East & South Asia: ESA economy moves into a higher gear
November 15, 2017
The economy of the East and South Asia (ESA) region continued to fire on all cylinders in Q3 as both domestic and external demand remained resilient. ESA’s aggregate GDP rose 6.3% annually in Q3, which was above the 6.1% increase in Q2 and the 6.1% rise that FocusEconomics analysts expected last month. Growth accelerated for the first time in nearly two years. Healthy global demand, accommodative financial conditions and resilient domestic activity have underpinned the region’s economic performance so far this year.
China, the region’s largest economy, managed to post a still-impressive growth rate of 6.8% in Q3, which was only a notch below the 6.9% rise tallied in the first two quarters of the year. With this result, the economy will comfortably beat the 6.5% growth target that Chinese authorities set for this year. China continued to benefit from resilient private spending as low inflation boosted households’ purchasing power. Although infrastructure projects remained strong in Q3, overall investment was hit by stricter environmental rules and the shutdown of some mines. While external demand continued to fuel economic growth, strong domestic dynamics boosted imports, suggesting that the external sector may have detracted from overall growth.
In Korea, GDP expanded at the fastest pace in over three years in Q3. The external sector led economic growth as higher demand for Korean goods more than offset the negative impact of reduced tourism from China. A strong residential sector and the extra budget for this fiscal year also supported economic activity. Against this backdrop, expectations are rising that the Bank of Korea could start its tightening cycle as soon as this month.
Growth momentum also strengthened in Taiwan, where annual growth hit an over two-year high in Q3. Strong global growth and increased demand for electronics led exports to record the fastest acceleration in nearly eight years. On the downside, the performance of the domestic economy was lackluster, casting doubts about the sustainability of Taiwan’s economic recovery. Although growth decelerated in Q3 in Hong Kong, it remained strong on the back of a solid job market and resilient external demand.
While GDP data is outstanding for major player India, indicators for Q3 suggest that the economy is gradually switching into a higher gear following the demonetization process that occurred in late 2016 and the implementation of Goods and Services Tax (GST) on 1 July of this year.
U.S. President Donald Trump’s recent trip to Asia helped ease tensions with China. The two countries signed deals worth around USD 250 billion, while Trump softened his tone about trade disputes with the world’s second-largest economy. In the political arena, Trump struck a warmer tone than he had in the past with China regarding North Korea and demanded that President Xi Jinping “work hard” on addressing the threat. Trump also restated that the U.S. supports South Korea in the conflict with its northern neighbor.
The most recent data for October paints a less bright picture of the ESA economy in the final quarter of the year. Exports decelerated markedly in China, Korea and Taiwan, while all manufacturing PMIs in the region moderated. October’s early indicators suggest that global dynamics could be cooling, which is having a negative impact on manufacturing activity. As a result, our panel of analysts expect GDP growth to moderate to 6.1% in Q4.
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ESA’s 2018 economic outlook remains bright
The region of East and South Asia is expected to perform strongly next year as China’s slow transition towards a more sustainable growth path will be partially offset by robust growth in India. Moreover, the recovery in commodities prices is expected to be relatively slow, which bodes well for consumers and the region’s external accounts. Financial conditions should tighten gradually in 2018, but are expected to remain largely accommodative in the region. FocusEconomics panelists expect the ESA economy to grow 6.0% in 2018, which is unchanged from last month’s estimate and a notch below the 6.2% projected for this year. For 2019, analysts project regional growth to remain broadly steady at 5.9%.
This month’s stable outlook for 2018 reflects unchanged growth prospects for China, Pakistan and Sri Lanka. Our panel upgraded their projections for the economies of Bangladesh, Hong Kong, India, Korea, Mongolia and Taiwan. No downward revisions were made this month.
The Indian economy is expected to post the largest expansion in the region in 2018; panelists project growth of 7.4%. The Chinese economy is expected to grow healthily, at 6.4%. Conversely, the more mature economies of Hong Kong and Taiwan are expected to be the region’s laggards and grow a modest 2.5% and 2.3%, respectively.
