Thomas White Global Investing

Middle East / Africa: April 2018

June 12th, 2018

Good tidings on political and economic fronts

The Middle East and Africa region witnessed some encouraging political and economic developments during the review period. South Africa, the largest economy under our purview in the region, appeared set for an economic rebound, amply supported by the election of a new head of state in February 2018. Israel’s economy received a boost from its crucial exports sector in the first quarter, while the beleaguered Egyptian economy made steady recovery under the IMF-mandated financial assistance program. The State of Qatar, which has been reeling under the weight of the economic sanctions imposed by some Middle-Eastern countries, announced long-term plans to reduce its dependence on imports. The UAE, a federation of seven emirates, made amendments to its foreign investment norms to attract inflows and diversify its economy away from oil exports.

 

South Africa: GDP data could herald economic recovery

The fourth-quarter GDP data released in March could not have come at a more opportune time for South Africa’s troubled economy. Africa’s most industrialized economy expanded a betterthan- expected 3.1% in the last quarter of 2017, driven by the recovery in trade and agriculture. Trade rebounded in the quarter to expand 4.8%, while the farm sector clocked a 37.5% quarter-onquarter growth, thanks to the improvement in the drought situation. Above all, the election of Cyril Ramaphosa as the leader of the nation’s ruling party late last year, replacing the corruption-tainted Jacob Zuma, also weighed positively on economic growth.

Citing signs of improvement in political climate with the change of guard and the uptick in consumer and business sentiment, the World Bank raised its 2018 growth projection for the country from 1.1% to 1.4%. Nonetheless, the Washington-headquartered organization sounded a note of caution that inequality and unemployment may undermine South Africa’s growth potential.

In another shot in the arm for the South African economy, credit rating agency Moody’s affirmed its “investment-grade” rating and upgraded its credit outlook to “stable” hoping that the gradual strengthening of the country’s institutions would be sustained to support the economic recovery. On the other hand, S&P left its “junk” rating on the economy untouched, taking the view that stronger per capita growth and debt stabilization would be the key to any rating upgrade, according to a Reuters news report. However, the agency raised its growth estimates for the economy from 1% to 2% in 2018 and from 1.7% to 2.1% in 2019.

 

 

Israel: Growth momentum intact in the first quarter

Following upon its strong performance in the fourth quarter of 2017, the Israeli economy expanded an annual 4.2% in the first quarter of 2018, according to a preliminary estimate from the Central Bureau of Statistics. The GDP figure, which came in above analyst estimates, was driven by increased exports, investments and consumer spending. Exports, which make up 30% of economic activity, rose 7.2%, private consumption rose 10.0%, and business investment zoomed 20.3%, Nasdaq.com reported.

The issue of interest rate increases was in focus with the Organization for Economic Cooperation and Development (OECD) urging the Bank of Israel to raise interest rates to prevent overheating in the economy, Reuters reported. Though Israel’s annual inflation rate stood at 0.1% in January, the central bank estimates that inflation will increase to the range of 1-3% by the end of 2018 due to the pressure from rising wages. The OECD has projected 3.5% GDP growth in 2018 and 3.4% in 2019.

 

 

Egypt: Economy on the right track; inflation a concern

Egypt’s GDP expanded at an annualized rate of 5.4% in the third quarter of the current financial year (July 2017 to June 2018), which compares with 4.3% recorded in the same period a year ago. Cairo has undertaken some painstaking reforms as part of its $12-billion loan agreement with the International Monetary Fund (IMF) to kick-start its economy that has been ailing since a 2011 upheaval.

In its mid-term assessment of the economy, the IMF acknowledged the steady progress Egypt has made in implementing reforms. However, it also urged the Sisi administration to focus on the private sector to generate more employment opportunities for the country’s growing number of unemployed youth. The IMF expects the economy to expand 5.2% this fiscal year, compared to 4.1% a year ago.

Egypt’s President Sisi is widely credited with steering the economy in the right direction since he took charge in 2014. While Mr. Sisi could succeed in tackling the fuel shortage in the country, currency reform that devalued the Egyptian Pound has not been well received, according to a Reuters news report. This is not surprising considering rising inflation remains an issue that requires the government’s urgent attention. Though headline inflation came down to 13.3% in March, it still erodes the purchasing power of middle class Egyptians considerably.

 

 

Qatar: Moving beyond sanctions

Faced with a boycott and economic sanctions imposed by some Middle Eastern countries, including Saudi Arabia, Qatar launched a five-year development plan in March to reduce its dependence on imports. The scheme primarily aims to rationalize energy consumption and encourage development of renewable energy, a Reuters news report said. The plan also aims to equip Qatar to meet 30% of its demand for farm animals and 65% of its demand for fish domestically by 2022. The government also plans to curb spending and cut down on money transfers to its sovereign wealth fund, though there will be no pause in infrastructure spending in the run-up to the FIFA World Cup to be hosted by Qatar in 2022.

Notwithstanding the boycott, Qatar’s economy appears to be coping well with the economic impact. Despite a drop in hydrocarbon production in the fourth quarter of 2017, the economy posted real GDP growth of 1.6% for the year 2017 as the non-hydrocarbon sector expanded 4.2%. Encouraged by the resilience of the economy in the face of sanctions and expectations of increased hydrocarbon output and higher crude oil prices, Qatar National Bank raised its 2018 GDP growth projection for the emirate from 2.5% to above 2.8%, a report in Gulf Times said.

 

 

The U.A.E.: Reducing its dependence on oil

The steady rise in oil prices was a morale booster for the United Arab Emirates, a federation of seven emirates, during the review period. Still, the UAE is trying hard to diversify its economy to reduce its dependence on oil. In line with this strategy, the UAE cabinet recently allowed foreign investors to own 100% of UAE-based businesses by the end of 2018. Currently, foreigners are forbidden from owning more than 49% of firms operating out of the UAE. Moreover, investors would also be granted residency visas for up to 10 years to facilitate investments in various industry segments and research areas, Reuters reported. In a related development, the UAE and Japan signed an investment protection treaty to extend the bilateral trade ties beyond the energy sector. Non-oil trade between the two nations came in at $15 billion in 2017, an 8.4% increase over the year before.

