East & South Asia economy set to enter into a gradual slowdown following Q1's pick-up
June 22, 2016
Stellar economic performance in India and government-led stimulus in China propelled growth in East and South Asia (ESA) at the outset of the year. According to a more complete set of data, the region’s GDP expanded 6.2% annually, which was just above the 6.1% rise tallied in Q4. As a result, the region experienced the first pick-up in growth since Q2 2014. Robust dynamics in urban consumption were behind the sharp acceleration observed in India. Nevertheless, analysts remain skeptical about the accuracy of the new GDP series. Asia’s export-driven economies such as Hong Kong, Korea, and Taiwan were severely hit by weak global demand, while in China, policy support cushioned the blow from external shockwaves and mounting domestic imbalances.
Although economic dynamics strengthened in the first three months of the year, growth momentum is unlikely to be sustained in the coming quarters due to a series of factors. Recent economic data for China corroborate that the investment-led recovery is coming to an end as authorities are becoming increasingly concerned about negative spillovers from fueling growth via cheap credit. Moreover, data confirming that state-sponsored companies are keeping investment afloat and not private businesses has led to doubts about the success of China’s economic transition, which does not bode well for regional growth in the medium and long term.
Soft global demand is continuing to impact regional growth as the external sector is one of the key sources of growth in most of the East and South Asia region. On the upside, the United States Federal Reserve’s decision to postpone its policy normalization has taken pressure off of the region’s financial markets, at least in the short term. Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA economy expanding 6.0% in Q2.
2016 ESA economic outlook steady due to stable dynamics in the region’s biggest players
Despite more stable economic conditions in the last few months, overall, the region continues to brace for tough times. Although policymakers in China will avoid any sharp downturn, they are willing to tolerate slower growth, which reduces the possibility that they will implement bold stimulus measures. Moreover, a tightening cycle in the United States, whenever it occurs, has the potential to heighten volatility in the region’s financial markets, while subdued global demand promises to derail any substantial economic recovery. On the upside, the region’s two titans,China and India, are expected to continue expanding at strong rates. As a result, FocusEconomics panelists left the region’s growth projections for 2016 unchanged at last month’s 6.0%. For 2017, our panel of analysts foresees the ESA economy slowing to a 5.9% increase.
This month’s stable regional economic outlook for 2016 reflects unchanged growth prospects forBangladesh, China, India, Korea, Mongolia and Sri Lanka. Conversely, growth estimates in Hong Kong, Pakistan and Taiwan were revised downward.
India is expected to be the region’s fastest-growing economy in 2016 with a 7.5% expansion, followed by Bangladesh, with an expected 6.6% increase. At the other end of the spectrum, Hong Kong, Mongolia and Taiwan are projected to be the slowest-growing economies, with growth rates below 1.5%. China’s economy is seen expanding 6.5% in 2016, which is in line with the lower band of the government’s economic target for this year of 6.5%–7.0%.
CHINA | SOEs play biggest role in investment growth
Growth momentum appears to have moderated slightly in Q2 as the policy stimulus unveiled at the end of 2015 and in the first months of the year has started to fade away. The main example isinvestment, which hit an all-time low in May. Investment in the real estate sector, which has been leading the recent pick-up in growth, slowed in May. Furthermore, more detailed data show that state-owned enterprises (SOE) account for the bulk in new investment, while private business investment remains weak. This has sparked concerns about the quality of growth in China. On the external side of the economy, exports continue to be hit by subdued global demand, while the yuan is under pressure due to Brexit fears and uncertainty about monetary policy normalization in the United States.
Although this year’s policy action signaled that authorities will prevent any sharp slowdown, the economy is expected to gradually decelerate in the coming quarters. While slower growth will partially reflect a healthy domestic rebalancing, mounting economic imbalances and weak global demand have the potential to increase turbulence in China’s expected soft-landing. FocusEconomics panelists forecast that the economy will expand 6.5% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth slowing to 6.3%.
INDIA | Economy expands at fastest pace in five years in FY 2015
India’s GDP gained momentum in the final quarter of FY 2015 and pushed full-year growth to a five-year high. GDP grew 7.6% in FY 2015, which was up from 7.2% in the previous fiscal year and primarily reflected robust growth in private consumption, which accounts for nearly 60% of the economy. Nonetheless, ever since the Ministry of Statistics and Programme Implementation (MOSPI) introduced a new methodology last year to measure GDP, doubts continue to linger regarding the reliability of the data. According to the Ministry of Finance, the government met its budget deficit target for FY 2015, which was set at the equivalent to 3.9% of GDP. The budget deficit has been shrinking for several years and is expected to narrow further in FY 2016. The government has set a goal to reduce the shortfall to 3.5% of GDP in FY 2016.
India is set to have another year of strong growth propelled by healthy domestic dynamics. Fast labor force growth and a rapidly-expanding middle class should continue supporting private consumption. However, a weak monsoon and economic headwinds from abroad represent downside risks to India’s bright outlook. FocusEconomics panelists expect GDP to increase 7.5% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, the panel sees growth remaining stable at 7.5%.
KOREA | Economy faces tough road ahead
Revised data confirmed that the economy was subdued at the beginning of the year. GDP growth moderated in the first quarter, which reflected that domestic demand was not strong enough to offset a sharp deceleration in exports. Korean households put the brakes on consumption despite fiscal stimulus packages having been introduced in H2 2015 and firms remained reluctant to ramp up investments as they are still concerned about external conditions. Indeed, Koreanexports struggled and decelerated significantly in Q1 due to China’s slowdown. Recent data show that Korean industries continue to brace for tough times as industrial output was hit hard in April and the manufacturing PMI did not show any significant progress in May. Moreover, sentiment indicators suggest that morale among businesses and consumers remained weak in May.
This year, the economy will be constrained by sluggish exports, uncertain political developments in the Korean peninsula and the negative spillover stemming from China’s economic slowdown. However, growth is expected to be somewhat supported by private consumption. Analysts expect that GDP will grow 2.6% in 2016, which is unchanged from last month’s forecast. In 2017, panelists forecast GDP growth to accelerate marginally to 2.8%.
INFLATION | Inflation falls to four-month low in May
Persistent low oil prices and subdued growth both in the region and globally are keeping inflationary pressures at bay in East and South Asia. Inflation in the region fell from April’s 2.7% to 2.5% in May. That said, the gradual increase in commodity prices observed so far this year is balancing risks to the inflation outlook.
Analysts kept their 2016 inflation estimate for the region at last month’s 2.4%. Looking at the countries in East and South Asia on an individual basis, analysts left the forecast for five of the nine economies surveyed stable, including some of the region’s biggest players such as India and Korea. Our panel of experts expects inflation to rise to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist
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