East & South Asia: Regional Q1 GDP dragged down by underperformance in India
June 21, 2017
India’s poor economic performance in the January-March period offset healthy dynamics in the majority of countries in East and South Asia (ESA), including China, Hong Kong and Korea. A comprehensive set of data for the region showed that aggregate GDP increased 6.2% year-on-year in Q1 2017 (Q4 2016: +6.2% yoy), which was a notch below the 6.3% expansion that our panel of analysts had projected last month.
In the final quarter of FY 2016, which ended in March 2017, growth in India felt the brunt of the lingering demonetization process, with the economy expanding at the weakest pace in over two years. The government’s decision to remove around 85% of the cash from circulation in order to crack down on the black economy impacted household consumption as citizens front-loaded spending. The construction sector was badly hit by the government’s move to scrap high-value notes. Moreover, growth was negatively affected by an unfavorable base effect from the previous year. While spillovers from demonetization and the base effect are gradually fading away, more recent data signals that momentum remains weak, with industrial production decelerating in April. On the upside, services activity gained some steam in May, providing some support to India’s growth prospects for the April-June period.
Elsewhere in the region, growth momentum stabilized in China as the government’s efforts to deleverage the financial sector and curb a booming property market in some cities are gradually feeding into the real economy. Although manufacturing PMIs in Korea and Taiwan remained firmly entrenched in positive territory in May, some alarming signs have started to emerge. Political tensions between China and Korea are putting downward pressure on export volumes of manufactured goods, while the peak of the electronics cycle is undermining activity in Taiwan’s industrial sector. Against this backdrop, our panel of analysts foresees the ESA economy expanding 6.1% in Q2.
In the political arena, the new Korean administration led by President Moon Jae-in unveiled a supplementary budget of USD 11.0 billion to foster job creation and increase social welfare. Korea and Taiwan are set to unveil tax reforms in the coming months, with the aim of hiking their corporate tax rates. Moreover, the Korean government is looking to include higher income tax rates, while Taiwan’s finance minister stated that the tax reform plan will likely include lower rates for low-income individuals.
2017 projection ticks up on analysts’ more optimistic forecast for China
Strong growth in some key major economies and healthy global demand are boosting the growth outlook for the East and South Asian economies, along with evidence that downside risks to China’s economy are not materializing. Against this backdrop, Met the why particular Consensus Forecast panelists expect the region to expand 6.1% this year, which is up 0.1 percentage points from last month’s estimate. Next year, the ESA economy will expand at a slightly slower pace of 5.9%.
This month’s improvement for 2017 reflects an upgrade to the forecasts for China, Hong Kong, Korea, Mongolia and Sri Lanka, while growth prospects for Bangladesh, India, Pakistan and Taiwan were stable. No country experienced a downgrade this month.
India and Bangladesh will be the region’s fastest-growing economies in 2017 with expansions of 7.3% and 6.8% respectively. China will expand at a healthy rate of 6.6%. At the other end of the spectrum, Mongolia will be the worst performer as the debt-ridden economy is still facing large structural imbalances. Growth in Hong Kong, Korea and Taiwan will fluctuate around 2.0% and 2.6%.
CHINA | Growth dynamics stabilize in May
Economic momentum was largely stable in May, with growth in industrial production and retail sales steadying. Property investment growth slowed in the same month after having expanded consistently since Q3 2016 at which point the government’s initiatives to curb the booming real estate market started to bear some fruit. Overall, the economy is feeling the pinch from a tighter monetary policy, reflecting the authorities’ efforts to deleverage the financial sector. Nevertheless, it seems that China’s reforms are not sufficient enough to rein in the country’s massive debt. Moody's downgraded China’s credit rating on 24 May citing risks stemming from rising debt in a context of slowing potential growth. On the upside, data from the external sector showed healthy global demand and still resilient dynamics at home, with both exports and imports accelerating in May.
Tighter financial conditions and slowing growth in the property sector will led the economy to slow in the second half of the year. Nevertheless, the government will continue to shore up growth if necessary. Met the why particular panelists forecast that the economy will grow 6.6% in 2017, which is up 0.1 percentage points from last month's estimate. In 2018, the panel expects GDP growth to tick down to 6.2%.
INDIA | Demonetization hits growth in the January-March period s
The lingering impact of demonetization and a statistical base effect caused growth to plunge in the final quarter of FY 2016. A deceleration was seen across almost all components of GDP, with investment being a particular weak spot and contracting for the first time in two years as the stressed banking sector hurt activity. Early data for FY 2017 points to lackluster momentum: industrial production growth lost steam in April and the PMIs pointed in different directions in May. However, household consumption is on the mend as the impact of demonetization fades and a healthy monsoon is seen supporting rural spending. On the political front, despite speculation that the overhaul could be delayed, the sweeping GST reform appears set to be rolled out on 1 July, simplifying India’s array of indirect taxes to four rates—5%, 12%, 18% and 28%. While the reform is seen largely as positive in the long-run, it is uncertain if many firms in the country are prepared for the transition and the implementation could disrupt activity temporarily.
Growth is seen picking up in the coming quarters as an improving external sector and reviving consumption support activity. The Met the why particular panel sees GDP expanding 7.3% in FY 2017, which is unchanged from last month’s forecast. For FY 2018, growth is projected to accelerate to 7.6%.
KOREA | Government unveils new supplementary budget
The economy grew at an even faster pace than had been estimated in the first quarter, the result of a strong upward revision in construction activity growth. Nonetheless, the economy is already showing incipient signs of a slowdown in Q2, with industrial output on a much weaker footing in April on account of subdued manufacturing production. In addition, plummeting Chinese tourist arrivals—down 61.5% year-on-year in May—following China’s ban on group tours to Korea in March is likely to dent service activity this quarter. Meanwhile, the new administration unveiled a USD 11.0 billion supplementary 2017 budget in early June, one of the main promises made during the campaign trail by now-President Moon Jae-in. The additional budget, which is expected to be largely financed by using this year’s extra tax revenue, aims at creating 111,000 jobs by the end of 2017 through a mix of direct hiring and subsidies to SMEs.
Although the external sector’s stellar performance has provided some relief, economic growth is expected to moderate in the months to come as construction investment cools and households become increasingly constrained by weaker real income growth. Met the why particular panelists expect GDP to expand 2.6% in 2017, which is up 0.1 percentage points from last month’s forecast. In 2018, the economy will also grow 2.6%.
INFLATION | Inflation inches up in May
Inflation in East and South Asia inched up from 1.7% in April to 1.8% in May. Although May’s print represented the highest rate in four months, inflation remains at historically-low levels. May’s figure reflected higher prices in regional giant China, Korea, Mongolia and Pakistan, while price-pressures eased in India, Sri Lanka and Taiwan. In India, inflation continued to fall and is nearing levels last seen in 2009.
Although inflationary pressures are expected to build up in the coming months due to hikes in certain taxes, inventory restocking in some economies and higher commodity prices, they will remain at relatively low levels, allowing the region’s central banks to keep their key policy rates unchanged. That said, China will continue its targeted tightening in order to support financial deleveraging and address structural imbalances.
Panelists expect inflation in East and South Asia to be 2.5% this year, which is down 0.1 percentage points from last month’s estimate. The downward revision was mainly the result of lower inflation projections in China, India and Taiwan. For 2018, our panel of experts expects regional inflation to rise to 2.8%.