East & South Asia: Private debt and the U.S. election outcome emerge as key risks for the region
October 19, 2016
Economic dynamics in East and South Asia (ESA) have likely lost some steam in Q3 following Q2’s stable growth. According to estimates from FocusEconomics analysts, the region expanded 6.0% annually in Q3, which was marginally below the 6.1% rise recorded in the previous three quarters. Slowing growth in China is mainly behind the deceleration in the region after policy support started to fade. Growth in Korea also likely moderated in Q3 on the back of subdued business investment and weak exports. Meanwhile, India’s economy may have shifted into a higher gear due to public sector pay hikes and increased rural consumption following a nearly normal monsoon this year. Taiwan has also positively contributed to growth in the region due a temporary improvement in external demand and a favorable base effect from last year.
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Although the risks to ESA’s economic outlook appear to be limited, the region as a whole faces a number of challenges that could derail growth. Household and corporate debt have risen dramatically since the global financial crisis in 2008 as most of the world’s central banks adopted an accommodative monetary policy that drove interest rates to record lows and encouraged widespread cheap lending. While most debt in the region is held in domestic currencies, which reduces risks from sudden capital reverses, credit-fueled growth usually entails risks related to asset bubbles and non-performing loans. This situation could deteriorate if the expected interest rate hikes in the United States materialize. In an attempt to reduce the country’s burgeoning household debt, the Korean government unveiled a series of measures in the summer aimed at cooling the country’s booming property market. More recently, however, the Chinese government ruled out guidelines to cut corporate debt, which included debt-to-equity swap programs and bankruptcies for zombie firms.
While domestic political risks are largely contained, the 8 November U.S. election could cause turbulence depending on the outcome. Analysts believe that a victory of Hillary Clinton would entail no major changes to U.S. relations with Asia, but a triumph of Donald Trump would have the potential to seriously disrupt trade between the U.S. and China. Trump pledged to label China a currency manipulator, which could imply trade sanctions, and called for a 45% tariff on imports from China until the yuan floats freely. This situation could strain relations between the world’s two largest economies and, if the U.S. imposes a tariff on Chinese imports, it would likely prompt China to retaliate. A trade war between the two countries would reverberate across the globe and discourage external demand.
As a result of external headwinds and weak domestic growth, the region is set to decelerate throughout the rest of the year. Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA economy expanding 5.9% in Q4.
India drives this month’s improvement to 2016 economic outlook
This year, ESA will benefit from positive dynamics in India due to a nearly normal monsoon following two years of drought, as well as higher wages and the government’s encouraging reform path. In China, the authorities’ commitment to shore up the economy and avert any sharp downturn bodes well for economic growth in the region. While a gradual resurfacing of inflation in the region could slow further monetary policy easing, a number of governments in ESA have started to unveil stimulus plans to jumpstart their economies. As a result, our panel of analysts decided to upgrade ESA’s 2016 growth forecast by 0.1 percentage points to 6.1% following stable estimates for the previous four months. For 2017, the Consensus from our panel of analysts is for the ESA economy to moderate slightly to a 5.9% increase.
This month’s upgrade to the regional economic outlook for 2016 reflects higher growth prospects for India. Forecasts for regional heavyweight China, Hong Kong, Korea, Taiwan and Sri Lankawere unchanged this month, while Mongolia was the sole country for which the panel downgraded their view of the economy. Preliminary figures for the Bangladeshi and the Pakistanieconomies show that growth in FY 2016, which ended in June 2016, was 7.1% and 4.7% respectively.
India is expected to be the region’s fastest-growing economy in 2016 with a 7.6% expansion, followed by Bangladesh and China, with an increase of 7.1% and 6.6% respectively. At the other end of the spectrum, Mongolia, Taiwan and Hong Kong, in that order, are projected to be the slowest-growing economies, with growth rates equal or close to 1.0%. Korea’s economy is seen expanding 2.6% in 2016.
CHINA | City councils tighten overheated property market
Data available for September suggest that the economy fared relatively well in Q3, though the positive impact of previous policy support has gradually faded. The PMI ended the quarter on a solid footing and retail sales were robust in August. On the downside, investment likely decelerated in Q3 and exports slowed sharply in September. In an attempt to cool their overheated real estate markets, more than 20 municipalities, particularly in top-tier cities, had introduced home purchase restrictions and higher mortgage down payments by the end of September. These initiatives come after two years of easing to support the property sector and threaten to add downward pressure on overall growth. On 11 October, the State Council unveiled plans to cut rising corporate debt, including encouraging mergers and acquisitions, swapping debt to equity and facilitating firms’ bankruptcy.
