East & South Asia: Strong global demand and resilient domestic activity shore up growth in ESA in 2017
December 18, 2017
The economy of the East and South Asia (ESA) region shifted into a higher gear in Q3 on the back of strong external demand and solid domestic activity. A more complete set of data for ESA countries showed that aggregate GDP for the region rose 6.2% annually in Q3, which was above the 6.1% increase in Q2. The print, however, was below the preliminary 6.3% figure reported last month as weaker-than-expected economic dynamics in India dragged down regional growth. That said, the Indian economy is slowly recovering from the lingering effects of demonetization that occurred in late 2016 and the implementation of the Goods and Services Tax (GST) on 1 July of this year.
Economic activity in the region appears to have picked up steam in November, following a worrisome start to Q4. Manufacturing activity improved across-the-board as solid global demand is supplying more work for Asian factories and supporting investment. Exports also fared better in November compared to October. Moreover, job markets remain relatively tight in the region, which translates into higher wages and, ultimately, stronger consumption.
Despite November’s positive figures for manufacturing and exports, growth will likely decelerate in Q4 due to a series of factors. China’s measures to cut down on pollution are hurting activity in the mining sector and heavy industries. Moreover, the recovery in energy prices since September will have a negative impact on the region’s external accounts, as all ESA countries import the vast majority of the crude oil that they consume. Unfavorable base effects are expected to also contribute to slower growth for Hong Kong and Taiwan in Q4. As a result, regional growth is seen slowing to 6.1% in Q4.
China and India, the region’s two largest economies, took diverging paths throughout this year. While China’s growth prospects for 2017 have been raised by 0.4 percentage points since the start of the year, India’s projections have been cut by a full percentage point. China benefited from healthy global growth and resilient domestic activity. Conversely, India did not benefit to the same extent from rising global demand, as its economy is less exposed to international trade flows. Moreover, India’s economy was dragged down by necessary but painful economic reforms (demonetization and GST), battered financial and public banking sectors and a poor summer harvest.
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2017’s strong growth momentum set to continue next year
The tailwinds that propelled growth this year in East and South Asia are expected to carry over into 2018. Global demand for tech goods has proven more resilient than previously thought, shoring up the region’s all-important external sector. Moreover, despite the ongoing tightening cycle in the United States, financial conditions will remain accommodative, supported by relatively low rates in the region and the continued quantitative monetary easing in the European Union and Japan.
While a sharp deceleration in China remains the main threat to the region’s stellar growth trajectory, Chinese authorities have so far managed to pivot the economy towards more suitable growth levels without causing significant economic jitters. Furthermore, if China succeeds in promoting consumption as the main engine of growth, it could have positive spillovers for the region through higher demand.
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FocusEconomics panelists expect the ESA economy to grow 6.0% in 2018, which is unchanged from last month’s estimate. For 2019, analysts project regional growth will remain broadly stable at 5.9%. This month’s stable outlook for 2018 reflects unchanged growth prospects for Bangladesh, China, India, Mongolia and Pakistan. Projections were upgraded for the economies of Hong Kong, Korea and Taiwan. Sri Lanka was the sole economy to see a downgrade.
The Indian economy is expected to post the strongest increase in FY 2018, with 7.4% growth. The Chinese economy is expected to grow healthily, at 6.4%. Conversely, the more mature economies of Hong Kong, Korea and Taiwan are expected to be the region’s laggards, with growth rates at between 2.4%-2.9%
CHINA | Economic policies for 2018 to be set at upcoming Communist Party conference
Economic momentum appears to be losing some steam in Q4 as the economy is transitioning towards a more sustainable growth trajectory. Investment growth decelerated in November due to a cooling property market. Moreover, industrial production remained weak in November amid the government campaign to improve air quality. Conversely, in November, growth in retail sales was robust, signaling that the role of consumer spending in the economy is gradually strengthening. The Economic Work Conference is expected to take place in the second half of December and will follow the all-important 19th National Congress of the Communist Party of China held in October, where the party leadership set the long-term economic guidelines for the country. Participants will draft the main economic policies and targets for 2018. Despite the opaque nature of the gathering, the conference will likely focus on addressing major risks such as financial leverage, pollution and poverty. The GDP growth and inflation targets will likely remain unchanged at 6.5% and 3.0%, respectively.
