East & South Asia: Regional growth remains stable in Q4 on resilient dynamics in China
January 25, 2017
The economic performance in East and South Asia (ESA) remained stable in Q4 on the back of stronger-than-expected growth in China. According to preliminary estimates from FocusEconomics analysts, the region expanded 6.1% annually in Q4, matching the result in the previous four quarters and slightly exceeding the 6.0% rise that our panel of analysts had expected last month. This brought full-year growth to 6.1% in 2016, which was slightly down from 2015’s 6.3% rise and the weakest growth since 2001. The FocusEconomics panel expects the region to start the year on a similar note to how 2016 ended, with growth steady at 6.1% in the first quarter, before entering a soft downward trajectory.
Strong private consumption, along with resilient manufacturing output, led the Chinese economy to accelerate for the first time in 2016 in Q4. Weak growth in investment and resilient retail sales suggest that the country is moving forward with its plan to achieve more sustainable and quality-driven growth. Taiwan is also likely to have contributed to Q4’s positive result as the country’s economic recovery is gradually gathering pace following 2015’s dismal performance. Stronger foreign demand for Taiwanese goods is behind the improvement recorded in H2 2016.
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On the downside, political unrest has hit growth in Korea in Q4. The corruption scandals that led to the impeachment of President Park Geun-hye are weighing on consumer confidence and the situation will undoubtedly reverberate through the economy this year. In India, the all-important service and consumption sectors will feel the pain of the banknote demonetization process that the government started in November in an attempt to crack down on the shadow economy. That said, analysts believe that the impact will be short-lived and that the economy will recover in the coming quarters.
Trump’s decision on 23 January to pull out from the 12-country Trans-Pacific Partnership (TPP) is adding more uncertainty to an already somber trade outlook for Asia. This decision could encourage other countries, such as Japan, to follow in the United States’ footsteps. The TPP was conceived by former-President Barack Obama as a way to strengthen the ties between Asia and the United States, while creating an economic barrier against China. Against this backdrop, some countries have started to look at China as a possible TPP partner in order to fill the vacuum left by the United States. While China could benefit from Trump’s choice to abandon the TPP, at this stage it is not clear what the economic impact of the decision will be or whether the TPP will continue without the U.S.
Risks to 2017 ESA economic outlook appear balanced
This year, the ESA economy is expected to perform at a similar pace to that of in 2016. China’s ongoing economic transition, which entails weaker but more sustainable growth, will be compensated for by stronger economic dynamics in most countries in the region. The main exception will be Korea, as the country is immersed in a deep political crisis that is gradually feeding into the real economy. However, more dark clouds are gathering on the horizon. Uncertainty about U.S. President Donald Trump’s economic and trade policies are the main downside risk to growth, in particular due to threats from the U.S. administration to impose a tariff on Chinese goods, which could cause a trade war between the world’s two largest economies. Furthermore, a faster normalization of monetary policy in the United States has the potential to heighten financial volatility in the region.
There are, however, some silver linings amidst the gloom. The expected fiscal stimulus plan in the United States, coupled with bold government support in China, bodes well for growth in the region. Moreover, the pick-up in inflation is expected to be limited, giving central banks in the region leeway to keep their monetary policies accommodative.
After expanding 6.1% in 2016, the ESA economy is seen growing at a broadly steady rate of 6.0% in 2017—unchanged from last month’s forecast. In 2018, GDP is seen expanding at a slower pace of 5.8%.
This month’s outlook for 2017 reflects unchanged growth prospects for six of the nine economies surveyed, including the region’s powerhouse China. Projections for India, Korea and Sri Lanka were downgraded.
India and Bangladesh are expected to be the region’s fastest-growing economies in 2017 with increases of 7.4% and 6.8% respectively, followed by China, with a 6.4% expansion. At the other end of the spectrum, Hong Kong, Mongolia and Taiwan are projected to be the slowest-growing economies, with growth rates below 2.0%. Korea’s economy is seen expanding 2.4% in 2017.
CHINA | Economy defies global and domestic headwinds in Q4
Despite the implementation of measures to tighten the property market and less decisive policy support, the economy managed to expand at the fastest pace in one year in Q4. Robust dynamics in retail sales and manufacturing activities were behind the acceleration. On the downside, investment may have weakened in the same period due to weaker infrastructure investment. While no public announcement was made following December’s Central Economic Work Conference, analysts believe that the main economic guidelines for this year will be ensuring stability and containing economic risks in the face of a challenging global context. Promoting reforms and bolder fiscal support will be key elements to achieve this, while official economic targets will be announced at the National People's Congress in March.
While the government will try to cushion any sharp slowdown, growth will moderate this year on the back of a cooling property market and rising global economic uncertainties. FocusEconomics panelists forecast that the economy will grow 6.4% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP to slow to 6.1%.
INDIA | Growth hit by demonetization process
Economic activity likely took a dive in the October-to-December period, after the government’s bold demonetization in early November caused cash shortages and economic disruptions throughout the economy. Incoming data for the period is downbeat: the manufacturing and services PMIs fell into contractionary territory in December. The trade balance, however, improved in the same month—a silver lining from the measure—as subdued activity hit import demand. Looking forward, all eyes are on the budget for FY 2017, which will be revealed on 1 February. The government has made several changes to its usual budget proceedings, including presenting it one month earlier than normal and scraping a separate budget for railways. The budget will be announced just days before a few states hold elections, which will serve to test the mood of the population towards the current government.
India’s outlook was revised down for the second consecutive month as our analysts continue to adjust their forecasts to the demonetization cash crunch. The reform, along with a disappointing GDP result in Q2, fueled a 0.2 percentage point cut in India’s growth forecast. Our panelists now see the economy growing 7.0% in FY 2016, before accelerating to 7.4% growth in FY 2017.
KOREA | Political scandals plague the economy
The ongoing political turmoil in the country had a significant impact on the economy towards the end of 2016, despite comments made by the Minister of Finance to the contrary. The economy is expected to have slowed further in Q4 2016, despite a rebound in industrial production in November and an expansion in merchandise exports in December. In December, consumer confidence fell to a seven-year low and the PMI remained firmly entrenched in contractionary territory as the political crisis took center stage with a parliamentary vote in favor of impeaching President Park Geun-hye. Furthermore, manufacturing businesses indicated in January that they remain deeply concerned about the domestic situation, more so than about the external environment. Continuing the country’s political saga, on 19 January, a district court denied a request to arrest Lee Jae-yong, vice chairman and leader of electronics giant Samsung, on allegations of involvement in the snowballing corruption scandal that has engulfed President Park.
The ongoing political scandal will continue weighing on sentiment for most of this year. The court has 180 days to rule on whether the impeachment of President Park is valid, triggering a likely election within 60 days of the impeachment. Moreover, a slowdown in construction this year will weigh on investment, and higher inflation and muted employment will affect consumption. Against this backdrop, analysts cut their growth forecast by 0.1 percentage points and see the economy expanding 2.4% in 2017. In 2018, the economy will expand 2.6%.
INFLATION | Inflationary pressures set to resurface this year
A gradual increase in commodity prices is expected to boost inflationary pressures this year. As a result, panelists revised up their inflation estimates for 2017 by 0.1 percentage points and they now expect inflation in East and South Asia to rise to 2.7% this year, after averaging 2.4% in 2016. On a country basis, 2017’s upward adjustment reflects higher inflation projections for China, Korea and Taiwan. For 2018, our panel of experts expects regional inflation to rise to 2.8%.
Written by: Ricard Torné, Head of Economic Research