Meanwhile, the UAE urged the United States to exempt it from the recently imposed tariffs on aluminum and steel. The UAE, the third-largest exporter of aluminum to the U.S., also ships steel to the world’s largest economy. Likewise, UAE-based airlines are big purchasers of Boeing aircraft, while the UAE government procures defense equipment in bulk from U.S.-based manufacturers.

 

Developed Asia Pacific: April 2018

June 12th, 2018

Japan contracts; Australia loses momentum

Japan, the largest of the economies under our coverage in the Developed Asia region, contracted in the first quarter of 2018. Notwithstanding the blip, the government of Japan appears optimistic about the growth prospects for the economy, citing positive trends in consumer spending, and a rise in exports and capital investment by firms.

Though the resources-driven economy of Australia managed to maintain its growth streak during the review period, exports were hit by bad weather. The International Monetary Fund (IMF) expects New Zealand’s economy to expand 3% in the short term, buoyed by the government’s massive housing construction scheme and increased spending on social services. Singapore Prime Minister Lee Hsien Loong said given the healthy global economic outlook, the island-nation would grow between 1.5% to 3.5% in 2018. However, Mr. Lee acknowledged that growing trade tensions remain a concern. The trade-reliant economy of Hong Kong expanded at a faster-than-expected pace in the first quarter of 2018, driven by healthy private consumption and robust exports.

 

Japan: Blip in growth after long expansion streak

After growing for eight quarters in a row, the world’s third-largest economy lost momentum during the first quarter of 2018. The Asian economy shrank an annualized 0.6% in the first three months of the year due to weak household spending and slowing business investment. Japan’s economy had expanded 0.6% in the fourth quarter of 2017. Still, analysts are hopeful that a robust global economy will trigger a rebound in the economy in the second quarter.

Notwithstanding the blip in growth, the government of Japan sounded optimistic about the overall growth prospects for the economy, citing positive trends in consumer spending, and a rise in exports and capital investment by firms. Japan’s economic growth for the fourth quarter was also revised upward. On the downside, the Bank of Japan has made only minimal progress in achieving its inflation target of 2%.

Prime Minister Shinzo Abe said he would stick to the planned hike in sales taxes next year. Sales taxes are slated to go up to 10% from the current rate of 8% in October 2019. Mr. Abe also ruled out a snap general election, saying his government’s immediate priority is to implement policies announced last year. On the foreign policy front, Mr. Abe said he would visit China in 2018 in an effort to improve bilateral ties with its Asian neighbor.

 

 

Australia: Growth slows as exports hit

The resource exports-driven economy managed to maintain its decades-long growth streak in the fourth quarter of 2017. GDP expanded a meager 0.4% during the period as bad weather hit exports but was offset by robust government spending and a rebound in household consumption, according to a Reuters news report. On an annual basis, the economy expanded only 2.4%, compared to a 2.9% growth in the third quarter.

The Reserve Bank of Australia has maintained a cautious stance on increasing interest rates and kept the rate unchanged at 1.50%. The bank is hopeful of a rebound in exports though it admitted that consumer spending is yet to gather pace as households are reeling under mounting debt. January retail sales data, the latest available, showed only a tepid 0.1% rise in sales.

Looking ahead, Reserve Bank of Australia Governor Philip Lowe expressed confidence that domestic economic growth would pick up pace, thanks to a strong labor market and synchronized global growth. However, Mr. Lowe said U.S. President Donald Trump’s recent imposition of trade tariffs would be detrimental to global trade and the exports-driven economy.

 

 

New Zealand: IMF optimistic about short-term prospects

The International Monetary Fund (IMF) expects the South Pacific economy to expand 3% in the short term, helped by the government’s massive housing construction scheme and increased spending on social services. However, the Washington-based organization also sounded a note of caution on the country’s housing market, a Reuters report said. Though soaring home prices have cooled, household debt remains high, Thomas Helbling, the IMF’s Australia and New Zealand Mission Chief said. The central bank, which has imposed curbs on lending, also proposes to ban foreigners from buying homes to prevent overheating in the market.

Reuters reported that the new government under the leadership of Jacinda Ardern has decided to increase the quantum of foreign aid to ramp up the country’s presence in the Pacific and to counter the growing influence of China. New Zealand would contribute an additional $498.9 million to its regular foreign aid corpus to wean neighboring countries off China’s orbit, the report added. New Zealand and its ally Australia have held sway over the Pacific region for long before China made its presence felt.

 

 

Singapore: Economy seen to clock moderate growth

Singapore looks set to clock modest growth for the year 2018. For the year 2017, the economy had grown a healthy 3.6%, thanks to strong exports. Prime Minister Lee Hsien Loong commented that given the robust global economic outlook, the island-nation would grow between 1.5% to 3.5% during the year. However, Mr. Lee acknowledged that growing trade tensions remain a concern, Reuters reported. Healthy global trade is crucial for the export-reliant economy of Singapore.

Semiconductor manufacturing has given a boost to Singapore’s economy in recent years with production increasing a whopping 48% in 2017. However, the industry’s Singapore Semiconductor Industry Association expects output growth to be moderate in 2018 as the global demand for mobile devices softens. The electronics segment, which includes semiconductor manufacturing, contributes more than 25% of the city-state’s manufacturing GDP, a Reuters news report pointed out.

 

 

Hong Kong: Growth in the fast lane

Hong Kong’s economy recorded a remarkable performance in the first quarter of 2018. The economy expanded an annual 4.7% during the period, the fastest rate of growth in seven years, driven by healthy private consumption and robust exports. On a quarter-on-quarter basis, the economy expanded 2.2% from the fourth quarter of 2017. Private consumption, which accounts for two-thirds of the city’s GDP, increased an annual 8.6% in the first quarter, while exports grew 5.2% on a year-on-year basis.

