China remains as the focal point of ESA growth story
February 24, 2016
Economic growth in East and South Asia (ESA) slowed further in the final quarter of 2015 as demand from China is falling and the region’s overall economic conditions remain soft. More complete data showed that the region’s GDP increased 6.1% year-on-year in Q4 2015, which was just below the 6.2% expansion tallied in Q3. On top of the deceleration in China reported in last month’s Consensus Forecast report, growth in India, the region’s second-largest economy, also slowed down in Q4. Dynamics in India were negatively affected by tighter financial conditions and worsening external demand. Moreover, analysts highlighted that there is a significant mismatch between national accounts data and other economic indicators and that actual growth could be overstated. Elsewhere in the region, Taiwan’s economy continued to be impacted by weaker activity in China and contracted for the second consecutive quarter in Q4.
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Weaknesses observed throughout 2015 have not abated and seem to have carried into Q1. While China has not published its normal set of economic data this month due to the Chinese New Year festivities, the indicators available suggest that the economy’s structural slowdown remains intact. Against this backdrop, falling demand from China will continue to pose downside risks to growth in the entire region. That said, a more accommodative fiscal stance and a looser monetary policy in most of the countries are expected to shore up economic activity. While low commodity prices are exerting deflationary pressures on economies across the region, they are also helping to improve the external position of some countries in a context of falling shipments. Bolder support from authorities is expected to shore up the economy of East and South Asia in Q1. FocusEconomics Consensus Forecast panelists expect the ESA economy to also expand 6.1% in the three months up to March.
ESA economic outlook stabilizes this month on unchanged growth prospects for China
The ongoing slowdown in China, coupled with fears of an abrupt downturn in the world’s second-largest economy, continue to negatively impact the region’s economic outlook. Moreover, this month, the outlook was negatively affected by concerns about the slow implementation of economic reforms in India. Despite the overall bleak economic picture, FocusEconomics panelists kept their growth projections for 2016 at 6.1% for the fourth consecutive month on stable prospects for China. For 2017, our panel of analysts foresees the ESA economy slowing further to a 5.9% increase.
This month’s stable outlook for 2016 reflects unchanged growth prospects for Bangladesh, China, Hong Kong, Mongolia and Pakistan. On the contrary, panelists cut their projections for India, Korea, Sri Lanka and Taiwan.
Despite the downward adjustment, 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 range, Hong Kong and Taiwan are projected to be the slowest economies, with an increase of 2.1% and 1.9%, respectively. China’s economy is seen expanding 6.5% in 2016, which is in line with authorities’ guideline that growth should be “no less” than 6.5%, according to the 13th Five-year Plan that covers the period between 2016 and 2020.
CHINA | Economic conditions remain challenging at the outset of the year
A combination of structural changes in the economy, subdued global demand and domestic challenges such as overcapacity in certain sectors and high corporate debt led growth to slow further in Q4. Although economic data at the outset of the year are distorted by the Lunar New Year festivities, latest indicators suggest that the country remains in a soft patch. The manufacturing PMI hit an over-three-year low in January. Meanwhile, developments in the foreign exchange market have received most of the attention in recent weeks. The yuan recorded its largest gain in more than a decade on 15 February following the Central Bank governor’s declaration that there was no basis for devaluation. That said, despite the surge, the yuan has not yet recovered the ground lost in January. In the political arena, the curtain will be lifted on the National People's Congress (NPC) on 3 March, which will define the economic targets for this year.
In line with the authorities’ plan, the economy is expected to continue experiencing a structural rebalancing in 2016. Uncertainties regarding the effectiveness of economic policy, a further slowdown in the external sector and high corporate debt remain the main threats to China’s growth. Panelists surveyed for this month’s FocusEconomics report left their 2016 GDP growth forecast unchanged at last month’s 6.5%. Next year, panelists see the economy expanding 6.2%.
INDIA | All eyes on upcoming budget presentation
India’s economy slowed in the October to December period on the back of weak fixed investment growth. Although the expansion was still robust and the country is on track to be one of the fastest-growing economies in Asia, market analysts continue to express doubts over the underlying health of the economy after last year’s significant GDP revision. Moreover, high-frequency indicators point in opposite directions: exports continued to tumble in January, while the manufacturing and services PMIs improved. Against this backdrop, all eyes are on the government ahead of the 29 February budget presentation. While the government has committed to gradual fiscal consolidation, weak external and rural consumption have led to speculation that targets could be revised and that stimulus may be in the cards.
Growth is expected to remain strong thanks to firm domestic demand. However, lingering risks to the outlook include fiscal slippage, slow reform implementation and increased volatility in global financial markets. FocusEconomics panelists expect GDP to increase 7.5% in FY 2016, which is down 0.1 percentage points from last month’s forecast. For FY 2017, the panel sees growth remaining stable at 7.5%.
KOREA | Disappointing external sector performance continues to weigh on growth
The economy lost some momentum last year, as sliding exports and weak manufacturing restrained growth. By contrast, domestic demand was robust throughout 2015, with household and government spending, as well as fixed investment, all picking up, partly owing to the policy measures taken to propel growth. Recent economic data paint a bleak picture at the outset of 2016. In January, exports recorded the largest contraction since the financial crisis. In addition, business confidence hit a near-seven-year low and the manufacturing PMI fell back intro contractionary territory. In a bid to stimulate exports and domestic demand, the government extended its fiscal stimulus in February. Meanwhile, the Kaesong industrial complex was shut down over elevated tensions with North Korea.
Weak exports are dragging on Korea’s outlook. However, healthy private consumption and investment are expected to sustain still-solid economic growth. Our panelists expect GDP to expand 2.7% in 2016, which is down 0.1 percentage points from last month’s forecast. The panel sees growth at 2.9% in 2017.
INFLATION | Region’s inflation hits 16-month high in January
Inflation in East and South Asia continued to quicken in January, rising from 2.2% in December to 2.4%, according to preliminary data. Although January’s result marked the highest inflation rate since August 2014, inflationary pressures remain contained due to a series of factors such as the low oil price environment and subdued regional growth. This situation provides more leeway for the central banks in the region to keep a loose monetary policy and support the economy.
Analysts project that the region’s inflation will average 2.2% in 2016, which is down 0.1 percentage points from last month’s estimate. Looking at the countries in the region, analysts cut the forecast for seven of the nine economies surveyed, including Hong Kong, India, Korea, Mongolia, Pakistan, Sri Lanka and Taiwan. Our panel of experts expects inflation to rise to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist
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