East & South Asia: ESA continues defying domestic and global headwinds
April 26, 2017
Preliminary Q1 data for East and South Asia (ESA) corroborate that Q4’s healthy growth momentum carried into this year. China’s economy accelerated to a one-and-a-half year high, bringing regional growth to 6.2%. While Q1’s aggregate reading matched Q4’s result, it exceeded the 6.1% increase that our panel of analysts had projected last month. On top of China’s healthy performance, which is translating into stronger regional demand, the region is benefiting from sustained expansions in developed economies and improvements in some emerging market commodity exporters as a result of higher prices for raw materials. Moreover, despite a tighter monetary policy in the United States, financial conditions remain loose in other key economies.
China’s GDP growth surprised on the upside in Q1 due to a revived external sector and strong investment and manufacturing output. While this might suggest China is heavily relying on old recipes to boost economic growth, a more detailed analysis shows the economic rebalancing remains firmly in place. Investment strengthened in Q1, but it was fueled by private companies instead of state-owned enterprises. The uptick in global demand has strengthened the manufacturing sector. Moreover, the real estate sector continues to defy expectations of a slowdown and expanded healthily again in Q1, adding further strength to domestic demand. In India, data for the final quarter of FY 2016 (January–March 2017) suggest that growth softened slightly following Q3’s surprisingly strong performance.
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Winds of change are blowing in Korea as the 9 May presidential election will likely change the political landscape of the country by putting an end to nearly a decade of conservative governments. The two presidential front-runners are in favor of adopting a softer diplomatic tone with North Korea. While a more pragmatic approach bodes well for stabilizing the region, it could also trigger political strife with the United States, which has recently adopted a more belligerent stance. In the economic area, both candidates have already hinted at the possibility of increasing fiscal spending, while taking a tougher stance against the chaebols. Moreover, job creation will be a priority for both candidates as unemployment is rising, in particular among young people.
Healthy regional growth feeds into this year’s economic outlook
Tailwinds from last year, combined with renewed regional growth momentum, are brightening the outlook for ESA this year. The region is strongly benefiting from a pick-up in global growth and healthy economic dynamics in China and India. Elsewhere in the region, the 9 May election in Korea promises to bolster the outlook for the region’s third largest economy, ending months of political uncertainty. While authorities will likely refrain from using monetary stimulus to support their economies this year, the region will benefit from bold fiscal spending in some key countries like China and Korea. US–China relations warmed following the April meeting between the leaders of the two nations, which has eased concerns of an open trade war between the two global behemoths and significantly reduced the threats that had hung over ESA’s growth prospects at the start of the year.
Against this backdrop, FocusEconomics Consensus Forecast panelists expect the region to expand 6.0% this year, which is unchanged from last month’s estimate. Next year, the ESA economy will expand at a slightly slower pace of 5.9%.
This month’s outlook for 2017 reflects stable growth prospects for Bangladesh, China, India, Korea, Pakistan, Sri Lanka and Taiwan. The economic outlook for Hong Kong was revised up this month, while Mongolia’s growth prospects were downgraded.
India and Bangladesh will be the region’s fastest-growing economies in 2017 with expansions of 7.3% 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 of around 2.0%. Korea’s economy is seen rising 2.4%.
CHINA | GDP surprises on the upside in Q1
Investment and manufacturing led growth momentum to strengthen in Q1. Although continued investment-fueled growth casts some doubts on the quality of China’s economic rebalancing, certain details from Q1 suggest that the country’s economic transition toward more sustainable levels remains intact. Private companies were behind the recovery in nominal investment, while dynamics in the service sector remained strong. A recovery in global demand, coupled with an improved domestic economic outlook, caused manufacturing output to strengthen sharply. Despite fears of an increase in trade protectionism, exports expanded for the first time in two years. Moreover, April’s talks between Donald Trump and Xi Jinping have alleviated fears of an open trade war between the world’s two largest economies.
Economic growth will decelerate in the coming quarters as China continues its transition to a “new normal” growth trajectory, which implies weaker but more sustainable economic growth. While risks are titled to the upside following Q1’s strong result, a sharp correction in the property sector continues to weigh on China’s economic outlook. FocusEconomics panelists forecast that the economy will grow 6.5% in 2017, which is unchanged from last month's estimate. In 2018, the panel expects GDP growth to slow to 6.2%.
INDIA | Growth momentum weakens in final quarter of FY 2016
Monthly data suggest that the economy ended the fiscal year on a soft note in the final quarter, after growth surprised on the upside in Q3 FY 2016. Industrial production dropped in February and the manufacturing and services PMIs came in at low levels throughout the quarter. However, the PMIs picked up in March, suggesting that economic activity is improving after demonetization-related cash shortages in earlier months. Meanwhile, the country’s most significant tax reform in decades cleared more hoops at the start of April as key legislation related to the GST reform was approved in parliament. Additional legislation still needs to be passed by the state assemblies and specific tax rates set before the targeted 1 July rollout date.
A healthy monsoon forecast should support consumption this fiscal year and fuel a slight pick-up in GDP growth. FocusEconomics panelists see GDP expanding 7.3% in FY 2017, which is unchanged from last month’s forecast. For FY 2018, growth should accelerate further to 7.6%.
KOREA | Winds of political change are blowing
Sino-Korean tensions continue to mount as May’s presidential election looms and the economic rift with neighboring China deepens. Chinese tourist arrivals plunged in March following China’s ban on group tours to Korea in response to the latter’s decision to deploy a U.S. missile defense system on its soil. The bilateral dispute has also impacted Korea’s automotive sector, with auto sales to China almost halving last month. Nonetheless, soaring exports in other sectors suggest that the Korean economy may have emerged largely unscathed in Q1. In particular, higher oil prices have seen petrochemical shipments sky-rocket while renewed IT-sector demand has boosted semiconductor sales. Upbeat dynamics in the external sector have led in turn to improved confidence in the Korean manufacturing economy, with business sentiment steadily trending upwards. Economic conditions have also improved in the domestic economy, with the job market posting gains in March after February’s slump, and household debt growth—the biggest threat to consumer spending—moderating in Q1.
Unlike the external sector, domestic growth is expected to remain subdued, burdened by high household debt. Nonetheless, a likely Liberal party victory in May is expected to usher in a new era of expansionary fiscal policymaking, which will bode well for near-term growth prospects. 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 inches up in March but remains low
Inflation in East and South Asia increased slightly in March to 1.6% following February’s sharp decline to 1.5%, which had brought regional inflation to the lowest rate since October 2009. The slight increase mostly reflected higher inflationary pressures in most countries in the region due to strengthening prices for commodity prices. In China, despite rising mildly, inflation remained at low levels due to subdued food prices. Inflationary pressures will strengthen in the coming months in the ESA region due to higher prices for raw materials and stronger regional growth, but will nevertheless be benign overall.
A combination of higher interest rates in the United States, limited inflationary pressures and resilient regional growth will prompt most central banks in the region to keep their policy rates on hold throughout this year.
Panelists expect inflation in East and South Asia to be 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