Buoyed by the first-quarter numbers and the economy’s strong showing in 2017, the Hong Kong government expects GDP growth to be in the range of 3% to 4% in 2018. Financial Secretary Paul Chan said the open economy would benefit from the overall uptick in the global economy. Mr. Chan added that headline inflation is expected to increase to 2.2% in 2018, up from 1.5% in 2017 due to local cost pressures, according to a MarketWatch report. The Asian Development Bank (ADB) has forecast economic growth of 3.2% in 2018 and 3% for 2019, Xinhuanet.com said in a news report.

 

 

 

 

 

Emerging Europe: April 2018

May 17th, 2018

Oil prices offer respite for Russia; Turkey calls early elections

During the review period, the steady rise in oil prices came as a saving grace for Russia, the largest of the economies under our purview in the emerging Europe region. Yet, structural factors such as a declining population and low investments as well as the continuing financial sanctions cloud the economy’s long-term prospects. In Turkey, the surprise call for early elections turned the spotlight on the problems faced by the economy such as slowing growth, soaring inflation and depreciation of its currency lira.

Poland, the largest among the former Soviet satellite states, looks set to sustain its GDP growth rate this year as well after expanding 4.6% in 2017. The political stalemate in the Czech Republic showed no signs of abating as the Prime Minister-in-waiting Andrej Babis is yet to muster the numbers required to form the government. The re-election of Viktor Orban as prime minister ensured policy continuity in Hungary. The largely export-oriented economy is banking on the boom in corporate and household lending to steer economic growth. Greece, which is slowly returning to normalcy, got a shot in the arm as the European Bank for Reconstruction and Development is likely to extend its mandate in the country for five more years.

 

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Russia: Oil prices offer respite amid fresh sanctions

The review period turned out to be a mixed bag for Russia’s economy. While the steady rise in oil prices came as a saving grace for the economy, fresh sanctions imposed in April by the United States were an unexpected shock, clouding the business environment further. The impact of sanctions that targeted some Russian individuals and firms was immediately evident in the stock market rout and the plunge in the ruble. What’s more, it could likely derail the Russian central bank’s plans to reduce interest rates to boost economic growth. Analysts had expected the central bank to trim rates to 7% at its meeting scheduled for June 2018. The sole consolation though is that inflation is expected to remain at 3.4% through the year, below the central bank’s target rate of 4%.

Russia’s economy, which was reeling under the impact of Western sanctions and lower oil prices, had bounced back in 2017, clocking a growth rate of 1.5%. Looking ahead, Russia appears to have pinned its hopes on the football World Cup to be held in the country in June-July this year to spur economic growth. Deputy Prime Minister Arkady Dvorkovich said the preparations for the World Cup had contributed about 1% to economic growth in the last five years and would continue to add to GDP growth in the short term, according to a Reuters news report.

Meanwhile, Vladimir Putin’s re-election as president for the fourth term has turned the spotlight back on economic issues that confront the economy. In addition to structural factors such as a declining population, an unhealthy dependence on the oil and natural gas sector and low investment levels, continuing financial sanctions also bog down the economy. Furthermore, the Putin administration is left with little room to launch fiscal stimulus measures to prop up the economy.

 

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Turkey: Economy in focus as Erdogan calls early elections

By many measures, Turkey’s economy is in good health. Tourism, an important sector that brings in sizable revenues, is on the road to recovery, the banking sector is doing reasonably well, the country’s debt to GDP ratio remains low and above all, last year’s growth momentum still lingers. Still, Deputy Prime Minister Mehmet Simsek acknowledged that current-account deficit and inflation remain the biggest challenges faced by the economy.

President Tayyip Erdogan called snap elections for June 24, advancing the polls originally scheduled for November 2019. Mr. Erdogan said economic challenges and the ongoing war in neighboring Syria demand a powerful executive presidency that would get approval with the fresh vote, according to a Reuters news report. While early elections raised concerns of increasing authoritarianism as it would make Mr. Erdogan more powerful, analysts pointed out that slowing growth – Turkey is expected to expand 4.1% in 2018, below the government’s estimate of 5.5% — would have prompted the president to declare early elections, not to mention the continued depreciation of the lira.

Rating agency Standard & Poor’s cut Turkey’s credit rating to “junk”, citing a bleak inflation outlook and the long-term depreciation and volatility of the nation’s exchange rate, a Bloomberg news report said. S&P warned of a hard landing for the credit-fueled, overheated economy, taking special note of its widening current-account deficit and soaring inflation.

 

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Poland: Economy expected to sustain growth in 2018

Poland appears to be in growth mode, following up on its respectable 4.6% GDP expansion in 2017, rating agency Moody’s reported in an assessment of the economy. Moody’s said Poland’s GDP growth will likely maintain its solid pace in 2018. Observing that Poland’s credit profile reflects robust economic growth, the agency raised its 2018 GDP growth forecast to 4.3% from its earlier view of a 3.5% growth. For 2019, it expects the Polish economy to clock 4.0% growth, revised from its previous forecast of 3.2%. However, Moody’s said uncertainty regarding government policy remains a concern.

The rise of nationalist governments in central and eastern Europe has raised concerns in the European Union over some of their authoritarian policies. Reuters reports that judicial reforms being implemented by the government under the leadership of Prime Minister Mateusz Morawiecki has been a sore point with the European Commission as it holds that the proposed changes undermine the rule of law.

The confrontation had escalated to a level where the EC even sought to suspend Poland’s voting rights in the European Union. Recently, Poland agreed to amend some of the provisions to comply with the requirements of the European Commission.