While a disordered correction in the real estate market and ballooning private debt cast a cloud on the country’s economic outlook, the authorities’ willingness to avert any sharp economic downturn promises to shore up growth. FocusEconomics panelists see GDP growing 6.6% this year, which is unchanged from last month's forecast. Next year, the panel sees GDP growth slowing to 6.3%.
INDIA | Financial system in the eye of the storm
India’s economy is showing signs of gaining momentum halfway through FY 2016. Business confidence picked up in the April-to-June period and households are benefiting from favorable tailwinds due to public sector pay rises and a near-normal monsoon. In addition, the current account came close to balancing in Q2 FY 2016 due to a lower oil bill and subdued gold imports—highlighting the country’s reduced vulnerability to external risks. However, the economy is not firing on all cylinders and growth has been uneven across sectors. Reducing stress in banks’ balance sheets is vital to boosting credit growth and supporting fixed investment, which plunged in Q1 FY 2016 and dragged down GDP growth. The majority of bad debt is held by state-owned banks and policymakers are considering consolidating some indebted lenders.
A stronger monsoon should drive up rural income and add to the already favorable tailwinds to consumption. The FocusEconomics panel raised their GDP forecast by 0.1 percentage points this month and now see the economy expanding 7.6% in FY 2016. For FY 2017, the panel sees growth stable at the robust pace of 7.6%..
KOREA | Government unveils fresh stimulus package
The Korean economy continues to be affected by multiple downside risks both at home and abroad, including strikes at major carmakers, ongoing corporate restructurings and the increased probability of a Federal Reserve interest rate hike. Samsung’s recent product recall and production scrap of a smartphone model could heap further pressure on the country’s economy, though the extent of the impact will largely depend on other Korean manufacturers’ ability to absorb the newfound demand. In order to shore up growth and meet its economic growth target of 2.8% by year-end, in early October the government unveiled a set of fiscal stimulus measures worth USD 8.9 billion to be implemented in the fourth quarter. This will likely translate into higher consumer sentiment, which stabilized in September following two consecutive months of improvement. Other recent data paint a bleaker picture: in October, business confidence was up a notch but remained firmly entrenched in pessimistic territory, while the PMI tumbled to a 14-month low in September.
Surging levels of household debt and uncertainty regarding the effect of Samsung’s crisis on the economy and the timing of U.S. interest rate normalization are severely weighing on economic activity. Nonetheless, Korea’s massive stimulus packages will continue to boost household spending and fixed investment, driving growth this year. Forecasters expect GDP to grow 2.6% in 2016, which is unchanged from last month’s forecast. Next year, analysts expect growth to stabilize at 2.6%.
INFLATION | Inflation rebounds from 10-month low in September
Inflation in East and South Asia rose from August’s 10-month low of 1.9% to 2.3% in September. Bangladesh, China, Korea and Pakistan recorded higher inflation readings in September, while the drop in prices in Mongolia eased slightly in the same month. Conversely, price pressures receded in India, Taiwan and Sri Lanka. Going forward, inflation should remain broadly stable as the region is under the influence of diverging forces. Regional inflation should benefit from a positive base effect following the recent stabilization in commodities prices, particularly oil, while stable financial market conditions are keeping pressure on currencies low. However, commodities prices are stabilizing but at low levels, and economic growth in the region remains feeble. Against this backdrop, central banks are likely to keep an accommodative monetary policy stance for the foreseeable future. In this regard, India’s newly formed Monetary Policy Committee decided to cut rates in order to achieve its inflation target and spur growth.
The 2016 inflation projection for the region remains stable at 2.4% for the fifth consecutive month. Looking at the countries in East and South Asia on an individual basis, analysts left the forecasts unchanged for China and Hong Kong. Projections for Bangladesh, India, Korea, Mongolia and Sri Lanka were revised downwards, while estimates for Taiwan were upgraded. Our panel of experts expects inflation to inch up to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist