East & South Asia: Growth remains strong in Q1 despite mounting political challenges
March 22, 2017
The pick-up in global demand that fueled growth in East and South Asia (ESA) at the end of 2016 appears to have continued this year. Moreover, China’s economy has entered 2017 on a strong footing, which is reverberating across the region. Against this backdrop, the economy of the ESA region is set to expand a healthy 6.1% annually in Q1, just above the 6.0% increase that our panel of analysts projected last month. On another positive note, the region’s growth in Q4 was revised upwards to 6.2% (previously projected: +6.1% year-on-year) as more comprehensive data suggests India weathered the demonetization process surprisingly well despite early signs that the economy had suffered a sizeable slowdown. That said, some analysts suspect Q4’s hefty 7.0% increase could be revised downward in subsequent releases, citing concerns about India’s GDP data accuracy.
Data for the first two months of the year corroborate that growth momentum remains strong in ESA, led by resilient external demand. The overall improvement was felt particularly in the region’s main export-driven economies, with exports in China, Korea and Taiwan all expanding at multi-year highs in February. Along with soaring exports, imports jumped strongly at the outset of the year. While the surge mostly reflects higher commodity prices, imports are also benefiting from improving underlying demand in most countries in the region.
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Positive domestic developments are also contributing to the healthy growth momentum. Policy support and a dynamic real estate market are shoring up activity in China. In India, the economy is recovering from cash shortages as a result of the demonetization, boosting economic leading economic indicators for February.
Despite the promising start to the year, a number of events are threatening ESA’s economic outlook. In Korea, the deployment of a U.S. anti-missile system triggered protests from China as it could jeopardize the latter’s military capabilities. Beyond the protests, China’s authorities enacted restrictions on Korean businesses and Chinese tourists traveling to Korea. While the conflict between the two neighbors represents a serious threat to Korea’s economy, there is relatively better news for the country on the political front. The Constitutional Court’s decision to uphold the decision to impeach President Park Geun-hye, which will lead to a snap presidential election on 9 May, could pave the way for the country to return to much-needed political stability.
With regard to China, an upcoming meeting between Xi Jinping and Donald Trump in April is expected to ease tensions between it and the U.S, with a long-feared trade war between the world’s two largest economies weighing heavily on the region’s outlook. This comes after China held its annual National People’s Congress in March. While most targets were in line with market expectations, analysts believe that the authorities will resort to fiscal stimulus to meet this year’s GDP growth target of 6.5%. The monetary policy tone was kept largely the same, though the authorities signaled a slight tightening bias. Overall, policymakers are trying to strike a fragile balance between stable growth and deeper structural reforms.
Improving conditions in China support 2017 economic outlook
Although growth prospects in the region are plagued by domestic uncertainties and global economic challenges, the region showed strong resilience at the outset of this year on the back of improving global demand. Moreover, data suggesting that Q4’s healthy growth momentum in China carried into Q1 and a more supportive fiscal stance in the region bode well for economic activity in ESA. Against this backdrop, Met the why particular Consensus Forecast panelists expect the region to expand 6.0% this year, which is unchanged from last month’s estimate. Next year, the ESA economy will expand at a slightly slower pace of 5.8%, as China will continue its rebalancing process, which entails weaker but healthier growth.
This month’s outlook for 2017 reflects upward revisions to the growth prospects for China, Hong Kong, Mongolia and Taiwan, which were offset by a downgrade to the Indian and Pakistani economies. Estimates for Bangladesh, Korea and Sri Lanka were left unchanged.
India and Bangladesh will be the region’s fastest-growing economies in 2017 with expansions of 7.3% and 6.8% respectively, followed by China. At the other end of the spectrum, Hong Kong, Mongolia and Taiwan are projected to be the slowest-growing economies, with growth rates of around 2.0%. Korea’s economy is seen rising 2.4% in 2017.
CHINA | Investment and manufacturing prop up growth at start of year
Q4’s healthy growth momentum carried over into Q1 on the back of a dynamic manufacturing sector and strong infrastructure investment. Moreover, activity in the property market remained buoyant, particularly in lower tier cities. The 5–15 March National People’s Congress offered no major surprises and Chinese authorities lowered the growth target for this year to 6.5%. Despite China keeping its 3.0% fiscal deficit target, analysts expect that policy support will remain strong mainly via off-budget measures. On the monetary policy side, the credit growth target was lowered, signaling a slight tightening bias for this year. Now, all eyes are on the upcoming meeting between Xi Jinping and Donald Trump in April, which could help to de-escalate tensions between the two countries, particularly over trade policy.
