China's more supportive growth stance likely to shore up regional growth in the short term
April 26, 2016
Despite strong headwinds at the outset of the year, East and South Asia (ESA) managed to keep up the pace of growth in Q1. The region’s annual expansion was 6.2% in the three months up to March (Q4: +6.1% year-on-year), according to a preliminary set of data. Although economic activity in China decelerated slightly in Q1, it still grew at a strong 6.7% pace (Q4: +6.8% yoy). Beyond that, dynamics softened in most of the ESA countries due to mounting domestic challenges and weak global demand. India is the primary exception—the latest indicators show that the country had a rosy start to 2016.
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This year began with heightened volatility in China’s financial markets, which reverberated across the region. Moreover, oil prices fell to multi-year lows in January, triggering fears that the world could fall into period of deflation and prompting doubts about the health of the global economy. This situation led analysts to downgrade their view of many economies in the region, particularly those with stronger ties to the world’s second-largest economy. Against this backdrop, Chinese authorities decided to adopt a more proactive fiscal and monetary policy as rubberstamped in March’s National People’s Congress. So far, policy action in China has translated into stronger economic activity, particularly in infrastructure and property investment. While improved dynamics in China bode well for economic growth in the region, from a somewhat longer-term perspective government-led credit growth poses some risks to debt sustainability.
As China has entered into a mini-cycle of strong growth, overall activity in ESA should remain robust in Q2. FocusEconomics Consensus Forecast panelists expect the ESA economy to expand 6.1% in Q2, which would be in line with Q1’s result. That said, as the effects of the recent stimulus in China will start to fade away in the second half of the year, analysts foresee a sharper slowdown in Q3 and Q4. Nevertheless, stronger stimulus from China’s authorities, better dynamics in global demand and a successful implementation of India’s reform plan could further boost growth in the coming quarters.
Stronger dynamics in China drive improvement in 2016 ESA economic outlook
Cheap credit and government support propelled growth at the end of Q1 in China. Given the nature of the measures, healthy dynamics in China are expected to carry into this quarter, which will translate into stronger activity across East and South Asia. Moreover, the latest data for the region’s second-largest economy, India, also signal improving economic conditions. If Indian authorities succeed in enabling much-needed economic reforms, current positive momentum in India will likely strengthen and spur growth in the region. Against this backdrop, FocusEconomics panelists lifted the region’s growth projections for 2016 by 0.1 percentage points to 6.1%. For 2017, our panel of analysts foresees the ESA economy slowing to a 5.9% increase.
This month’s upward revision to the regional economic outlook for 2016 reflects better prospects for Pakistan and unchanged growth estimates for Bangladesh, China and India. On the other hand, panelists cut their estimates for Hong Kong, Korea, Mongolia and Taiwan. Sri Lanka also experienced a downgrade to its outlook, although this partially reflected panelists’ adoption of last year’s rebased GDP series.
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 and Taiwan are projected to be the slowest-growing economies, with an increase of 1.8% and 1.5%, respectively. 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 | Bold policy support shores up growth in Q1
Following a challenging start to the year, strong policy support and improved credit conditions fostered growth at the end of Q1 and helped to stabilize economic activity in the first three months of 2016. GDP expanded 6.7% annually in Q1, which was only a notch below the 6.8% growth tallied in Q4 2015. While more detailed data suggest that economic activity was buttressed by old recipes such as government support and cheap credit, other indicators signal that China’s gradual transition toward more sustainable levels is continuing. A loose monetary stance, rising investment and improved dynamics in the property sector indicate that the pickup observed in March will likely continue in the coming months.
While policy support is expected to shore up the economy in the short term, government-led credit growth presents significant downside risks to China’s outlook from a somewhat longer-term perspective. Particularly, cheap credit has the potential to further exacerbate domestic imbalances. FocusEconomics panelists forecast that GDP will grow 6.5% in 2016, which is unchanged from last month's projection. In 2017, the panel expects GDP growth to slow to 6.3%.
INDIA | Economy on track to post robust growth at the end of FY 2015
Recent data suggest that India’s economy ended FY 2015 on a high note and likely grew at the fastest pace since FY 2010. Industrial production rebounded in February and the PMIs signaled improving economic conditions in March. The key to maintaining strong growth momentum going forward lies in enacting meaningful economic reforms, however, resistance in Congress has curtailed momentum. The ruling BJP and its allies do not hold a majority in the upper house—a roadblock to passing key legislation. Against this backdrop, four states and one union territory are holding elections in April and May, with results due on 19 May. While wins for the government or its allies will not shift the balance of power, the elections serve as a barometer for the government’s popularity. 17 seats in the upper house from these states will come up for re-election by the end of 2017.
Buoyant domestic demand should continue to fuel healthy growth, however, slow reform implementation remains a key downside risk. The analysts we surveyed expect GDP to increase 7.5% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, our panel sees growth remaining stable at 7.5%.
KOREA | April election results in a hung parliament for first time since 2000
Economic activity, supported by strong domestic demand, showed resilience in the final quarter of 2015 despite a difficult external environment. In Q1, domestic demand likely continued to buttress growth, but economic activity is expected to have lost dynamism as the economic slowdown in China—Korea’s main trading partner—weighed heavily on the external sector. According to recent trade data, exports decreased 8.1% year-on-year in March, extending the declines seen in the last 14 months. On the political front, in the 13 April parliamentary elections, contrary to most predictions, the ruling conservative Saenuri Party of President Park Geun-hye lost a considerable number of seats and thus failed to secure a majority. As a result, there is unlikely to be much progress in policymaking for the remainder of Park Geun-hye’s administration, which ends in 2018.
Stricken by a challenging global scenario and a MERS outbreak, Korea’s economy slowed in 2015. In 2016, domestic demand will support growth, which is expected to match last year’s 2.6%. However, weak external demand will continue to hurt exports and limit higher economic growth. This prompted analysts to cut their forecast by 0.1 percentage points over the previous month’s projection. Next year, growth will pick up modestly due to better prospects for the global economy. Analysts expect GDP growth of 2.8% in 2017.
INFLATION | Inflation decelerates in March; risks skewed to the upside
As the impact of the Lunar New Year holidays started to wane, inflation in East and South Asia decelerated slightly in March. Inflation in the region inched down from February’s one-and-a-half year high of 2.8% to 2.6%, according to preliminary data. Inflationary pressures are resurfacing modestly on the back of higher food prices and the recent rise in oil prices since January’s lows. That said, these gains would not be significant in the short- and mid-term due to still sizeable output gaps and weak global demand. On the contrary, this context provides ample scope to ease monetary policy further.
Against a backdrop of higher food prices, risks to the inflation outlook are slightly skewed to the upside. Analysts project that the region’s inflation will average 2.3% in 2016, which is up 0.1 percentage points from last month’s estimate. Looking at the countries in the region on an individual basis, analysts revised the forecast for three 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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