 

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Czech Republic: Politics still in focus

The political stalemate in the country showed no signs of abating as billionaire Andrej Babis struggles to form the government. Mr. Babis has been functioning as the caretaker prime minister for about five months now. At the crux of the issue are the conditions set by Babis’ potential partner, the Social Democrats, to support him as prime minister. Though Mr. Babis won on the back of his anti-immigrant rhetoric and defiance of the European Union, he has been trying to build bridges with Western governments by projecting himself as a pro-European leader.

Czech Republic’s economy expanded at an annual 5.1% in the last quarter of 2017, the latest quarter for which data are available. The export-oriented economy had registered a 5% growth in the previous quarter. Since the beginning of 2017, Czech GDP has steadily accelerated.

 

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Hungary: Banking on lending boom to propel growth

Hungary witnessed an unprecedented boom in consumer lending in recent quarters, thanks to a double-digit increase in wages and low interest rates. Central Bank Deputy Governor Marton Nagy said the economy needs even faster growth in lending to sustain its expansion, according to a Reuters news report. Mr. Nagy said while corporate lending should grow at an annual 10-15%, household lending can increase at an even faster rate. On its part, the central bank has kept the base interest rate at a record low of 0.9% until 2020. Mr. Nagy added that growth in both corporate and household lending would propel the economy to expand above 4% in the years ahead.

The re-election of Prime Minister Viktor Orban and his Fidesz party in the April elections sets the stage for Mr. Orban to pursue his anti-immigrant and anti-EU policies unhindered. Mr. Orban’s victory points to the increasing popularity of nationalist sentiments in European Union member states.

 

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Greece: On the right track

Greece is expected to exit its third bailout program in August 2018. Moreover, the beleaguered south European economy, which is slowly returning to normality, got a shot in the arm as the European Bank for Reconstruction and Development (EBRD) is considering extending its tenure in the country by five more years. The bank, originally constituted to help the former communist-ruled east European nations in their transition to market economies, has pumped in about $2 billion-worth of investments in Greece over the last two and a half years. The EBRD’s work in Greece includes recapitalization of the country’s four big banks, funding the upgrade of 14 regional airports and financing renewable energy projects, Reuters said in a news report.

Bringing more cheer, Greece exceeded its bailout targets in 2017, the European Commission confirmed. The debt-laden country achieved a budget surplus equivalent to 4.2% of its GDP in 2017, surpassing the 1.75% target set by its lenders, Bloomberg reported.

 

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Emerging Asia Pacific: April 2018

April 2nd, 2018

China expected to decelerate in 2018; Indian economy rebounds

China, the largest of the economies under our coverage in the Emerging Asia Pacific region, was in the spotlight during the review period for a political development that could have far-reaching implications for the country as well as the global economy. Domestically, growth in the world’s second largest economy is expected to slow down in 2018 as the Chinese government bolsters its efforts to curtail risks in its financial system and shuts down polluting factors. The Xi Jinping administration hopes these measures would help generate sustainable economic growth for the long term, notwithstanding short-term economic pain resulting from increasing corporate borrowing costs and slowing factory production. On the other hand, India, the third-largest economy in Asia, appears to be recovering after the sharp deceleration last year, which followed the twin shocks of demonetization and the disruptive rollout of the goods and services tax. South Korea’s economy is expected to benefit from the Winter Olympics held in February, not to mention improving bilateral ties with its estranged neighbor North Korea.

The Indonesian economy expanded 5.2% in the fourth quarter from the year-ago period, helped by a rebound in exports though consumer spending remained tepid. While Malaysia’s export growth is seen to moderate in 2018, monetary policy remains tight and high level of household debt is likely to restrain consumer spending. Thailand’s GDP growth came in at 4% year on year in the fourth quarter, below the consensus estimate of 4.4%. Taiwan’s economy, that is renowned for manufacturing and exports of memory chips and precision parts, registered higher export growth in January, helped by robust global demand for its products. The Pacific economy of the Philippines, that has the distinction of growing above 6% for six years in a row, also stands to gain from President Duterte’s massive $180-billion infrastructure building scheme to construct roads and railway lines.

China: Growth expected to decelerate in 2018

The world’s second-largest economy registered fourth quarter GDP growth of 6.8%, which beat analyst estimates. For the year 2017, the economy expanded 6.9% even as the government initiated economic restructuring. The positive data highlighted the fact that while old economy sectors such as heavy industries and housing-related segments slowed, services, some parts of the manufacturing sector, and high-tech industries displayed robust growth, as a CNBC report pointed out. To be specific, the services sector contributed about half of GDP in the quarter, while the farm sector accounted for about 10%. The services sector expanded 8.3% in the quarter from the year-ago period, while agriculture sector grew 4.4%.

Bringing more cheer, the country’s industrial output expanded at a faster clip in the first two months of 2018. Industrial production advanced 7.2% year on year, compared to estimates of 6.1% growth. Urban fixed-asset investment rose 7.9% during January-February from 7.2% in December.

Moreover, consumers also seemed to loosen their purse strings as retail sales grew 9.7% on a year-on-year basis during the period.

Yet, the Chinese government was realistic in acknowledging the effects of the painful restructuring program it has undertaken as it expects economic growth to decelerate to 6.5% in 2018. Chinese policy makers have been trying to rein in financial risks and slow the ballooning build-up of debt without upsetting economic growth. Shutting down inefficient, polluting factories is a part of the government’s program to generate sustainable economic growth in the long term.

Meanwhile, the recent decision of the National People’s Congress to rescind term limits for presidency has received much global attention as it would allow Mr. Xi Jinping to remain president for life. While some have hailed the move as one that would lead to more political stability in China, it has been pointed out that the dependence on a single person’s health, perceptions and judgement may pose a long-term challenge for both China and the global economy.

