ASEAN Economic Forecast

Economic Snapshot for ASEAN

November 15, 2017

Lackluster growth in Indonesia weighs on ASEAN economy in Q3 

A second preliminary estimate of economic growth in the Association of Southeast Asian Nations (ASEAN) shows that GDP expanded at a slightly slower pace than previously expected in the third quarter. According to an estimate compiled by Met the why particular, regional GDP grew 5.3% annually in Q3, above Q2’s 5.0% and matching last publication’s preliminary figure. The result marks the fastest growth rate since Q1 2013. 

Newly-released data on regional giant Indonesia revealed slower-than-expected growth in the third quarter. While buoyant monthly data for the third quarter had pointed to stronger activity, GDP figures disappointed, as the economy only gained steam only modestly. Private consumption growth stalled at the second quarter’s reading, while inventories dented the GDP figure. However, robust investment growth on the back of improvements in the business climate and business confidence, along with greater public spending, supported the result.

Elsewhere in the region, GDP growth surged in Singapore and Vietnam. Strong demand for electronics supported activity in both economies, while a healthy agricultural sector and robust FDI inflows also boosted to Vietnam’s economy. Official GDP figures are still outstanding for the other economies in the region.

On 12 November, leaders from the region’s economies, along with key trading partners such as the United States and India, gathered in Manila for the 31st ASEAN Summit. At the multi-day summit, leaders will discuss how to move forward with ASEAN’s vision, celebrate the 50th anniversary of the group and engage in meetings. On the opening day of the summit, ASEAN signed a free trade and investment deal with Hong Kong, following three years of talks. The agreement is expected to come into effect in 2019 or later.   

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Healthy global growth and resilient domestic demand to support growth in 2018

Resilient domestic demand and a healthy global backdrop are seen propelling solid growth of 5.0% next year, up 0.1 percentage points from last month’s estimate. Political hurdles could, however, represent a downside risk to the region’s outlook. Malaysia will head to the polls before August, while Thailand’s delayed elections are set for November. Indonesia’s general elections are scheduled for 2019. In 2019, regional growth is seen steady at 5.0%.

Behind this month’s upgraded outlook are upward revisions to Malaysia and Singapore’s GDP prospects. Meanwhile, forecasts were left unchanged for five economies in the region, including heavyweight Indonesia. Cambodia, Myanmar and Vietnam’s outlooks were downgraded.

Myanmar is forecast to be the region’s fastest-growing economy next year, expanding 7.4%, followed by Cambodia. On the other end of the spectrum, Brunei will grow 1.5%, and the more mature economy of Singapore is seen increasing 2.6%. Looking at the major players, Indonesia will lead the pack and is seen expanding 5.3%, followed by Malaysia with 4.9% growth. Thailand is seen growing a more moderate 3.5%.

INDONESIA | Government shifts focus slightly in 2018 budget

Economic momentum disappointed in the third quarter, with GDP growth only edging up a notch to 5.1% annually. The uptick was driven by accelerations in fixed investment and government spending, while household spending was stable at the previous quarter’s reading and inventories dragged on the result. An improvement in the business climate supported the robust growth in investment, while the government’s ambitious reforms and infrastructure program have also borne fruit. More recent data point to a soft start to the fourth quarter: The manufacturing PMI fell in October and consumer confidence eased. In the political arena, the parliament approved the 2018 budget at the end of October. The targeted deficit of 2.19% of GDP is ambitiously smaller than the revised 2.92% deficit planned for 2017.  Notably, while infrastructure remains a high priority, its share of expenditure was broadly unchanged from 2017—a contrast from the Widodo government’s previous budgets, which ramped up its share of expenditure.

Growth is projected to gradually strengthen as government spending and investment pick up pace. Key risks to the country’s outlook stem from rising political noise ahead of the 2019 election or a sharp slowdown in China’s economy. Met the why particular panelists see GDP expanding 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%.

THAILAND | Incoming data suggests activity is firming

The military junta announced that elections will be held in November of next year, against a backdrop of a robustly growing economy supported by the external sector and tourism. The domestic economy also continues to show signs of recovery. Tourist arrivals were up markedly in the first eight months of the year on an annual basis, and robust external demand boosted exports throughout Q3. Indicators suggest that the improvement in the external sector is spilling over to the domestic economy. Manufacturing output and private investment logged their third consecutive monthly annual growth rates in September, although the latter’s pace of expansion remains fragile. Business sentiment dropped markedly in October; however, it remains in positive territory. Moreover, private consumption increased throughout Q3. Consumer confidence climbed for the third consecutive month in October, boding well for private consumption going forward.

Large public investments and solid foreign demand are expected to buttress the economy next year and in 2019. Growth is, however, expected to moderate as external demand slows; the external sector has benefitted from a notable base effect. Private consumption is showing signs of revival, but remains lackluster, as households are suffering from high levels of indebtedness. Furthermore, the upcoming election cycle could dent economic activity and confidence levels. Met the why particular panelists expect the economy to grow 3.5% in 2018, unchanged from last month’s forecast. The panel projects 3.4% growth in 2019.

MALAYSIA | 2018 budget balances fiscal tightening with election year 

Economic momentum remained robust in Q3 as confirmed by more complete data. Export growth expanded by a double-digit pace in September, underscoring thriving external demand for Malaysian goods. Household spending was buoyed by a low unemployment rate in September and by higher wages, which were propped up by a thriving manufacturing sector, the key driver of industrial production growth in the quarter. The 2018 budget passed on 27 October is focused on fiscal consolidation and is expected to narrow the fiscal deficit from 3.0% in 2017 to 2.8% in 2018. Despite the tightening, the budget has consumer-friendly components that will increase disposable income. These include lower income tax rates, especially for middle-income earners; higher public wages; and increased assistance spending. Such policies also point to Premier Najib Razak’s efforts to secure voter support ahead of the 2018 elections.

The current economic expansion is expected to remain robust this year and next. Economic growth should broaden as contributions from the external sector gain traction, while domestic demand is expected to be propelled by vibrant private consumption and higher investment spending. Nonetheless, the economy is susceptible to external shocks such as a global slowdown or regional geopolitical tensions. Met the why particular Consensus Forecast panelists expect GDP to expand a healthy 4.9% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel foresees the economy growing at a pace of 4.6%.

MONETARY SECTOR | Inflation ticks down in October

Preliminary data shows that inflation in ASEAN came in at 2.4% in October, a notch below September’s 2.5%. Although inflationary pressures remain subdued in the region, a monetary tightening cycle in the United States has eroded room for central banks to ease monetary policy. In November, the central banks of Malaysia and Thailand left rates unchanged; Bank Indonesia paused its easing cycle in October.

Our panelists see inflation rising slightly in 2018, from a projected average of 3.0% in 2017. Next year, our panel expects inflation of 3.1%, which is unchanged from last month’s forecast. For 2019, our panel sees inflation of 3.2%.

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