemming from the general election. The weather also likely had an impact as workers toiled in sweltering temperatures in May‒June. Moreover, there was lower-than-average rainfall in June, the first month of the four-month monsoon season, which will have hit the agricultural sector. In politics, the government unveiled its final budget for FY 2019 on 5 July. The budget outlines a 13.3% spending increase, which is unchanged from the interim budget presented in February. Despite this rise, the government targets a fiscal deficit of 3.3% of GDP, which is lower than the shortfall of 3.4% of GDP recorded in FY 2018.

The economy should regain momentum in the coming months, especially if monsoon rains pick up in July‒September. Fixed investment should benefit from greater policy certainty following the elections, in addition to lower interest rates. Weak public finances, problems in the shadow banking sector and a shaky global economy pose downside risks, however.

Our panelists expect GDP growth of 6.9% in FY 2019, which is down 0.1 percentage points from last month’s estimate, and 7.1% in FY 2020.

Korea Economic Outlook

The economy seems to have remained on feeble footing in the second quarter. Exports plunged in June, largely on a sharp fall in semiconductor sales, while the PMI was stuck in contractionary territory, stymied by shrinking demand. Consequently, consumers and businesses remained decidedly pessimistic in June and for July, respectively. In early June, the government released its economic agenda for H2, which spelled out plans to spend nearly three-quarters of the supplementary budget in the first two months, spur investment and expand tax incentives in a bid to boost domestic demand and revive the flagging external sector. In the political arena, while Japanese restrictions on exports to Korea of several high-tech smartphone materials will likely further hamper the economy, its unintended consequence of boosting semiconductor prices should aid Korean tech firms in the short-term. 

The outlook for this year is less promising than previously expected. Heightened global trade tensions and a weaker tech sector will hit fixed investment, while pessimistic consumer confidence and a gloomier economic outlook will constrain household spending. Fiscal stimulus should provide support, however.

FocusEconomics panelists project the economy will grow 2.0% in 2019, which is down 0.2 percentage points from last month’s forecast, and 2.4% in 2020.

East Asia Monetary & Financial Sector News

Inflation rose from 2.3% in April to 2.5% in May, with all economies that have released data showing an increase in inflationary pressures (data still pending for Hong Kong). While inflation is expected to gain steam this year, this will largely depend on developments in the oil market as well as domestic factors such as the outbreak of African swine fever in China.

Monetary policy is inconsistent across the region. While the Bank of Korea cannot normalize its monetary policy due to weak growth and low inflation, Mongolia is hiking its policy rate in an attempt to curb surging inflation. Meanwhile, China is trying to ease financial conditions without derailing deleveraging efforts.

In recent weeks, currencies in East Asia continued to slide on the back of escalating trade tensions between the U.S. and China as well as signs of cooling global growth. Looking forward, most currencies in the region are set to weaken, reflecting rising trade uncertainty and weak economic growth in the region.

South Asia Monetary & Financial Sector News

Inflation accelerated to 3.8% in June from 3.7% in May. This was due to greater inflationary pressures in India, whereas inflation slowed in Bangladesh, Pakistan and Sri Lanka. Taking 2019 as a whole, inflation is seen accelerating compared to 2018. This is partly on stronger economic growth and higher import tariffs in India, as well as IMF-backed subsidy cuts in Pakistan.

While there has been little significant monetary policy change in recent weeks, on 3 July the IMF called on the Pakistani government to grant the Central Bank greater independence and reduce its financing of the government’s fiscal deficit. In 2019 as a whole, interest rates are expected to average slightly lower than in the previous year, largely on loosening in India.

In recent weeks, the Indian rupee has made up some lost ground against the USD, likely on the back of a relatively prudent final FY 2019 budget. Pakistan’s rupee, meanwhile, has continued to depreciate as the ramifications of the IMF agreement were digested. This year, all currencies in the region are expected to depreciate against the USD.

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