 

 

India: Economy on the mend

The Indian economy expanded at a 7.2% annual rate in the October-December quarter. This continues the country’s rebound from last year’s slowdown due to the demonetization of high-denomination currency notes in November 2016 and teething troubles related to the rollout of a nationwide goods and services tax (GST) in July 2017. The construction sector grew 6.8%, manufacturing rose 8.1%, and the farm sector expanded by 4.1% during the review period. The International Monetary Fund has forecast that the economy will expand 7.4% in 2018 and 7.8% in 2019, while rating agency Moody’s expects India to grow 7.6% in 2018. Moody’s had raised the country’s investment grade rating in November 2017.

The healthy economic data do not seem to be an aberration as factory production increased and retail inflation softened at the turn of 2018. The index of industrial production expanded by 7.5% in January, which was better than analyst expectations. At the same time, retail inflation fell to 4.4% in February 2018 from 5.1% in January, giving the Reserve Bank of India the leeway to hold off on interest rate hikes for now.

However, certain domestic and global factors could play spoilsport with the still nascent economic recovery. The banking sector is reeling under bad loans that deter the flow of investments into the economy, while the recent fraud at a leading government-owned bank has dented investor confidence. Export growth is yet to gather pace and GST-related issues still need to be ironed out. U.S. President Trump’s protectionist policies such as the recent imposition of tariffs on steel and aluminum imports may not have an immediate economic impact as India’s share of steel exports to the U.S. is negligible. However, domestic prices could come under pressure due to the trickle-down effect of possible retaliatory tariffs on global steel prices.

 

 

South Korea: Growth slows as exports slump

The economy slowed down in the fourth quarter of 2017 due to a long holiday that curtailed industrial production, while the robust overseas sales of computer memory chips was offset by the slump in automobile exports, a Reuters news report said. GDP growth slowed down to 3.0% in the quarter from the year-ago period, compared to 3.8% in the third quarter. Exports dropped 5.4% in the review period, while construction investment fell 3.8% as the government plans to curb excessive borrowing to discourage consumers from owning multiple homes. Private consumption, which increased 1.0%, proved to be the saving grace for the economy during the fourth quarter.

Seoul expects the February Winter Olympics will give a boost to economic growth this year. As well, the signs of improving bilateral ties with its estranged neighbor North Korea also bode well for the largely export-reliant economy.

On its part, the Bank of Korea has maintained an accommodative monetary policy as it left the interest rate unchanged at 1.50% in its review meeting on January 18. The BOK forecasts growth at 3% for the year 2018 and expects inflation to remain a tad lower at 1.7% from its previous view of 1.8%.

 

 

Indonesia: Exports drive economic growth

The economy expanded 5.2% in the fourth quarter from the year-ago period, better than expected, helped by a rebound in exports though consumer spending remained tepid. Exports increased 8.5% during the quarter, while retail sales edged up by a meager 2.6%.

Factory activity in the economy expanded in February, primarily driven by higher output and new orders, a report in Financial Times said. The Nikkei-Markit manufacturing index showed a reading of 51.4 in February, from 49.9 in January, the fastest pace of growth recorded since June 2016. Improving domestic demand helped offset the dip in overseas demand for goods manufactured in Indonesia.

The International Monetary Fund (IMF) also acknowledged the strength of domestic demand when it projected medium-term economic growth for the country to be around 5.6%. The Washington-based organization said it expects annual inflation to be about 3.5%. The IMF also forecast that the current-account deficit would remain steady at 2% of GDP due to stable commodity prices and robust exports. While praising Indonesia’s economic management, IMF Managing Director Christine Lagarde urged the Joko Widodo administration to boost its GDP growth rate to create more employment opportunities.

 

 

Malaysia: Slowing exports to hit economic growth

The south-east Asian economy grew at a rate of 5.9% year-on-year in the fourth quarter of 2017, slower than the 6.2% expansion in the quarter before. The services sector, the mainstay of the economy that contributes more than half of GDP, rose 6.2% in the quarter, helped by retail and wholesale trade. Manufacturing expanded 5.4%, thanks to increased demand for electrical products, according to a Financial Times report. Overall growth in the year 2017 increased to 5.9%, from 4.2% recorded in 2016. However, the prospects for the economy in 2018 do not seem as bright. While export growth is seen to moderate, monetary policy remains tight and a high level of household debt is likely to restrain consumer spending, a Capital Economics forecast said.

To rein in inflation, Malaysia’s central bank increased interest rates to 3.25% in January 2018, the first rate hike in more than three years. However, the bank left its key interest rate unchanged in its policy review in March as inflation has eased to about 3% after touching 5.1% early in 2017 and the pace of economic growth is expected to decline.

 

 

Thailand: Growth seen to remain largely intact

Despite registering growth for the fifteenth quarter in a row, Thailand’s economic expansion fell short of analyst estimates in the fourth quarter of 2017. Growth came in at 4% year on year in the quarter, below the consensus estimate of 4.4%. Manufacturing and tourism were the main drivers of growth during the review period. The manufacturing segment expanded 3%, while tourism-related sectors grew 4.6%. Looking ahead, while the rebound in tourism looks encouraging, GDP growth will keep the current pace as exports are likely to face headwinds, a forecast from Capital Economics said. Thailand, which receives tourists primarily from mainland China and other Asian countries, anticipates hosting about 37 million tourists in 2018. Capital Economics expects Thailand’s GDP growth to average 4% in 2018.

Encouragingly, exports from Thailand increased at the fastest pace in five years in January, according to a Financial Times report. In terms of numbers, exports rose 17.6% year on year during the month, while imports too increased 24.3%.

 

 

Taiwan: Exports keep the economy humming

Taiwan’s economy expanded 3.3% year-on-year in the fourth quarter of 2017, which came in well above the government’s estimate of a 2.4% increase. The economy, which is renowned for manufacturing and exports of memory chips and precision parts, registered higher export growth in January, helped by robust global demand for its products. Export orders rose 19.7% in January compared to the year-ago period, the highest rate of growth clocked in the past twelve months. Region-wise, export orders from China rose 31%, while U.S.-bound exports increased 16.3%, according to a Reuters news report. Taking into account the strong export numbers, Taiwan now expects economic growth in 2018 to be around 2.4%, compared to its earlier view of a 2.3% expansion.

