Fading stimulus in China, weak global demand and mounting domestic challenges will hinder growth in ESA
May 25, 2016
Government-led stimulus in China helped to shore up economic growth in the final months of Q1 in East and South Asia (ESA). However, overall growth for the quarter, was hit by strong headwinds at the outset of the year and mounting troubles in some countries. The region’s annual expansion was 6.1% in the three months up to March (Q4: +6.1% year-on-year), according to a more complete set of data. Most of the economies in the region experienced a deterioration in Q1, including China, Hong Kong, Korea, and Taiwan. Weak global demand continued to drag on economic activity in Korea and Taiwan, while lower tourist arrivals are severely hurting activity in Hong Kong. India is the main bright spot in the region due to strong public investment and robust urban consumption. That said, analysts remain skeptical about the accuracy of the new GDP series.
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Dynamics in China are key to shift growth into higher gear in East and South Asia and economic data for March corroborated that government-led stimulus took off at the end of Q1, helping lift economic sentiment in the region. However, Chinese authorities have started to unwind policy stimulus in recent weeks as they are increasingly concerned about the negative implications of government-fueled stimulus. This was reflected in China’s economic indicators for April and has the potential to cloud the outlook for the region. Although the rippling effect of Q1’s economic stimulus will inevitably fade away in the coming months, signals from China’s leaders that they will not allow the economy to slow down sharply has the potential to shore up economic sentiment in the region.
Global demand remains tepid in 2016 as most of the world’s key players and many emerging-market economies are performing below their potential. This situation is having a negative impact in the region’s export-driven nations. Moreover, mounting domestic challenges in some countries in the region are also putting a dent in ESA’s overall economic growth. As a result, overall activity in ESA is expected to moderate in the coming quarters. FocusEconomics Consensus Forecast panelists see the ESA economy expanding 6.0% in Q2.
2016 ESA economic outlook hit by mounting domestic challenges
While policy support in China is positive news for the region, at least in the short term, challenging domestic conditions in some countries are weighing on East and South Asia’s growth prospects. In particular, Hong Kong’s economy is suffering from a correction in the housing market and weaker inbound tourism, while policy uncertainty is adding to an already battered economic situation in Taiwan. Moreover, data for April suggesting that Chinese authorities may have become more cautions on economic stimulus have the potential to dampen economic activity in the region. Against this backdrop, FocusEconomics panelists cut the region’s growth projections for 2016 by 0.1 percentage points to 6.0%. For 2017, our panel of analysts foresees the ESA economy slowing to a 5.9% increase.
This month’s downward revision to the regional economic outlook for 2016 reflects worse prospects for Hong Kong, Mongolia and Taiwan. Growth estimates were unchanged in Bangladesh, China, India, Korea, Pakistan and Sri Lanka.
India is expected to be the region’s fastest-growing economy in 2016 with a 7.5% expansion, followed by Bangladesh, with an expected 6.6% increase. At the other end of the spectrum, Hong Kong, Mongolia and Taiwan are projected to be the slowest-growing economies, with growth rates below 2.0%. China’s economy is seen expanding 6.5% in 2016, which is in line with the lower band of this year’s economic target of 6.5%–7.0%.
CHINA | Authorities start to pull in the reins on stimulus
While strong policy support fueled economic growth at the end of Q1, data for April suggest that policymakers took their foot off the gas pedal amid concerns that government-led credit growth could exacerbate domestic imbalances and derail much-needed economic reforms. So far this year, Chinese authorities’ moves are in line with their objective to gradually implement economic reforms and tolerate slower growth, but also to step in if growth should fall below the threshold level established in March. While weaker economic indicators were seen across the board, the rebound in the property market remained intact in April, which is expected to buttress growth in the short term.
Policy action alleviated concerns about a sharp slowdown in the foreseeable future. Moreover, growth should remain relatively strong in the coming months on the back of still-accommodative monetary policy and rippling effects from Q1’s government support. Weak global demand and high private debt levels are the main risks to growth. FocusEconomics Consensus Forecast panelists forecast that the economy will grow 6.5% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth slowing to 6.3%.
INDIA | Economy enters this quarter on weaker note
India’s economy gained momentum in FY 2015 and is expected to have grown at the fastest pace in five years. Robust urban consumption and public investment have supported growth despite an unfavorable external environment. Recent data point to a soft start to FY 2016: both the manufacturing and services PMIs moderated in April. Meanwhile, the government received a small boost in state elections whose results were released on 19 May. The ruling BJP-led alliance won in Assam and improved its performance in West Bengal, suggesting that the government’s popularity is intact. However, the results will not have a meaningful impact on the upper house, where the BJP and its allies do not hold a majority, meaning that the government will need to work with other parties to pass critical reforms including the Goods and Services Tax bill.
Healthy domestic dynamics should drive another year of strong growth in FY 2016. However, a weak monsoon and slow reform implementation remain key downside risks to the forecast. FocusEconomics panelists expect GDP to increase 7.5% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, the panel sees growth remaining stable at 7.5%.
KOREA | Global headwinds hit growth in Q1
Preliminary figures released by the Central Bank showed that the Korean economy slowed in the first quarter of the year. According to the Bank, the economy grew 2.7% annually in Q1, down from the 3.1% expansion tallied in Q4. Growth was constrained by a poor performance of the external sector and a sharp deceleration in domestic demand. More recent data paint a mixed picture of the economy: business confidence reached an eleven-month high in May while exports contracted at a double-digit rate in April. Meanwhile, Korean industries are bracing for some rough times as global trade slows and China’s industrial sophistication improves. The government plans to restructure the shipping and shipbuilding industries to reduce high levels of corporate debt and support businesses amid a demand slump. The policies, which will likely tighten corporate credit standards, are expected to result in massive layoffs.
Domestic demand will support growth in 2016 but the economy will be constrained by sluggish exports, uncertain political developments in the Korean peninsula and the negative spillover stemming from China’s economic slowdown. Panelists participating in the FocusEconomics Consensus Forecast estimate that GDP will grow 2.6% in 2016, which is unchanged from last month’s forecast. In 2017, panelists forecast GDP growth to accelerate marginally to 2.8%.
INFLATION | Inflation inches up in April
Rising food prices are slightly fanning inflationary pressures in East and South Asia. Inflation in the region inched up from March’s 2.6% to 2.7% in April. Along with food prices, domestic factors and, particularly, the recovery in global oil prices are also contributing to the recent uptick in regional inflation. While there are some upside risks such as a poor monsoon in India and higher rentals in China, overall, inflationary pressures should remain largely contained going forward due to sizeable output gaps in the region, weak global demand and relatively low commodity prices.
As upside risks to ESA’s inflation outlook are gradually materializing, analysts increased their 2016 inflation estimate for the region from last month’s 2.3% to 2.4%. Looking at the countries in the region on an individual basis, analysts revised the forecast for four of the nine economies surveyed upward, including the region’s big player China. Our panel of experts expects inflation to rise to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist
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