East & South Asia: Sharp slowdown in India dents ESA's momentum in Q2
September 20, 2017
Comprehensive data for East and South Asia (ESA) revealed that growth momentum waned in the second quarter of the year. ESA’s aggregate GDP rose 6.1% annually in Q2, which was a notch below last month’s preliminary estimate and marked the slowest growth since Q4 2015 (Q1: +6.2% year-on-year).
The downward revision to the region’s growth rate was due to a sharp and unexpected deceleration in India’s economy. Growth plunged to the lowest rate since Q4 FY 2013 due to an adverse impact from the Goods & Services Tax (GST), which came into effect on 1 July. Confusion over the tax’s implementation disrupted manufacturing output and sparked a broad destocking by retailers, while investment activity was feeble due to a stressed banking sector and overleveraged firms. However, the chaotic GST rollout is likely to only temporarily dent activity. Overall, the tax is a landmark reform for the Indian economy and has improved the country’s business environment by streamlining the fragmented tax system.
Elsewhere in the region, China’s economy drove growth, expanding at a robust 6.9% rate in Q2. While the regional giant has so far avoided fears of a slowdown, recent data for Q3 suggests that the economy has embarked on a downward trajectory. However, the slowdown is likely to be gradual as authorities are expected to continue keeping a heavy hand in the economy. A glimpse of what is to come in terms of policy-making will likely be revealed on 18 October at the 19th National Congress of the Communist Party, where President Xi Jinping will present the party’s goals for the next five years. The trajectory of the Chinese economy is critical for regional growth as any strong slowdown would likely have ripple effects across the smaller, export-dependent economies in the region.
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Growth to moderate in 2018 as China slows
A resurgence in external demand and a vibrant first half of the year for the Chinese economy will fuel healthy growth in East and South Asia this year. FocusEconomics Consensus Forecast panelists expect the region to expand 6.1% in 2017. Next year, activity is seen losing momentum slightly as China’s economic transition continues. However, an acceleration in India, the second-largest economy, as it puts shocks from demonetization and the GST implementation in the rearview mirror should limit the regional slowdown. In 2018, ESA is seen growing 6.0%, which is up a notch from last month’s forecast.
This month’s upgraded outlook for 2018 reflects brighter growth prospects for Hong Kong, Korea and Sri Lanka. India and Pakistan were the only countries to have their projections downgraded. India’s downward revision reflected that recent data points to a larger than previously expected downturn in FY 2017, which will likely have spillover effects on FY 2018’s figures. The growth forecasts for all other economies in the region were left unchanged.
Next year’s fastest-growing economy is projected to be India with an expansion of 7.4%. China will also grow at a healthy pace of 6.3%. At the other end of the spectrum, Taiwan will be the region’s worst performer and grow a modest 2.1%. Among the rest of the major regional players, Hong Kong and Korea will expand 2.4% and 2.7%, respectively.
CHINA | Upcoming Congress to shape economic and political future
Recent data points to easing momentum in China’s economy, following buoyant growth in the first half of the year. In August, retail sales growth moderated, industrial production lost steam and the pace of investment cooled. In addition, the external sector’s performance deteriorated as exports slumped, while import growth picked up speed. Recently, exporters have come under strain due to the recent strengthening of the yuan. While the incoming data suggests that growth has peaked and entered a downward trajectory in H2, the downturn is likely to be modest overall as government spending should prevent a sharp slowdown. Meanwhile, all eyes are on the government’s 19th National Congress of the Communist Party on 18 October. Five of the seven members of the standing committee are due to retire, and their replacements will help shape the future of China’s policy. President Xi Jinping will also lay out the party’s priorities for the next five years.
FocusEconomics panelists forecast that the economy will grow a robust 6.7% in 2017, thanks to a strong start to the year and fiscal stimulus. Next year, growth is seen slowing moderately as the economy continues to transition; GDP is seen expanding 6.3%, which is unchanged from last month’s forecast.
INDIA | Growth slides in Q1 FY 2017
Economic momentum sputtered in the first quarter of FY 2017 as growth slid to the slowest rate in three years. A poorly performing external sector, which was hit by a strong rupee and confusion over the implementation of the Goods and Services Tax (GST), was largely to blame. In addition, investment was weighed down by a stressed banking sector and overleveraged firms. However, the impact from the GST implementation should be temporary, and growth is seen gaining steam going forward. Moreover, incoming data for Q2 FY 2017 is tentatively bright: Industrial production rebounded in July and the manufacturing PMI returned to expansionary territory in August. On a positive note, the new GST generated higher revenue than expected in July, the first month of implementation. Despite the robust collections figures, it appears increasingly likely that the government could fall short of its fiscal targets, as the deficit rose to 92.4% of the full-year target in July.
FocusEconomics panelists downgraded their view of the economy this month following a lackluster first quarter of FY 2017. The panel sees GDP expanding 7.0% in FY 2017, which is down 0.2 percentage points from last month’s forecast. However, activity should pick up in H2 FY 2017 as the economy moves past demonetization and the GST implementation. Growth is projected to accelerate to 7.4% in FY 2018.
KOREA | Housing reforms likely to inflict economic pain
Despite the economy’s resilient performance in Q2, available data from Q3 shows signs that growth may be abating. Although exports were healthy in August, Korea’s all-important external sector is expected to slow in the coming months. Moreover, a continued decline in Chinese tourism translated into job losses in tourism-related sectors in August. Also of concern are legislative measures to cool the housing market; given that financial conditions are tight, the market could see a correction heading into 2018. High household debt in particular is increasingly worrisome. In October, the government is expected to announce measures to tackle household debt, although these will likely thwart investment. Furthermore, in early September U.S. President Donald Trump announced he is reconsidering the U.S.-South Korea free trade agreement, which came at an unfortunate time given the heightened geopolitical tensions with North Korea. Tensions with the North dragged on consumer confidence in August, which declined after six months of consecutive improvements.
The proposed 2018 budget, which includes a 4.6% increase in fiscal spending, is expected to give the economy a boost. However, headwinds for the external sector may weigh on the speed of economic growth in 2018. FocusEconomics panelists expect GDP to expand 2.8% in 2017. In 2018, the economy is forecast to grow 2.7%, which is up 0.1 percentage points from last month’s estimate.
INFLATION | Inflation jumps in August
Inflation in East and South Asia rose in August as price pressures in China and India intensified. Inflation was 2.2%, above July’s 1.7% and the highest reading since January. Despite the rise, overall inflationary pressures in the region remain muted.
Panelists expect regional inflation to rise gradually next year after averaging 2.2% in 2017. Inflation is seen rising to 2.6% in 2018, which is unchanged from last month’s forecast. Partly behind the growing price pressures are higher commodity prices as the global economy picks up steam.