East & South Asia: Healthy domestic dynamics under threat from external headwinds
November 16, 2016
Economic performance in East and South Asia (ESA) accelerated for the first time in over two years in Q3. According to estimates from FocusEconomics analysts, the region expanded 6.2% annually in Q3, which was above the 6.1% rise recorded in the previous three quarters and overshot the 6.0% growth expected last month. Resilient private consumption, fiscal support and a pick-up in investment led the Chinese economy to keep up its growth momentum, thereby supporting most economies in the region. Hong Kong’s economy defied both external headwinds and domestic challenges and accelerated for the first time in a year in the July-September period. Moreover, in Taiwan, strong domestic demand and renewed demand from the external sector led the economy to expand at the fastest pace in a year-and-a-half in Q3. On the downside, however, difficulties in Korea’s all-important companies Hyundai and Samsung drove the country’s economy to slow in the three months up to September.
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The unexpected victory of Donald Trump in the 8 November U.S. presidential elections has the potential to harm economic growth in the region if some of the measures announced in the campaign materialize under his administration, though there is much uncertainty in this regard. His most controversial campaign announcement was to label China a currency manipulator and impose a tariff of 45% on Chinese imported goods. A trade war between the world’s two largest economies would certainly disrupt global trade and affect some of the export-driven economies in the region. Moreover, Trump’s position against the Trans-Pacific Partnership (TPP) and some regional free trade agreements, such as that with Korea, pose additional risks to regional trade. On the monetary policy side, Trump’s plans to cut taxes and boost spending have the potential to drive up inflation. This situation, coupled with Trump’s more hawkish stance on monetary policy, could prompt the Federal Reserve to accelerate its policy normalization and tighten global financial conditions.
Beyond external headwinds, regional growth appears to be improving. Growth in regional powerhouse China has stabilized and fears of a sharp slowdown now look overblown. Stable dynamics in China will positively impact the economies most exposed to it, such as Hong Kong, Korea and Taiwan. Despite its deep integration with China’s economy, Mongolia will be the main blackspot as the country is plagued by large economic imbalances. In India, reform momentum is expected to continue next year, adding to an already positive economic outlook. Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA economy expanding 6.0% in Q4 and also in the first half of 2017.
China’s solid growth momentum drives improvement to 2017 economic outlook
The Chinese authorities’ commitment to avert any pronounced slowdown in the country and the Indian government’s encouraging reform path will be key to keeping ESA’s growth healthy next year. Moreover, headwinds that plagued growth in Hong Kong and Taiwan will gradually fade in 2017, supporting the region’s economic outlook. Conversely, the expected monetary tightening in the United States, weak global demand and the possibility of increasing tensions between China and the United States are the main downside risks to regional growth. Against this backdrop, our panel of analysts decided to upgrade ESA’s 2017 growth forecast by 0.1 percentage points to 6.0% following stable estimates for the previous eight months. For 2016, the Consensus from our panel of analysts is for the ESA economy to grow a slightly stronger 6.1%.
This month’s upgrade to the regional economic outlook for 2017 reflects higher growth prospects for Bangladesh, China and Hong Kong. Forecasts for India, Korea, Mongolia, Pakistan, Sri Lankaand Taiwan were left stable this month.
India is expected to be the region’s fastest-growing economy in 2017 with a 7.6% expansion, followed by Bangladesh and China, with increases of 6.9% and 6.4%, respectively. At the other end of the spectrum, Taiwan and Hong Kong, in that order, are projected to be the slowest-growing economies, with growth rates below 2.0%. Korea’s economy is seen expanding 2.6% in 2017.
CHINA | Economy set to meet 2016 annual growth target
Q3’s healthy growth momentum has carried into the final quarter of the year as private consumption remains strong and investment appears to be recovering somewhat. Robust dynamics in the real estate market, which shored up economic activity in Q3, are expected to slow in Q4 as a result of the recent measures adopted by some local governments to cool their soaring property markets. Still, the economy is comfortably on track to achieve the government’s annual growth target of between 6.5% and 7.0%. In its Q3 monetary policy report, the People’s Bank of China highlighted that striking a balance between cutting asset bubbles and stabilizing growth will be the key challenge in the near future.