Being an export-dependent economy, Taiwan is vulnerable to the fluctuations in economic fortunes of its main trade partners such as China and the United States. That being said, exchange rates could impact the economy more than interest rate hikes. Needless to say, a weak Taiwanese Dollar helps to keep its exports competitive. Moreover, Taiwan is being talked about as a potential member of the Trans-Pacific Trade Partnership, a trade deal that is being revamped after President Trump pulled the United States out of the original 12-country pact.

 

 

Philippines: Growth momentum intact

The Philippines clocked GDP growth of 6.7% for the year 2017, earning the distinction of growing above 6% for the sixth year in a row. For the fourth quarter, the economy registered year-on-year growth of 6.6%. Consumer spending, which contributes about 70% of GDP, climbed 6.1% in the fourth quarter. Government spending increased 14.3%, while investment rose 8.2%. The Pacific economy also stands to gain from President Duterte’s massive $180-billion infrastructure building scheme to construct roads and railway lines. However, the mammoth government spending has put a strain on the country’s budget, stoking inflation fears. It is widely expected that the central bank will proceed with a rate hike in the first quarter of 2018.

Acknowledging the strong economic growth, the Philippine central bank said the fourth quarter and 2017 GDP figures confirm the underlying strength of the economy, according to a Reuters news report. Central Bank Governor Nestor Espenilla said the Philippines’s vast foreign reserves provide ample defense against capital outflows. Mr. Espenilla said the country is expected to have posted a current account deficit of $100 million in 2017.

 

Developed Asia Pacific: January 2018

March 20th, 2018

Japan’s pace of growth slows; Australia wary on rate hike

Japan, the largest of the economies under our purview in the Developed Asia region, continued to expand in the fourth quarter, though the pace of growth slowed down to just 0.1% on a quarteron- quarter basis, compared to a 0.3% in the previous quarter. While both domestic demand and private consumption registered growth, capital expenditure fell short of expectations. The Shinzo Abe administration expressed confidence in Bank of Japan Governor Haruhiko Kuroda by re-appointing him for a new five-year term, signaling that the bank’s loose monetary policy would continue in the near term. The Reserve Bank of Australia is likely to maintain a cautious stance on increasing interest rates in 2018, given the tepid rise in wage growth and inflation in the country. The bank holds a healthy view of the domestic economy as unemployment has steadily declined amid a synchronized acceleration in the global economy.

While global factors have always impacted export-driven New Zealand’s economic fortunes, domestic factors now also appear equally important for the South Pacific economy. Based on its upbeat assessment for the city-state’s manufacturing sector, Singapore’s trade ministry expects the economy to expand above the middle of the 1.5%-3.5% range in 2018. The trade-dependent economy of Hong Kong recorded a blip in growth during the fourth quarter, expanding 3.4% year on year, compared to a 3.6% growth in the previous quarter. Taking into account the moderation in growth and the fiscal surplus the territory currently enjoys, Financial Secretary Paul Chan is likely to present an expansionary budget.

 

Japan: Pace of growth slows; Kuroda gets second term at BoJ

The world’s third largest economy continued to expand in the fourth quarter, though the pace of growth slowed down to just 0.1% on a quarter-on-quarter basis, compared to a 0.3% in the previous quarter. While both domestic demand and private consumption registered growth, capital expenditure fell short of expectations. External demand remained unchanged from the third quarter as exports rose 2.4%, while imports increased 2.9%. Thanks to the robust rise in shipments to China and Asia, exports jumped 9.3% year-on-year in December 2017. Despite the increase in exports, the rising yen appears to have dented business confidence.

Meanwhile, the Shinzo Abe administration offered a nod of confidence in Bank of Japan Governor Haruhiko Kuroda by re-appointing him for a new five-year term, signaling that the loose monetary policy would continue for the near term. In his new term, Mr. Kuroda faces challenges including a rising yen that threatens to undermine the profits of exporters.

With President Trump pulling the United States out of the Trans-Pacific Partnership (TPP), Japan has taken the lead to forge a new partnership among the remaining 11 members.

The new trade pact, tagged Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), is likely to be signed in Chile shortly. While Japan is still hopeful that the U.S. would return to TPP, Mr. Trump has said Washington would reconsider the pact if it got a better deal, according to a Reuters news report. Japan’s chief negotiator Kazuyoshi Umemoto said he was confident Canada would sign the deal.

 

 

Australia: Central bank to tread cautiously on rate hikes

Given the tepid rise in wage growth and inflation, the Reserve Bank of Australia is likely to maintain a cautious stance on increasing interest rates in 2018. The bank holds a healthy view of the domestic economy as unemployment has steadily declined amid a synchronized acceleration in the global economy. Still, annual wage growth has remained at 2%, much lower than the bank’s target of 3.5%.

The low rise in wages also constrains consumer spending amid rising levels of household mortgage debt. Yet, the pick-up in retail sales in the fourth quarter and increased government spending on infrastructure brought cheer.

Housing, a crucial segment of the economy, rebounded in the beginning of 2018 as the demand for apartments showed a phenomenal increase. According to statistics based on the number of new building approvals, January saw a 17.1% increase on a month on month basis, compared to a 20.6% fall in December, a Financial Times report said.

 

 

New Zealand: Uncertainties cloud economic outlook

The country’s services sector recorded slow growth in January 2018 as new orders fell to their lowest levels seen in 10 months, according to a Reuters news report. The index showed a reading of 55.8 during the month. Specifically, the index that keeps track of new orders and business dipped to 57.6, the first time it came below 60 since April 2017, the report added.

