East & South Asia: Activity flounders in Q3 as India underperforms
December 14, 2016
Although preliminary data suggested that economic growth had gathered momentum in the third quarter, a more complete set of data revealed that growth had actually stalled again in the East and South Asia (ESA) economy. The region expanded 6.1% annually in Q3, a rate at which it has remained unchanged for the past four quarters, following over a year of slowing economic activity.
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The downward revision to Q3’s growth result came on the back of a worse-than-expected GDP result in India. While India’s economy still gained momentum in the July-to-September period, the expansion was uneven across the economy and plummeting fixed investment and a muted result from the external sector affected growth. In addition, Korea’s GDP result was revised down a notch and the economy expanded at the slowest pace in over a year in Q3. Activity was hampered by difficulties in key companies Hyundai and Samsung.
The political crisis that has plagued Korea since October deepened in December. The National Assembly voted in favor of impeaching President Park Geun-hye, throwing the country into a period of political uncertainty. The constitutional court will now rule on the motion, a process that could take up to six months. In the meantime, government policy and reforms will likely fall to the backburner as politics takes center stage and consumer confidence will remain in the dumps. However, the near-term effect should be limited as the government has already passed the budget for next year.
Growth to remain broadly steady in 2017
After an expected 6.1% expansion in 2016, the ESA economy is seen recording broadly steady growth of 6.0% in 2017—unchanged from last month’s forecast. The Chinese authorities’ commitment to averting any pronounced slowdown in the country should buttress activity in the region. In addition, ongoing reform efforts by the Indian government and an expected pick-up in global trade will support growth. In 2018, GDP is seen expanding at a slower pace of 5.8%.
This month’s outlook for 2017 reflects unchanged growth prospects for Hong Kong and China. Projections for Bangladesh, India, Korea, Mongolia and Sri Lanka were downgraded, while the 2017 growth forecast for Pakistan and Taiwan was revised upward.
India is expected to be the region’s fastest-growing economy in 2017 with a 7.5% expansion, followed by Bangladesh and China, with increases of 6.8% and 6.4%, respectively. At the other end of the spectrum, Taiwan, Hong Kong and Mongolia are projected to be the slowest-growing economies, with growth rates below 2.0%. Korea’s economy is seen expanding 2.5% in 2017.
CHINA | Growth momentum remains strong in Q4
While growth momentum has remained strong in Q4, as suggested by the manufacturing PMI for November, all eyes are on the Central Economic Work Conference (CEWC), expected to be held in mid-December. The CEWC will set the tone of the economy and policy for next year. The CEWC will also establish the economic targets for 2017, though they will not be disclosed until the National People’s Congress in March. The growth target is expected to be maintained at the current range of between 6.5% and 7.0%, while monetary and fiscal policies will likely remain accommodative. In the political arena, China’s authorities stated that they are “seriously concerned” after President-elect Donald Trump questioned the “One-China” policy, which has been the cornerstone of China-U.S. relations since the 70s. This incident is adding fuel to an already complicated political relationship between China and Trump.
The economy will moderate next year on the back of a cooling property market and a slow but steady domestic economic rebalancing, though the impact of these factors will be cushioned by policy support and stronger global growth. 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 | Cash shortages likely to dent growth
India’s economy gained steam in Q2 FY 2016, but failed to fire on all cylinders. Positive impulses to consumption from a near normal monsoon and public pay hikes drove the pick-up in GDP growth, however, a sharp fall in investment and a muted performance in the external sector prevented growth from hitting market expectations. The economy’s momentum is likely to have faltered in Q3 FY 2016, hit by the government’s bold demonetization program. Cash shortages have been reported and leading indicators suggest they are hitting activity: the services PMI fell into contractionary territory for the first time in over one year in November. However, the effect is expected to be transient and the economy should benefit in the longer run from a smaller parallel economy.
The cash crisis is likely to cause consumers to postpone non-essential purchases, which, combined with a disappointing GDP result in Q2, has led our panelists to revise down their forecasts for this year. GDP is expected to expand 7.2% in FY 2016, which is down 0.4 percentage points from last month’s forecast. For FY 2017, the panel sees growth accelerating to 7.5%.
KOREA | Government moves to impeach President
Korea’s embattled economy is poised to slow down further at the end of the year. Although exports rebounded in November on the back of increased Chinese demand, the domestic side of the economy remains very weak. The ongoing corporate restructuring in the shipbuilding sector, coupled with plunging activity in smartphone and car output, have continued to weigh on activity, with industrial production declining for a second month straight in October. Korea’s bleak outlook, fueled both by weakening fundamentals and the country’s political fallout, also hit operating conditions and economic sentiment in November, as reflected in the PMI, which remained firmly entrenched below the 50-point threshold, and in consumer confidence, which plunged to a seven-year low.
Korean exports will struggle next year in a context of subdued global economic growth and with a rising risk of protectionist measures in crucial trade partners. In the domestic economy, political uncertainty will deter investments and limit private consumption. This, combined with highly indebted households and knock-on effects from the crisis in some of Korea’s flagship industries, will prevent strong growth. Analysts expect GDP to grow 2.5% in 2017, which is down 0.1 percentage points from last month’s forecast. Our panel sees economic growth accelerating slightly to a 2.6% expansion in 2018.
INFLATION | Inflation edges up in November
Inflation in East and South Asia increased for the third consecutive month in November, reflecting resurfacing price pressures. Inflation in the region rose from 2.3% in October to 2.5% in November. Rising price pressures in China were largely behind the result.
Inflation in East and South Asia is expected to rise to 2.6% in 2017, after averaging 2.4% in 2016. A gradual increase in commodity prices and a base effect are expected to drive the increase. 2017’s projection was left unchanged from last month and mostly reflects that an upward revision to projections for Bangladesh, China and Taiwan offset a downward revision to the forecasts for India, Mongolia, Pakistan and Sri Lanka. For 2018, our panel of experts expects inflation to rise to 2.7%.
Written by: Angela Bouzanis, Senior Economist