The Chinese economy’s slow-but-steady deceleration will continue in 2018 as policymakers continue to rebalance the country’s economic model. Tighter regulation in the property market and stricter environmental regulations will exert downward pressure on growth. FocusEconomics panelists forecast that the economy will grow 6.4% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is expected to grow 6.2%.
INDIA | GDP growth gathers steam in the July–September period
Recent data suggests that India’s economic recovery is gradually taking hold following a lackluster performance in Q1 FY 2017. The economy grew at a faster 6.3% in year-on-year terms in Q2 FY 2017—which runs from July to September—with the effects of demonetization and the implementation of the Goods and Services Tax (GST) gradually dissipating. Although the fourth quarter got off to a weaker start, with seasonal effects dragging on economic activity in October, stronger data for November, including auto sales and the manufacturing PMI, suggests that the economy remains on a recovery path. Meanwhile, Moody’s upgraded the country’s sovereign issuer ratings to Baa2 from Baa3 in mid-November. The ratings agency expects the government’s reform agenda to unleash India’s growth potential and help drive down the government debt burden over the medium term, thus warranting a higher credit rating.
Growth is expected to accelerate further as recent fine-tuning measures on GST compliance, a large recapitalization plan for public banks and easing policy uncertainty all bolster the economy’s performance. The economy is expected to grow 6.6% in FY 2017, down 0.1 percentage points from last month’s estimate. This month’s downward revision largely reflects a slightly weakerthan-expected GDP figure in Q2 FY 2017. In FY 2018, panelists forecast growth of 7.4%.
KOREA | Economic activity remains resilient in Q4
New data released by the Bank of Korea confirmed that economic performance was exceptional in Q3. Growth came in at 3.8% compared to the same quarter last year—the fastest pace in nearly four years and higher than the 2.7% growth recorded for Q2. Data for November suggests strong growth for Q4: Consumer confidence hit a seven-year high, with consumers particularly confident about domestic economic conditions, and growth in exports gathered pace. On 5 December, parliament approved the government’s budget for the 2018 fiscal year, which includes a 4.6% increase in spending compared to the previous year.
It also approved increases in the maximum corporate tax rate and the upper personal income tax rate, raising concerns among some Korean businesses. Taken together, though, the parliament’s approvals should have an expansionary effect on the economy next year. Higher government spending next year and improved diplomatic relations with China—which is expected to boost trade between the two countries—should pave the way for solid economic growth in 2018. However, government measures to tame increases in housing prices could weigh on the outlook. Our panelists expect economic growth of 2.9% in 2018, which is up 0.1 percentage points from last month’s forecast, and foresee an expansion of 2.8% in 2019.
INFLATION | Inflation stabilizes in November
Inflation in East and South Asia came in at 2.2% in November (October: 2.2%), according to an estimate by FocusEconomics. Lower price pressures in China, Korea, Mongolia and Sri Lanka were offset by higher inflation in India—the result of higher accommodation costs and vegetable prices—and Pakistan. Meanwhile, the annual change in consumer prices swung back to expansion in November after having contracted in October.
Against a backdrop of low inflation and strong economic growth, the Bank of Korea decided to hike its main policy rate by 25 basis points to 1.50% on 30 November, the first rate hike in over six years. On 14 December, the People’s Bank of China increased borrowing costs by hiking interbank rates. The increase, however, was marginal and intended to limit the impact of the U.S. Federal Reserve’s decision to increase its benchmark rate. In India, the Central Bank decided to keep its main interest rates unchanged at its December meeting amid rising inflationary pressures. While chances of further rate increases in the region are slightly skewed to the upside, monetary conditions are expected to remain accommodative next year.
Higher commodity prices should fan inflationary pressures next year. That said, inflation will likely remain at relatively low levels throughout 2018. Panelists polled by FocusEconomics project average inflation of 2.6%, which is unchanged from last month’s estimate. Inflation is expected to inch up to 2.8% in 2019.
Head of Economic Research