The economy should continue to sail smoothly on the back of policy support and the slow but steady economic rebalancing. A sharp correction in the housing market and increasing disputes between China and the United States following Donald Trump’s victory are the main downside risks to growth for next year. Panelists see the economy expanding 6.6% in 2016. In 2017, the panel expects GDP growth to slow to 6.4%, which is up 0.1 percentage points from last month's projection.
INDIA | Government withdraws big bank notes to fight corruption
India’s economy likely picked up in Q2 FY 2016, although activity remains lopsided. Tailwinds from a near-normal monsoon and government pay hikes are expected to have boosted household consumption, but private sector investment is dragging behind. Data for the start of Q3 FY 2016 suggests the economy is continuing to improve: the PMIs recorded gains in October and exports expanded for the third consecutive month. Meanwhile, the government continuous to make progress on reforms. In a bold announcement on 8 November, the government scrapped two high denomination notes in an effort to fight tax evasion and illegal practices. The notes account for over 80% of the tender in circulation and the decision will likely be negative for economic activity in the near-term. However, in the long-run the move should boost government finances by increasing tax compliance and improve the business environment.
Tailwinds to consumption and the government’s progress with reforms are supporting India’s positive outlook. GDP growth should receive a boost this year and expand 7.6% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, the panel sees growth stable at the robust pace of 7.6%.
KOREA | Economic turbulence hits towards year-end
Concerns are emerging about Korea’s economy towards the end of the year as it shows signs of growing well below potential. GDP is expected to continue decelerating in Q4, following a slowdown in Q3. Growth in Q3 was the weakest since Q2 2015, as healthy growth in government spending and fixed investment were dragged down by weakness in the rest of the economy. Furthermore, the smartphone crisis in Samsung Electronics and the recall and labor problems in Hyundai Motor will adversely affect GDP growth in the fourth quarter, as the combined global sales of the two giants are equivalent to roughly 20% of GDP. On the political front, the corruption crisis that has engulfed President Park Geun-hye has compounded the problems of being a lame-duck president in her final year in office, though analysts believe that she will still survive the rest of the administration.
High levels of household debt and the negative spillover effects from the Samsung and Hyundai crises on activity are severely weighing on the economy at end of this year. On the horizon, Korea faces numerous challenges in the form of sluggish global economic growth, the ongoing restructuring of the shipbuilding industry and financial vulnerabilities. Analysts expect GDP to grow 2.7% in 2016, before moderating to a 2.6% expansion in 2017. The growth outlook for next year remained unchanged from last month’s forecast.
INFLATION | Inflation begins upward trend in September
Inflation in East and South Asia increased for the second consecutive month in October, reflecting resurfacing price pressures. Inflation in the region rose from 2.2% in September to 2.4% in October. China, Korea and Taiwan were behind the acceleration in October. Inflation is set to increase in the coming months due to a combination of factors. A gradual increase in commodity prices and a base effect in some countries are expected to exert upward pressure on inflation. This trend could be reinforced by resilient regional growth and weaker currencies in most countries in the region next year. Nevertheless, inflation will remain at low levels, enabling central banks to keep an accommodative monetary policy stance in 2017.
Inflation in East and South Asia is expected to average 2.4% in 2016, which would represent a significant acceleration from 2015’s 1.9%. Next year, our panel of experts expects inflation to be broadly stable at 2.5%, which is unchanged from last month’s estimate. Looking at the countries in East and South Asia on an individual basis, analysts left the 2017 inflation forecasts unchanged for China, India, Korea, Taiwan and Sri Lanka. Projections for Bangladesh and Pakistan were revised downwards, while estimates for Hong Kong and Mongolia were upgraded.
Written by: Ricard Torné, Senior Economist