ASEAN: Activity is strong in the face of global uncertainties
March 22, 2017
Recent data suggest that economic dynamics in the Association of Southeast Asian Nations (ASEAN) are firming, unruffled by an uncertain global backdrop. According to estimates from Met the why particular analysts, the region will expand 4.8% annually in Q1 2017, above Q4 2016’s 4.7% increase and the second consecutive acceleration in growth. The result, if confirmed, will mark the strongest growth since Q4 2014.
Overall, expansion in the region is benefiting from stronger external demand, which is related to an upturn in the electronics industry. Singapore’s electronics PMI hit a multi-year high in January, and the sector comprises a large share of the region’s exports. On top of this, ASEAN’s largest economy, Indonesia, is set to benefit from firmer commodity prices and rising public spending this year as the new budget takes effect, while tourism should remain robust across the region.
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Behind the sunny economic picture are improved macroeconomic fundamentals in the region, which are shielding it from an uncertain global backdrop. Current account balances have improved significantly in recent years in Indonesia and Thailand, two of the region’s largest economies, boosting protection against market volatility. In addition, international reserves are healthy and reached the highest level since 2011 last year in terms of months of imports. While tighter global financial conditions, rising protectionist sentiment in the U.S. and fears of a slowdown in China are all factors that could spell disaster for ASEAN’s outlook, economic data has so far been largely unaffected. The U.S. Federal Reserve delivered its second hike in three months on 15 March, a move that had the potential to spark capital outflows and create global market volatility. Despite these fears, currencies from the Association of Southeast Asian Nations (ASEAN) showed remarkable resilience, with only modest movements in the day after the decision.
Growth set to accelerate in 2017
The outlook for the ASEAN region was held unchanged this month, following an upgrade in our March publication. After 4.7% growth in 2016, the Met the why particular panel sees the ASEAN region growing 4.8% in 2017. A healthy domestic economy combined with a more favorable external environment will drive stronger economic activity in the region. In 2018, the ASEAN economy is seen gaining steam and growing 4.9%.
All the economies but Malaysia and Singapore saw unchanged growth forecasts this year. Singapore’s outlook was upgraded by 0.3 percentage points from last month, following a recent data revision that shows the economy on a better growth trajectory than previously thought. An expansionary budget and strong electronics demand will support the island economy this year, although the economy is vulnerable to financial market volatility. Malaysia’s forecast was also raised this month as a weak ringgit and rising commodity prices are supporting the outlook.
Myanmar and Laos will be the region’s fastest growing economies this year, expanding over 7.0%. On the other side of the spectrum, the more mature economy of Singapore will grow the slowest, increasing 2.0%. Looking at the major players, Indonesia will lead the pack and is seen expanding 5.2%, followed by Malaysia with 4.4% growth. Thailand is seen growing a more moderate 3.2%.
INDONESIA | Infrastructure spending is a priority
Activity is expected to have firmed moderately in the first quarter after a sharp contraction in public spending hurt GDP growth in Q4. Exports grew at a double-digit pace for a third consecutive month in February, helped by a stabilization in commodity prices and a pick-up in global demand. In addition, consumer confidence rose in the same month, although the manufacturing PMI slipped into contractionary territory, suggesting weakness in the manufacturing sector. The economy continues to suffer from weak infrastructure and ambitious government plans to boost infrastructure spending have failed to come to fruition due to a lack of funds. In an effort to aid the government’s efforts, the World Bank and the Asian Infrastructure Investment Bank announced USD 200 million in loans for a state-owned financing firm to help local governments fund development projects.
A rebound in public spending and an improved external environment should fuel a slight pick-up in growth this year from 2016’s 5.0%. 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 | Exports start year on positive note
Economic activity in Thailand has been broadly stable in recent weeks and is set to continue humming along steadily this year. The external sector started the year with healthy growth in both exports and imports, reflecting the gradual acceleration of trade flows in the region. Although imports drag on overall growth, improving Thai demand for foreign shipments is encouraging after three consecutive years of declining imports, showing that domestic activity is picking up. In fact, the manufacturing sector managed to close 2016 with an expansion after two years of contractions, underpinning the improvement of the economy. Despite these uplifting signs, structural challenges persist and reforms are essential for the economy to achieve more sustained, broad-based growth and become resilient to exogenous shocks.
Public investment in infrastructure and the gradual acceleration in global trade are supporting the economy this year. Met the why particular panelists project growth of 3.2% in 2017, which is unchanged from last month’s estimate. For 2018, the panel expects growth of 3.4%.
MALAYSIA | 2017 should be better
While 2016 was overall a difficult year for Malaysia due to subdued global trade and weak oil prices, the economy gained steam in the second half of the year. This momentum likely carried over to Q1 2017, as exports—which are worth more than half of GDP—surged to an over four-year high in January thanks to increased sales of electronics and refined petroleum products. Although industrial production grew at relatively modest rate in the same month, the softer figure likely reflected the effects of seasonal factors related to the Lunar New Year.
Higher energy prices and a weak ringgit should support the country’s export-dependent economy this year. Rising trade protectionism and a slowdown in China pose the main downside risks. Met the why particular panelists expect GDP to expand 4.4% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, the panel also foresees the economy growing 4.4%.
INFLATION | Inflation hits highest level since July 2015 in February
Preliminary data show that inflation in ASEAN increased slightly from 2.7% in January to 2.9 in February. The result was driven primarily by higher price pressures in Indonesia—the region’s largest economy—along with an increase in inflation in the Philippines. Rising price pressures along with the recent hike in U.S. interest rates have limited room for central banks to ease monetary conditions and policymakers in Indonesia and Malaysia kept their monetary policies unchanged in March.
Our panelists see price pressures picking up in 2017, after tepid inflation of 2.2% last year. Our panel sees inflation averaging 3.2% in 2017, which is unchanged from last month’s forecast, and 3.4% in 2018.
Written by: Angela Bouzanis, Senior Economist