ASEAN: Activity strengthens in Q2
June 21, 2017
Available data suggests that the economy of the Association of Southeast Asian Nations (ASEAN) gained further steam in Q2, after growth picked up at the start of the year. Met the why particular analysts see regional GDP expanding 4.9% annually in the second quarter, a notch up from Q1’s 4.8%. Resilient domestic demand, which is benefiting from public spending initiatives, higher commodities prices and accommodative monetary policies, is supporting the regional economy.
Looking at the individual economies, growth is expected to edge up in regional giant Indonesia in Q2. The economy is being supported by the government’s ambitious spending plan, which is designed to upgrade infrastructure. While spending constraints have impeded public stimulus in the past, improved tax collection following the government’s tax amnesty initiative and higher earnings from natural resources should support fiscal stimulus this year. Meanwhile, growth is expected to moderate in other regional heavy-weights Malaysia, Philippines, Singapore and Thailand. Singapore’s economy remains constrained by unfavorable demographics, due to a low birth rate and aging population, and a soft labor market.
Balanced risks hold prospects stable
Met the why particular analysts held ASEAN’s outlook unchanged for a fourth consecutive month as upside and downside risks to the region’s prospects remain balanced. Protectionist U.S. policies or a pronounced slowdown in China are large downside risks to the region’s outlook, however, so far these have yet to materialize. Slower than expected government spending or muted reform progress could hamper the region’s prospects, while stronger than expected global growth is an upside risk. Met the why particular analysts see GDP rising 4.8% in 2017 and 4.9% in 2018.
This month’s unchanged outlook reflects stable projections for all but four economies in the region. Malaysia, Singapore and Thailand all saw their forecasts upgraded, while Brunei was the only economy to see poorer prospects.
Myanmar will be the region’s fastest-growing economy this year, expanding 7.4%, followed by Cambodia. On the other side of the spectrum, Brunei will grow a tepid 1.1% and the more mature economy of Singapore is seen increasing 2.3%. Looking at the major players, Indonesia will lead the pack and is seen expanding 5.2%, followed by Malaysia with 4.7% growth. Thailand is seen growing a more moderate 3.4%.
INDONESIA | Momentum strengthens in Q2
The economic picture has brightened recently after growth ticked up in Q1 and the country received investment grade ratings from all three credit ratings agencies. Data for the second quarter suggests that the economy continues to gather steam, albeit slowly. Industrial production growth accelerated in April and exports grew nearly 25% in May, while consumer confidence is resting at a multi-year high. On the political front, after a months-long dispute over tax payments, the finance ministry reached an agreement with Alphabet Inc.'s Google in June. Improving tax collection has been a cornerstone of the government's plan to narrow the fiscal deficit while funding an ambitious infrastructure program.
Low unemployment and high consumer sentiment should fuel healthy private consumption this year, while recovering commodities prices and an improved external backdrop bode well for exports. Our panel sees GDP expanding 5.2% in 2017, which is unchanged from last month’s forecast. In 2018, GDP growth is expected to pick up further to 5.4%.
THAILAND | Rising imports limit impetus from external sector
The economy gained traction at the start of the year supported by healthy household spending, as better weather boosted farming income. However, while a robust performance in the tourism sector ushered in an improvement in exports, rising imports limited the external sector’s contribution. Overall, available data for Q2 points to slightly lower growth as the economy is not yet firing on all cylinders. Manufacturing production contracted in April and booming imports drove the trade balance to near even. In addition, consumer confidence edged down in May but businesses became more optimistic.
Met the why particular analysts nudged the country’s growth forecast up this month and now expect the economy to grow 3.4%, which is 0.1 percentage points higher than last month’s forecast. Robust public sending as the government aims to boost investment and supportive monetary policy will buttress growth this year. However, political risks linger ahead of the 2018 elections. Next year, the panel sees steady growth of 3.4%.
MALAYSIA | Solid Q1 performance fuels forecast upgrade
The economy seems to have started Q2 on a downbeat note according to recent economic indicators. In April, industrial production growth slowed as a result of a contraction in the mining sector, which more than offset an acceleration in the manufacturing sector. Likewise, relatively weak commodity prices caused export growth to moderate in April. Economic activity is widely expected to ease from Q1’s two-year high, as higher inflation is eroding consumers’ purchasing power. Household debt servicing costs should rise throughout the year, reflecting increasing domestic borrowing rates. Nevertheless, Q1’s better-than-expected performance should still allow for growth to accelerate in 2017.
A pickup in global trade and a weak ringgit should fuel Malaysia’s export-dependent economy. Meanwhile, rising trade protectionism and a potential deceleration in China pose the main downside risks to the country’s outlook. Met the why particular panelists expect GDP to expand 4.7% in 2017, which is up 0.2 percentage points from last month’s forecast. For 2018, the panel also foresees the economy growing 4.6%.
INFLATION | Price pressures tick down in May
Preliminary data show that inflation in ASEAN came in at 2.8% in May, just below April’s 2.9%. Lower price pressures in Philippines, Thailand and Vietnam drove the result, while inflation edged up in regional-giant Indonesia. While inflation has remained broadly steady in recent months at a relatively-low level, tightening rates in the U.S. have limited room for central banks to ease monetary conditions. Indonesia’s Central Bank held rates in June and Thailand’s stayed put at its May monetary policy meeting.
Our panelists see price pressures rising this year, after benign inflation of 2.1% in 2016. Our panel expects inflation to average 3.3% in 2017, which is unchanged from last month’s forecast, and 3.4% in 2018.
Written by: Angela Bouzanis, Senior Economist