Economy likely to have decelerated in Q4 following Q3 stabilization
January 27, 2016
Economic growth in East and South Asia (ESA) stabilized in the third quarter. More complete data showed that the region’s GDP increased 6.3% year-on-year in Q3 2015, which matched the pace of expansion registered in Q2. The stabilization in the region’s GDP growth reflected that the gradual slowdown in the Chinese economy was cushioned by stronger economic dynamics in India and Korea. Toward the end of 2015, economic growth in East and South Asia likely lost momentum as a result of a further deceleration in the Chinese economy. China’s GDP increased 6.8% annually in Q4, which was slightly down from the 6.9% expansion tallied in Q3. In 2015, China’s economy unsurprisingly increased 6.9%, which was in line with the government’s target of “approximately 7.0%”. The result, nonetheless, came in below the 7.3% expansion registered in 2014 and marked the slowest pace of growth in 25 years.
The economy of East and South Asia is headed toward some challenging months as the region faces tighter global financial conditions due to the U.S. monetary policy, as well as rising imports costs resulting from weaker regional currencies. On top of that, ESA will have to adjust to slower demand in China as the economy gradually shifts to a more consumption-driven growth model. Economies in the region face these challenges at the time when the build-up of leverage in the region, particularly in China, is raising serious concerns. Meanwhile, cheap oil in 2015 has benefited many ESA energy importers by improving their external accounts and boosting real spending power. However, these benefits may soon fade as global energy prices are expected to increase this year.
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Region’s economy seen slowing further in 2016
Despite a respectable growth figure, China’s GDP did slow in 2015. That said, India’s economy is expected to show resilient growth. The economy of East and South Asia is expected to have expanded 6.3% in 2015, which will mark a slowdown over the 6.6% expansion tallied in 2014. For this year, analysts expect the region’s growth to moderate further. Forecasters project that the economy of the ESA region will increase 6.1% in 2016, which, if confirmed, will represent the region’s weakest economic performance since 2001. Although risks are till tilted toward the downside, economists left their 2016 projection unchanged over the previous month. This month’s stable outlook reflects unchanged growth projections for seven of the nine economies surveyed, including China. That said, the panel cut its forecasts for Taiwan and Sri Lanka. For 2017, our panel of analysts foresees the ESA economy slowing further to a 6.0% increase.
India is expected to be the region’s fastest growing economy in 2016, with a 7.6% 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 2.0%, respectively. China’s economy is seen expanding 6.5% in 2016, which is in line with President Xi Jinping’s suggestion 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 | Economy increases at slowest pace in 25 years in 2015
China’s economic growth slipped down to 6.8% in Q4, which was marginally below the 6.9% registered in Q3. In 2015 as a whole, the economy increased 6.9%, which was in line with the government’s target of “approximately 7.0%”. Nonetheless, growth fell short the 7.3% observed in 2014 and marked the slowest pace since 1990. The Chinese leadership has promised structural reforms to boost long-term growth, and economic policy in 2016 will focus on supply-side reforms, while China’s authorities will also rely on demand-side stimulus to cushion the current slowdown. The path of full liberalization in the CNY is far from smooth. The currency’s weakness observed in December worsened at the beginning of the year as the Chinese currency remains under pressure due to strong capital outflows amid concerns about the health of the economy.
Following last year’s slowest expansion in 25 years, the economy is expected to continue experiencing a structural slowdown in 2016. Uncertainties regarding economic policy remain as there are increasing risks that policy makers will not deliver on time. 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 | Government employees are set to receive higher salaries amid robust growth
India’s economy accelerated in the July to September period, propelled by strong fixed investment growth and government spending. Despite the positive GDP figure, doubts remain regarding the health of the economy and higher frequency data remains lackluster: industrial production contracted for the first time in one year in November and the manufacturing PMI fell to an over-two-year low in December. Moreover, slowing nominal GDP growth is increasing fiscal pressures on the government ahead of next month’s budget presentation. A likely upcoming salary hike for millions of government employees, along with lower-than-expected nominal GDP and the high level of public expenditure needed to keep up growth momentum, have led to speculation that the government will revise fiscal consolidation targets in the upcoming budget.
Growth is expected to pick up pace slightly going forward thanks to firm domestic demand. However, a number of downside risks to the forecast exist. Specifically, slow reform implementation, increased uncertainty in global markets and the risk of fiscal slippage in the medium term could weaken prospects. FocusEconomics panelists expect GDP to increase 7.4% in FY 2015, which is unchanged from last month’s forecast. For FY 2016, the panel sees growth edging up to 7.6%.
KOREA | Economic growth strengthens toward the end of the year but outlook is weak
The Korean economy accelerated to 3.0% annual growth in the final quarter of 2015, driven by ongoing domestic strength, including robust private consumption and fixed investment. Exports registered an improvement in Q4, although much stronger imports growth led to a considerable overall drag from the external sector. Economic growth for 2015 as a whole came in at a three-year low of 2.6%. Exports registered an 8.0% contraction in 2015, which marked the weakest result since 2009. Exports represent roughly half of Korea’s GDP and are unlikely to boom this year as China and other emerging markets are on track to decelerate further. Moreover, with business confidence firmly entrenched in pessimistic territory in January, there is uncertainty over growth prospects for the economy in the year ahead.
A weak external sector and fading government stimulus will likely restrain growth going forward, although strong domestic dynamics should continue to pick up the slack. FocusEconomics panelists expect GDP to expand 2.8% in 2016, which is unchanged from last month’s forecast. The panel sees growth at 3.0% in 2017.
INFLATION | Region’s inflation picks up momentum toward the end of 2015
Inflation in East and South Asia accelerated from November’s 2.1% to 2.2% in December, according to preliminary data. December’s result marked the highest inflation rate in 14 months and mainly reflects higher inflation rates in China, India, Korea and Pakistan. Inflation in the region averaged 2.0% in the full year 2015, which was well below the 2.7% observed in 2014. Lower commodities prices, in particular oil prices, have kept inflationary pressures contained in the region. Low inflation has helped Central Banks to keep monetary policy looser for longer than would otherwise have been the case. Meanwhile, the recent weakening of the Chinese renminbi and expectations of its further depreciation is a growing concern among the region’s monetary policy makers.
Analysts project that the region’s inflation will average 2.3% in 2016, which is unchanged from last month’s estimate. Looking at the countries in the region, analysts cut the forecast for seven of the nine economies surveyed, including ESA’s key players China and India. Meanwhile, the inflation forecasts for Hong Kong, and Sri Lanka were left unchanged over the previous month. Our panel of experts expects inflation to rise to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist
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