East & South Asia Economic Forecast

Economic Snapshot for East & South Asia

April 25, 2018

Specter of full-scale trade war does not derail ESA’s stellar growth trajectory

The economy of East and South Asia (ESA) continues to defy any sign of an economic slowdown due to a combination of largely loose financial conditions in the region and a robust global trade cycle. A preliminary estimate shows that ESA countries expanded an aggregated 6.3% annually in Q1, matching both Q4’s print and last month’s forecast.

Resilient growth in the ESA region in the first quarter was mainly the result of healthy economic dynamics in China, which represents over two thirds of the region’s nominal GDP. China’s annual GDP growth stood at 6.8% for the third consecutive quarter in Q1 as private consumption likely remained strong, while real estate and service investment picked up. Although exports were robust in the first quarter due to strong global growth, the overall contribution from the external sector likely diminished as imports surged in the period on the back of vigorous domestic demand. With consumption and services becoming the main engines of growth, China is succeeding in achieving a difficult balance between upgrading its economic model, while also keeping growth at high rates.

With GDP data still outstanding for the remaining countries, economic indicators for the region corroborate that strong global economic activity continues to propel growth among export-driven economies including Korea. Healthy shipments are fueling manufacturing activity, which is in turn tightening domestic labor markets and spurring private consumption. However, as in China, dynamic domestic demand among export-driven economies is pushing up imports, worsening their external positions and weighing on overall economic growth. In South Asia, India continues to recover from the implementation of the Goods and Services Tax (GST) and the withdrawal of large denomination bank notes. It will likely post another healthy reading for the January–March period.

While the ESA region appears to be in a comfortable situation due to strong global demand, low borrowing costs and resilient domestic activity, protectionist policies by the United States threaten to put an end to an otherwise enviable growth trajectory. In January, U.S. President Donald Trump imposed tariffs on solar panels and washing machines that affected mostly China and Korea. In early March, the U.S. President announced more levies, this time affecting imports of aluminium and steel. While the punitive measure was suspended for a selected number of countries including the European Union and Korea, the duties were left in place for China, signaling the real target of Trump’s actions. In response, China implemented tariffs on 128 U.S. products in early April.

While no additional measures have been taken since then, the war of words between China and the United States has continued in the past few weeks, with Trump threatening to slap more than USD 110 billion in tariffs on Chinese goods. While the Chinese government has adopted a more conciliatory tone, stating that the country is willing to open its economy and cut tariffs on certain products like automobiles, officials also vowed to respond to any additional trade measures against the country.

Despite rising political uncertainty, our panel of analysts forecasts that growth in ESA will only inch down to 6.2% in Q2 2018.

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ESA’s 2018 economic outlook defies the winds of trade protectionism

The economic outlook for ESA remains strong despite mounting concerns about an all-out trade war between China and the United States. Robust global growth is underpinning demand for Asian goods, while buoyant domestic consumption is shoring up overall economic growth. While the impact of the trade dispute between China and the U.S. has been limited for now, a full-blown trade war between the two countries remains a real risk. Another key concern is a more rapid tightening cycle in the United States, which could fuel financial volatility and exacerbate domestic vulnerabilities in the region.

Met the why particular panelists project for the fourth consecutive month that the ESA economy will grow 6.1% in 2018. Reflecting the ongoing economic rebalancing in China and lower growth in the more developed economies of Hong Kong and Taiwan, economic growth for 2019 is seen inching down to 6.0%.

This month’s stable outlook for 2018 reflects unchanged growth prospects for regional heavyweights China and India. Estimates for Bangladesh, Pakistan and Taiwan were also left unchanged. Growth forecasts for Korea, Mongolia and Sri Lanka were downgraded, while Hong Kong was the sole economy to receive an upgrade.

The Indian economy is expected to be the region’s best performer this year, with 7.3% growth, followed by Bangladesh. The Chinese economy is expected to expand a robust 6.5%, while the more mature economies of Hong Kong, Korea and Taiwan will likely be the region’s laggards, with growth rates between 2.6%–3.1%.

CHINA | Growth remains resilient in Q1, while trade war looms

The economy continued to defy fears of a slowdown in Q1, with GDP expanding 6.8% annually for the third consecutive quarter. Strong private consumption and robust real estate and service investments were behind the resilient growth. While exports remained upbeat due to healthy global demand, vigorous domestic demand prompted imports to surge, diminishing the external sector’s overall contribution to growth. Slower credit growth and lower property sales in March signal that domestic demand will likely cool in Q2. Moreover, trade disputes between with the U.S. are clouding the outlook for the all-important external sector. On 23 March, China decided to retaliate with tariffs on 128 U.S. products worth about USD 3 billion in response to levies on aluminium and steel. While President Xi Jinping adopted a more conciliatory tone in April, officials stated that China will strike back against any punitive measure.

With the much-needed economic rebalancing coming alongside resilient growth, the economy appears to be in a sweet spot. That said, downside risks include a cooling housing sector, ongoing financial deleveraging and a potential trade war with the United States. Panelists forecast the economy will grow 6.5% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 6.3%.            

INDIA | Economy remains in good shape in Q1

Recent data suggests that the economic recovery that took hold in Q3 FY 2017 remained intact in the last quarter of the fiscal year, which runs to March 2018. Consumer data was encouraging through the quarter, with both urban and rural demand picking up on ebbing effects from major reforms—including demonetization and the implementation of GST—and higher credit growth. A cyclical recovery in investment is also underway, chiefly fueled through higher utilization of existing capacity. Accordingly, industrial production growth was upbeat in the months to February, while PMI indicators stabilized in March after seesawing in previous months. Nonetheless, optimism remains checked by growing imbalances, mainly related with a widening trade deficit; a mildly expansionary fiscal stance; and numerous risks to inflation.

The economic turnaround is expected to gain further traction this fiscal year. Notwithstanding reports of a cash crunch in several states, a normalization in cash conditions and the fading of GST disruptions should facilitate the economy’s recovery. A FY 2018 budget skewed to benefit rural incomes will also boost private spending. Nonetheless, risks of fiscal slippage and concerns over India’s banking sector cloud the outlook. Our panel expects growth of 7.3% in FY 2018, which is unchanged from last month’s estimate. In FY 2019, panelists see a GDP expansion of 7.5%.

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KOREA | Government revamps trade deal with the U.S.

The economy appears to be in good shape so far in 2018, following a slowdown in the fourth quarter that revised data showed was larger than initially estimated. In March, the external sector capped off a strong Q1, with merchandise exports buttressed by shipments of semiconductors, computing devices and petroleum products. Moreover, in the same month, consumers remained broadly confident about the economy. However, on the flip side, operating conditions in the manufacturing sector deteriorated in March. Meanwhile, on 26 March, the U.S. and Korea agreed to revise their bilateral free trade agreement. The agreement—which would improve U.S. access to Korea’s automobile market and require Korea to curb its steel exports to the U.S. in return for an exemption from higher U.S. steel tariffs—still needs to be formally adopted by both countries. On the fiscal front, in early April the government submitted to parliament an extra budget bill worth approximately USD 3.8 billion, taking advantage of the higher fiscal surplus logged last year.

Increased government spending, along with the possibility of reduced geopolitical tensions on the Korean peninsula, is expected to support economic growth in 2018. However, high household debt and recent government measures to tame increasing housing prices could weigh on activity. Met the why particular panelists forecast the economy will grow 2.9% in 2018, which is down 0.1 percentage points from last month’s forecast, and 2.9% again in 2019.

INFLATION | Inflation recedes in March

Inflation in East and South Asia eased as expected in March as seasonal effects related to the Lunar New Year holidays faded, and food prices were subdued. It fell from a multi-year high of 3.0% in February to 2.4% in March, softening in virtually all countries in the region. Inflation is at particularly low levels in India as increased food supply eases price pressures.

Subdued inflation in the region is giving room to central banks to keep largely accommodative monetary policies. The Reserve Bank of India held rates unchanged at its 4–5 April meeting and lowered its inflation projections for FY 2018—which runs to March 2019. The Bank of Korea also stood pat at its 12 April meeting but warned that, along with the direction of monetary policy internationally, the Bank will keep a close eye on the degree of protectionism among Korea’s trading partners to conduct its monetary policy. On 17 April, the People’s Bank of China announced a cut in its reserve requirement ratio for selected banks. That said, the move was not intended to alter the Bank’s monetary policy but to help banks repay maturing medium-term lending facility loans.

While inflation remains soft in most countries in the region, price pressures are expected to rise going forward as output gaps continue to narrow in the region and commodity prices increase. Panelists polled by Met the why particular project average inflation of 2.7% this year, which is unchanged from last month’s estimate. Inflation is expected to stabilize at 2.7% in 2019.

 

Ricard Torné

Head of Economic Research

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