Global factors always had a bearing on the export-reliant economy’s fortunes. However, domestic factors also appear equally important for the economy in the present context. Though Jacinda Ardern’s election as prime minister appeared to clear political uncertainty in the South Pacific nation, business confidence has been on the wane with the center-left government coming to power. Besides the anticipated fall in home prices and the proposed reforms at the central bank, natural factors such as the prospect of a severe drought stare the economy in the face.

 

 

Singapore: Growth seen moderating in 2018

After expanding 5.2% year on year in the third quarter, the city-state’s economy seems to have slowed down in the fourth quarter of 2017. On an annual basis, GDP increased only 3.6%, compared to the same period a year ago due to the contraction in manufacturing and construction segments. The economy expanded 2.1% from the previous quarter. The services sector that accounts for two-thirds of the economy recorded a 6.3% annualized growth in the fourth quarter. Singapore’s economy expanded 3.6% in 2017, thanks to robust global demand for electronics goods and semiconductors.

Notwithstanding the quarterly contraction in manufacturing due to moderating demand, the prognosis for the sector that produces electronics goods and precision parts is positive for 2018.

Based on its moderately upbeat view for the manufacturing sector, Singapore’s trade ministry expects the economy to expand above the middle of the 1.5%-3.5% range in 2018, a Bloomberg news report said. Given the economic outlook for the year, the Monetary Authority of Singapore (MAS) might tighten policy in 2018.

 

 

Hong Kong: Increased spending likely as growth dips

The trade-reliant economy of Hong Kong recorded a blip in growth during the fourth quarter, expanding 3.4% year on year, compared to a 3.6% growth in the previous quarter. While strong consumption as well as exuberant stock and property markets boosted economic growth, potential headwinds include the likely increase in U.S. interest rates in 2018 and easing of capital inflows from China. However, the economy grew at the rate of 3.8% year on year in 2017, higher than analyst estimates, helped by healthy domestic demand and lower unemployment. The city’s government expects economic growth in range of 3 to 4% in 2018.

Taking into account the moderation in growth and the fiscal surplus the territory enjoys, Financial Secretary Paul Chan is likely to present an expansionary budget, according to a Reuters news report. Tax relief for innovative industries and investments in sectors such as fintech, biomedical science, and artificial intelligence could be included in the budget, the report pointed out.

 

 

 

 

 

Middle East / Africa: January 2018

February 28th, 2018

Positive developments across the region

The Middle East and Africa region reported an encouraging set of news for the period between November and January. The largest economy under our coverage in the region, South Africa, saw a leadership change that is expected to usher in greater political stability. Israel’s all-important export sector remained robust, despite currency pressures, and the outlook for the Egyptian economy improved on the back of foreign currency and foreign investment inflows as well as a major gas discovery. Qatar stayed resilient amid geopolitical complications while the UAE’s non-oil sector continued to see robust activity.

 

South Africa: Leadership change promises greater political stability

South Africa releases its GDP data rather late, but recent developments indicate that after recording a comparatively strong third quarter, Africa’s most industrialized economy likely lost a bit of its momentum in the November-January review period.

Indeed, the three months until October 2017 witnessed several improvements in the country – the mining, manufacturing and financial services sectors registered faster growth while the drought-hit farm sector experienced a strong revival. However, according to the International Monetary Fund’s (IMF) latest “World Economic Outlook,” these advances may not be adequate to ensure a sustained recovery for South Africa in the quarters ahead. Citing the growing adverse impact of political uncertainties on business confidence and investment, the IMF has cut its 2018 and 2019 growth projections for the country (from 1.1% to 0.9% in 2018 and from 1.6% to 0.9% in 2019).

Given the widespread allegations of corruption and influence-peddling in the previous Jacob Zuma administration, the IMF’s pessimism does not appear to be misplaced. Nonetheless, the good news is that the recent resignation of Mr. Zuma and subsequent election of Cyril Ramaphosa as the new president promises greater political stability for South Africa in the near future. Reuters reported that Mr. Ramaphosa, who won the race to succeed President Jacob Zuma as ANC leader in December, has promised to attack corruption and kick-start growth, and the stock market rally following his election signals improved investor sentiment around South Africa.

In other developments, a looming water crisis amid the persistent drought in the Western Cape region of the country is threatening to hurt the entire South African economy. Commentators have predicted that in the event of taps running completely dry in the region, including the popular tourist destination Cape Town, South Africa may witness disruptive mass exoduses, diminished tourist inflows and even credit downgrades.

 

 

Israel: Export sector still robust despite currency pressures

The Israeli economy ended 2017 with its strong momentum intact. According to the country’s Central Bureau of Statistics, GDP expanded at an annualized rate of 3.6% between October and December, beating estimates but slowing down slightly from the third quarter. For the year 2017, the economy clocked 3.3% growth, which was faster than the forecast of 3%. Israel’s central bank has said that 2017 saw more broad-based growth compared to previous years as both exports and consumer spending contributed to the economic expansion.

In fact, the most significant news of the fourth quarter came from the export sector, which accounts for 30% of economic activity in Israel. The sector expanded 7.7% between October and December, signaling its ability to shrug off the impact of a strong domestic currency on a sustained basis. After plunging 8.8% in the second quarter owing to an appreciating shekel, exports did bounce back in the third quarter, but their recovery was largely due to the sales of startups. Against this backdrop, fourth-quarter export data was widely expected to provide cues to the general health of the export sector amid currency pressures.

In other developments, government spending jumped 9.7% in the fourth quarter, while private spending edged up 1.3% and investment in fixed assets actually diminished 5.5%. News from the labor market was also mixed. Between the third quarter and the fourth, Israel’s unemployment rate rose from 4.1% to 4.2%. However, for the year 2017, the unemployment rate slipped to 4.2% from 4.8% in 2016.

 

 

Egypt: Foreign currency and investments rise following major oil find

Egypt’s GDP grew at an annualized rate of 5.3% between October and December, its second quarter of the current financial year (July 2017 to June 2018). The same period a year ago had recorded 3.8% growth, which shows that the economy has been improving steadily since the beginning of its reforms program in November 2016. As a part of its agreement with the IMF, Cairo is overhauling the economy in exchange for a $12 billion loan. The reforms, which comprise a range of measures, seek to attract more foreign currency and foreign direct investments, besides curbing the budget deficit.

