East & South Asia: Disappointing performance in India hits ESA growth in Q2
September 21, 2016
Although preliminary data suggested that East and South Asia (ESA) managed to maintain Q1’s strong growth momentum in Q2, a complete set of data revealed that economic activity decelerated slightly in the April-to-June period. The region expanded 6.1% annually in Q2 (Q1: +6.2% year-on-year), which was below the 6.2% increase reported in last month’s FocusEconomics Consensus Forecast. The downward revision stemmed from disappointing growth in India, the region’s second-largest economy, which expanded at the weakest pace in over a year on the back of slowing urban consumption and a worrying decline in investment. A sharp slowdown in Mongolia as a result of the deep-rooted fiscal and economic crises also contributed to the deceleration. The rest of the region benefited from general policy support and a timid improvement in the external sector.
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Downside risks to growth related to domestic developments remain largely contained. In China,the government has made it clear that it will not allow the economy to decelerate to worryingly low levels, signaling that further policy action could be in the pipeline even if it means slowing economic reforms. Growth in India is expected to pick up in the coming quarters as strong monsoons and a hike in government wages will prop up consumption. Private investment, however, will remain fragile as businesses have yet to reap the benefits of the country’s recent reform processes. Elsewhere in the region, Mongolia remains the main black spot as the country endures a rollercoaster ride due to waning foreign reserves and a soaring budget deficit.
Meanwhile, the region’s economy remains extremely vulnerable to external headwinds. Despite a mild improvement, global demand remains weak, which is weighing on the region’s all-important external sector. More stable financial conditions following the Brexit vote and improved economic dynamics in some countries in the region drove some currencies to strengthen, which is adding further pressure on exports. Low inflation rates in the region and accommodative monetary policies at a global level have prompted authorities to bolster lending, which has translated into higher debt and worsening domestic financial imbalances in some countries. Therefore, the United States Federal Reserve’s resumption of its tightening cycle, which implies higher interest rates in most emerging-market nations, could heighten market volatility and threaten stability in the some financial markets in ESA.
Despite external headwinds and some domestic challenges, the region is set to decelerate only marginally throughout the rest of the year. Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA economy expanding 6.0% in Q3 and 5.9% in Q4, mostly driven by a gradual deceleration in China.
Economic outlook for 2016 stable for fourth consecutive month
Risks to ESA’s economic outlook continue to be broadly balanced. While policy support in China, still solid domestic demand in India and widespread accommodative monetary policies bode well for the region’s growth in the short term, external headwinds remain strong and threaten ESA’s growth outlook. As a result, our panel of analysts decided to maintain ESA’s 2016 growth estimate stable for the fourth consecutive month at 6.0%. 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 stable regional economic outlook for 2016 reflects unchanged growth prospects for all but two of the economies surveyed. Forecasts for regional heavyweights China, India, Korea and Taiwan remained unchanged while Hong Kong’s growth prospects were revised upwards and Mongolia was the sole country for which the panel downgraded their view of the economy. Preliminary figures for the Bangladeshi and the Pakistani economies 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 7.5% expansion, followed by China, with an expansion of 6.6%. At the other end of the spectrum, Taiwan, Mongolia 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 | H1 mini-cycle gradually fades
While the economy fared relatively well in the first half of the year on the back of policy support and healthy dynamics in the property sector, GDP will likely decelerate in the second half as the pickup in growth caused by what is being called a mini-cycle improvement is gradually fading away. Economic indicators painted a rosier picture for August following July’s disappointing figures. Overall, economic dynamics benefited from a recovery following July’s flood-related disruptions and stronger investment in the real estate sector. August’s improvement was in line with the healthy expansion in credit growth and government spending. This has sparked some concerns that the government may have increased policy support following July’s weak economic readings, which could endanger China’s economic transition.
Although the economy is expected to decelerate in the coming months, Chinese authorities showed their willingness to avert any sharp downturn by shoring up the economy through cheap credit and policy support. Nevertheless, if sustained, credit-fueled growth and government intervention have the potential to slow China’s reforms and exacerbate macroeconomic imbalances. FocusEconomics panelists see GDP rising 6.6% this year, which is unchanged from last month's forecast. Next year, the panel sees GDP growth slowing to 6.3%.
INDIA | Growth momentum weakens at outset of FY 2016
India’s economy started off FY 2016 on a sour note with growth moderating to an over-one-year low in the first quarter. Surging government spending managed to prevent an even larger slowdown as fixed investment plunged and private consumption decelerated. However, the weakness seen in Q1 FY 2016 is likely to dissipate slightly in Q2 and high-frequency data are more positive: both the manufacturing and services PMIs rose in August. In addition, consumption should receive a boost from a hike in public paychecks and a solid monsoon going forward. Meanwhile, a large-scale strike calling for higher wages and opposing some of the government’s reform plans took place in early September. The protest underscores the challenges facing the government’s ambitious reform agenda, especially unpopular labor reforms designed to improve the ease of doing business.
Booming consumption should support a robust expansion in FY 2016. The FocusEconomics panel sees GDP rising 7.5% in FY 2016, which is unchanged from last month’s projection. For FY 2017, the panel sees growth stable at the robust pace of 7.5%.
KOREA | North Korea’s nuclear test raises tensions in the peninsula
GDP growth in the second quarter was revised up to 3.3% from the 3.2% previously reported, supported by substantial gains in private consumption and fixed investment. Private consumption picked up momentum in Q2 as households began to benefit from the government’s fiscal stimulus. Fixed investment jumped, buttressed mainly by a construction boom. Consumers will continue benefiting from the fiscal stimulus as a supplementary budget was passed on 2 September, prompting consumer confidence to rise further in August. Other data for August sent mixed signals: exports grew for the first time in 20 months, but the manufacturing PMI fell deep into contractionary territory. North Korea caused a furor in the international community in recent weeks when the regime conducted a new nuclear test.
Korea’s government announced a massive stimulus program to boost economic growth earlier this year and it is already bearing fruit. However, downside risks to the growth outlook are the still sluggish state of the world economy, the continuing drag from corporate restructuring, rising household debt and the constant threat of a confrontation with North Korea. 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 stabilizes in July
Inflation in East and South Asia declined sharply from July’s 2.4% to 1.8% in August, the lowest reading since October 2015. Most countries in the region recorded lower inflation readings in August, including the region’s largest players China, India, Korea and Taiwan. Weak regional growth, low food prices and a favorable base effect in a number of countries in the region fueled the deceleration in prices. Stronger currencies in some countries also contributed to the fall in inflation. Against this backdrop, central banks are likely to keep an accommodative monetary policy stance for the foreseeable future.
The 2016 inflation projection for the region remains stable at 2.4% for the fourth consecutive month. Looking at the countries in East and South Asia on an individual basis, analysts left the forecasts unchanged for China, Hong Kong, India and Taiwan. Projections for Korea, Mongoliaand Sri Lanka were revised downward, while estimates for Bangladesh were upgraded. Our panel of experts expects inflation to inch up to 2.5% in 2017.
Written by: Ricard Torné, Senior Economist