CHINA | Economy shows strong resilience in Q3
The economy continues to defy signs of an abrupt slowdown on the back of resilient household consumption. GDP expanded 6.8% annually in Q3, just a notch below H1’s 6.9% increase and comfortably in line to achieve this year’s 6.5% growth target. The slight deceleration reflected poor investment dynamics partially due to stricter environmental regulations. Recent data for October suggests the economy is losing some momentum in Q4, with the manufacturing PMI receding, trade data weakening and the housing market showing signs of fatigue. At the closing of the National Congress of the Communist Party on 24 October, President Xi Jinping’s thought was enshrined into the party’s guiding principles. This is the first time since Mao Zedong that a living party leader has been incorporated into the party’s constitution, reflecting the amount of power Xi has amassed since he took over as General Secretary in 2012. Meanwhile, U.S. President Donald Trump softened his tone in his recent visit to China, shifting the blame for trade imbalances from China to past U.S. administrations.
China will continue with its managed deceleration as authorities seek to achieve a more sustainable growth trajectory, while implementing economic reforms. Fiscal policy will remain accommodative next year, while the government will likely tighten financial conditions. FocusEconomics panelists forecast that the economy will grow 6.4% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is expected to grow 6.1%.
INDIA | Government takes measures to shore up the economy
The economy is coming to terms with the disruptions caused by demonetization a year ago and the implementation of the Goods and Services Tax (GST) earlier this fiscal year. Consumption-related indicators have strengthened in recent months, while industrial output tracked higher in Q3 from the previous quarter. Nonetheless, GDP growth remains hampered by weak capital expenditure growth and a distressed banking sector. In a positive step, on 24 October the government unveiled a two-pillar stimulus package that encompasses a recapitalization plan for public sector banks worth USD 32.5 billion and a five-year USD 107 billion infrastructure investment program. In addition, authorities announced in early November a series of measures to lower the GST tax incidence on consumers as well as to reduce the compliance burden for firms.
Despite a tepid start to the fiscal year in April, economic growth is set to accelerate throughout FY 2017 as the economy recovers from demonetization- and GST-induced shocks. Economic momentum could be further bolstered by the new fiscal package, which will accelerate the resolution process of banks’ stressed assets, shore up loan growth and boost corporate sentiment. The economy is seen growing 6.7% in FY 2017, unchanged from last month’s estimate. In FY 2018, FocusEconomics panelists forecast growth of 7.4%.
KOREA | Exports and public spending prop up economic growth in Q3
The economy steamed ahead in Q3, according to preliminary data released by the Bank of Korea. Growth came in at 3.6% compared to the same quarter last year, higher than the 2.7% growth recorded for Q2. A jump in exports, coupled with an increase in government spending, propelled the economy in the third quarter. Kicking off Q4, consumer and business confidence were strong in October and November, respectively, and the underlying health of export growth was also strong in October. On 31 October, Korea and China agreed to improve diplomatic relations, which could lead to a recovery in tourism exports next year since they have suffered from the deterioration in relations between the two countries following the deployment of the THAAD missile system in Korea earlier this year. On. On 7 November, during his visit to Korea, U.S. President Trump called to push ahead with amendment negotiations for the U.S.- Korea free-trade agreement. President Trump’s visit was part of a wider tour of East Asia, in which he pushed for greater regional unity regarding North Korea.
The 2018 budget, which includes an increase in spending, and improved diplomatic relations with China should buoy economic growth next year. However, measures to cool the housing market could weigh on the outlook. FocusEconomics panelists expect GDP to expand 2.8% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, the economy is forecast to grow 2.7%.
INFLATION | Inflation accelerates slightly in October
Inflation in East and South Asia rose to 2.1% in October (September: 2.0%) according to an estimate by FocusEconomics. The print reflected higher price pressures in China and Sri Lanka. Conversely, inflation eased in Korea and Pakistan, while consumer prices declined on an annual basis in Taiwan for the first time in eight months. Despite October’s increase in inflation, price pressures remain subdued overall, giving central banks space to maintain accommodative monetary policy stances. That said, strong growth could prompt some central banks to tighten their monetary policies sooner than previously expected.
Next year, panelists expect regional inflationary pressures to resurface due to higher commodity prices and reduced economic slack in some economies. They project average inflation of 2.6%, which is unchanged from last month’s estimate. Inflation is expected to inch up to 2.7% in 2019.
Head of Economic Research