East & South Asia: Sailing uncharted waters
February 22, 2017
The economic performance in East and South Asia (ESA) has entered an unclear path at the outset of the year. The ESA economy is heading toward a mild deceleration following five consecutive quarters of steady growth. According to estimates from FocusEconomics analysts, the region will expand 6.0% annually in Q1, just below Q4’s 6.1% growth and the weakest expansion since the height of the Global Financial Crisis in 2009. Nevertheless, the bulk of the slowdown will come from a mild deceleration in China and Taiwan, while other regional players, such as India, will expand at faster rates.
Overall, the region is benefiting from a pick-up in global growth, which is fueling shipments from the region particularly in East Asia. However, the strong rebound in exports is not likely to be sustained as corroborated in some manufacturing PMI data for January. The external sector in ESA is expected to stabilize due to China’s cooling economy, particularly the property market, and the fact that the U.S. stimulus plan has yet to materialize. Nevertheless, data in Asia at the start of the year are highly distorted by the Lunar New Year holidays and more economic information for this quarter will be needed to fully assess the state of the economy in East and South Asia.
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In an unexpected move, the People’s Bank of China (PBOC) decided to tighten its monetary policy on 3 February. Instead of using the two benchmark rates, the PBOC relied on hikes in a number of short-term interest rates. Although the PBOC did not provide an explanation about this move, analysts believe that Chinese authorities are seeking to reduce excessive risk taking and taming capital outflows. While the expected impact on the financial sector will be relatively contained, it sets the tone for a more aggressive action if required going forward. A broad-based tightening will certainly hit domestic growth in China, with the potential to reverberate across the region.
In India, on 1 February, the government unveiled the long-awaited budget for next fiscal year starting in April. Investors reacted positively to the news. The budget intends to strengthen fiscal consolidation, while delivering growth stimulus measures. Moreover, the plan seeks to boost capital expenditure and implement measures to increase transparency. The FY 2017 budget represents another step in the right direction to increase the credibility of Indian policymakers and bring fiscal imbalances onto a sustainable path.
Stable conditions in China and India support 2017 economic outlook
The ESA economy is walking on a tightrope this year. Uncertainty about U.S. President Donald Trump’s economic and trade policies are the main downside risks to growth. However, Trump has not yet unveiled economic sanctions against China as he pledged in his electoral campaign, easing fears of an imminent trade war between the two global powers. Nevertheless, stronger-than-expected growth in the United States will force the Federal Reserve to hike rates quicker than had been anticipated, fueling volatility in the financial markets across the region.
On top of external headwinds, domestic challenges are resurfacing across the region. China’s decision to tighten its monetary policy has put regional policymakers on alert as it could led to a sharp deceleration in the region’s growth engine. Furthermore, the corruption saga continues to unfold in Korea, driving consumer confidence to multi-years lows and threatening to cause a slump in household spending.
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, Korea and Taiwan. Projections for Hong Kong, Mongolia and Sri Lanka were downgraded. India and Bangladesh will be the region’s fastest-growing economies in 2017 with expansions of 7.4% and 6.8% respectively, followed by China. 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 rising 2.4% in 2017.
CHINA | PBOC tightens policy rate to counter economic imbalances
The National Bureau of Statistics will not publish the regular set of economic data for January until next month, but other relevant economic indicators suggest that growth momentum is moderating slightly following Q4’s strong outturn. As the economy fared relatively well in 2016, Chinese authorities are gradually shifting their focus from supporting growth to tackling rising systemic risks. On 3 February, the Central Bank decided to use its monetary tool box and hiked a series of short-term interest rates. This move has been widely seen as an attempt to reduce excessive risk taking and support the yuan. The National People’s Congress is expected to provide a clearer view of the top leadership’s economic tone for this year on 3–5 March, including the economic targets for 2017.
While growth will decelerate slightly this year, China will continue to be the best performer among all major economies. However, risks are now titled to the downside as the implementation of protectionist policies by the U.S. administration could hurt China’s all-important export industry, while years of cheap money has exacerbated economic imbalances. 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 | Fiscal consolidation and growth policies behind FY 2017 Budget
Economic activity is beginning to firm after demonetization shocked the economy in the October to December period. The manufacturing PMI crossed into expansionary territory in January and imports rebounded. The government’s bold demonetization program resulted in massive cash shortages and economic disruptions through the economy at the end of last year and growth is expected have slowed to a multi-year low in Q3 FY 2016. Despite the backdrop of more moderate growth, the government stuck to a market friendly budget for FY 2017. The budget, which was presented on 1 February, pursues growth-supportive policies while targeting a narrower deficit of 3.2% of GDP and was met with a positive market reaction. Meanwhile, five states will conduct elections in February, with results to be announced on 11 March. The elections will test the electorate’s mood regarding the government after the economy’s tumultuous past months and ahead of the 2019 general vote.
FocusEconomics panelists see growth slowing to a three-year low of 6.9% in FY 2016 chiefly on the back of the cash crunch caused by demonetization. The effects should be largely transitory however, and growth is seen picking-up to 7.4% in FY 2017, which is unchanged from last month’s forecast.
KOREA | Political corruption saga continues to threaten the economic outlook
The Korean economy lost steam in the final quarter of 2016, growing at the slowest pace in a year and a half as the political turmoil surrounding the impeachment of President Park hurt consumer confidence and private consumption, which barely grew in Q4. A slowdown in exports and construction investment, which suffered from tighter mortgage rules, also kept a lid on GDP growth. Fixed investment growth was the only bright spot in this quarter’s reading as it hit an over six-year high, although this was not enough to prevent the overall deceleration in Q4. On 17 February, the leader of electronics behemoth Samsung Group was arrested over corruption allegations in connection to the recent political scandals that have rocked Korea.
The economy will be supported this year by strong government spending in sectors that have been affected by weak global trade. However, political uncertainty will continue to hurt economic sentiment and rising protectionism could pose a major obstacle to Korea’s export-led economy. FocusEconomics panelists expect GDP to expand 2.4% in 2017, which is unchanged from last month’s forecast. In 2018, the economy will grow 2.6%.
INFLATION | Inflation hits nine-month high in January
Inflation in East and South Asia accelerated in January to the fastest rate since April 2016 due to higher prices for commodities and the Lunar New Year holidays, which boosted consumption and led to an increase in prices. Inflation rose from 2.3% in December 2016 to 2.6% in January. The reading reflected higher inflation readings in most countries in the region, including China, Korea and Taiwan. On the other hand, inflation steadied in Pakistan, while price pressures moderated in India.
This year, inflationary pressures will be higher compared to those from 2016 mainly due to a gradual increase in commodity prices. Panelists expect inflation in East and South Asia to rise from 2.4% in 2016 to 2.7% this year, which is unchanged from last month’s estimate. For 2018, our panel of experts expects regional inflation to rise to 2.8%.
Written by: Ricard Torné, Head of Economic Research