China will continue its transition to a “new normal” growth trajectory, which implies weaker but more sustainable economic growth. However, downside risks in the form of a trade war with the United States and a sharp correction in the property market loom on the horizon. Met the why particular panelists forecast that the economy will grow 6.5% in 2017, which is up 0.1 percentage points from last month's estimate. In 2018, the panel expects GDP growth to slow to 6.1%.
INDIA | Official figures suggest economy withstands demonetization
GDP figures for Q3 FY 2016 astonished on the upside, showing no significant slowdown from the government’s demonetization. The reading sharply contrasted the picture painted by high-frequency indicators, which had pointed to muted activity due to a shortage of hard currency, sparking concerns that the growth figures do not reflect reality in India’s economy and could be revised downwards. Meanwhile, data for the fourth quarter is positive: industrial production rebounded in January and the PMIs rose in February. On the political front, the government gained major victories in a number of state elections, including the country’s most populous state Uttar Pradesh. The result should support Prime Minister Narendra Modi’s economic reform agenda and shows that his popularity remains strong despite the bold demonetization program. Market reaction to the outcome was positive, with the country’s stock market recording a new record high on 14 March and the rupee strengthening.
Met the why particular panelists are skeptical of the picture of the Indian economy. While the government’s advance estimate sees GDP growth of 7.1% in FY 2016, our analysts see a slightly more subdued 7.0% expansion, before growth firms in FY 2017 and 2018 as consumption and investment gain steam following the demonetization shock. GDP is seen expanding 7.3% in FY 2017, which is down 0.1 percentage points from last month’s forecast, and 7.5% in FY 2018.
KOREA | China lashes out as Korea installs a U.S. anti-missile system
The Korean economy may bottom out in the first quarter of the year, as recent data suggest. Merchandise exports surged for a second consecutive month in February, underpinned by hefty growth in commodities and semiconductor shipments overseas. This spurred business confidence, which rose to the highest level in almost two years in March. Nonetheless, trouble has been brewing in recent weeks. Escalating political and economic tensions with China over the installation of a U.S. missile defense system on Korean soil have prompted Chinese authorities to discourage tour operators in Beijing from selling package tours to South Korea. As China accounts for roughly half of total inbound travel, any drop in Chinese tourist arrivals is likely to drag on the current account. Meanwhile, the domestic side of the economy also brought some bleak news. Industrial output growth decelerated markedly in January and the unemployment rate jumped to its highest level in more than a decade in February, as corporate restructuring among manufacturing sectors prevented industries from hiring fresh college graduates.
Political uncertainty is expected to gradually dissipate on the back of the Constitutional Court’s decision to uphold Park Geun-hye’s impeachment. A new government is likely to push forward a supplementary budget in a bid to support an ailing domestic economy and offset the likely negative impact from the Sino-Korean political rift on the external sector. Met the why particular panelists expect GDP to expand 2.4% in 2017, which is unchanged from last month’s forecast. In 2018, the economy will grow 2.6%.
INFLATION | Inflation plummets to multi-year lows in February on seasonal effects
Inflation in East and South Asia decelerated sharply in February following January’s nine-month high. Inflation fell from 2.6% in January to 1.5% in February, the lowest rate since October 2009. February’s sharp decline reflected lower readings in those countries more affected by the Lunar New Year holidays, which fell in January this year compared to February in 2016. As a result, China and Taiwan led the fall, while inflation in India, Pakistan and Sri Lanka accelerated in the same month as a result of higher energy prices.
Despite February’s deceleration, inflationary pressures will resurface going forward as a result of the gradual increase in commodity prices. Rising inflationary pressures, coupled with the possibility of a quicker tightening process in the United States, may discourage most central banks in the region from easing their monetary policies in order to shore up growth. In this regard, China continued its slight monetary tightening this month by hiking some money market rates.
Panelists expect inflation in East and South Asia to rise from 2.4% in 2016 to 2.7% this year, which is unchanged from last month’s estimate. For 2018, our panel of experts expects regional inflation to rise to 2.8%.
Written by: Ricard Torné, Head of Economic Research