Speaking of foreign currency and foreign direct investments, Egypt reported a series of positive developments in recent months. Encouraged by reforms since the end of 2016, a devalued currency and, most importantly, a recent major gas find off the Egyptian coast, investors appear to be increasingly optimistic about Egypt’s prospects in the medium to long term. In November, Italian oil and gas company Eni reported the discovery of what is believed to be the largest ever offshore natural gas field in the Mediterranean. Given that the Zohr gas field lies in the Egyptian sector of the Mediterranean Sea, Egypt is likely to not just stop importing liquefied natural gas but also become a net exporter of gas by next year.

Soon after this discovery, foreign holdings of treasury bills reached a record high in December and the same month saw the Egyptian central bank’s foreign reserves soar to $37 billion from $24 billion a year ago. The foreign fund inflows are expected to help the country deal with its chronic balance of payments and trade deficit problems.

 

 

Qatar: Rating affirmation shows economy coping well with sanctions

During the latest review period, Qatar showed several signs of coping well with the economic sanctions imposed by some Middle-Eastern countries, including Saudi Arabia. The boycott of Qatar was announced in June 2017 on allegations that the country supported terrorism and destabilized the Middle East. The sanctions have taken a toll on the Qatari economy and, according to a Moody’s estimate, Qatar spent as much as 38.5 billion USD, or 23% of its GDP, to prop up its economy in the first two months of the sanctions alone.

However, S&P’s recent affirmation of Qatar’s long- and short-term ratings indicates that the country has been managing the economy well over the past few months. On its part, Fitch has announced that it expects Qatar’s fiscal deficit will narrow despite the economic blockade. Both S&P and Fitch have expressed optimism about the Qatari government’s infrastructure building program and strong finances.

 

 

The U.A.E.: Recovering oil prices, robust non-oil sector activity improve outlook

Thanks to recovering oil prices and the strength of the UAE’s non-oil sector, this year is expected to be better for the UAE economy. According to the UAE Ministry of Economy, GDP growth is likely to accelerate to 3.9% in 2018 while the IMF has pegged the 2018 GDP growth rate at 3.4%. To put these forecasts into perspective, the IMF projected just 1.3% growth in 2017. The most recent IHS Markit-produced Emirates NBD survey, which tracks activity in the UAE’s non-oil sector, shows that the IMF’s optimism is not misplaced. The survey indicated continued gains in output, new orders and employment in non-oil companies. The Emirates NBD report also noted a “marked improvement” in business confidence in January.

 

Emerging Europe: January 2018

February 22nd, 2018

Uptick in the Euro-zone, manufacturing bolster regional growth

Russia, the largest of the economies under our purview in the Emerging Europe region, continued to benefit from steady oil prices during the review period. More importantly, the economy seems to have become less vulnerable to the fluctuations in oil prices, being able to balance its budget even at $53 a barrel by 2019. Low inflation would give the Russian central bank the leeway to reduce interest rates further. The dip in inflation, a significant increase in tourism revenues and the government’s fiscal support of specific sectors bode well for Turkey’s economy.

Poland’s economy expanded 4.6% during 2017, driven by domestic demand and higher economic activity in the region and the European Union, its main trade partners, according to a Reuters news report. Household consumption, that contributes about 61% of GDP, expanded 4.7% in 2017, aided by government spending and higher wages. The Czech Republic’s central bank said it would continue to normalize interest rates to rein in rising inflation. The overall economic uptick in the central and east European region and the Euro-zone as well as low unemployment helped the small, export-oriented economy of Hungary to clock healthy growth rates in recent quarters. On the domestic front, the double-digit increase in wages coupled with low interest rates has fueled an unprecedented boom in consumer lending. The beleaguered south European economy of Greece appears to be making small strides toward returning to normality, the latest green shoot being the rebound in the manufacturing sector.

 

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Russia: Low inflation a positive; oil prices provide support

Low inflation is giving a boost to domestic consumption, Russian central bank governor Elvira Nabiullina reported. The government expects inflation to remain below the central bank’s target of 4%, according to a Reuters news report. Thanks to low inflation, the central bank has the leeway to reduce interest rates. However, Ms. Nabiullina acknowledged that the economy is still dependent on oil prices but has become less vulnerable to fluctuations in energy prices. In a related development, the Russian government is set to revise its oil price forecast upward for 2018 after the world’s major oil producers, including Russia, agreed to extend cuts to oil production.

Notwithstanding Russia’s reliance on oil prices, the breakeven price for crude oil to balance the country’s budget has progressively come down over the years and is slated to touch a modest $53 a barrel by 2019. Needless to say, the government’s cost-cutting efforts and curbs on corruption helped, a conscious shift in strategy from reckless public spending on projects fueled by higher oil prices during the boom years.

Meanwhile, Russia’s economy, which has rebounded from a two-year recession, seems to have bumped into a roadblock again. In a surprise development triggered by a slip in industrial production, the economy contracted 0.3% year on year in November 2017. Industrial output shrank 3.6% from the year-ago period, partly due to the production cuts by major oil producers and the warm weather that dampened the demand for natural gas in both domestic and foreign markets.

Conversely, Russia’s manufacturing sector continued its expansion spree in January, the sixth month in a row, thanks to new orders, complementing the growth in the services sector.

Taking into account the November contraction, the government said the economy expanded by 1.4% in 2017, lower than its previous view of 2.2% growth. Looking ahead, however, the economy ministry is optimistic that growth will rebound to about 2% in 2018.

 

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Turkey: Government proposes stimulus for select sectors

Turkey’s annual consumer price inflation for the month of January touched 10.4%, the lowest rate recorded since July 2017. This was due to base effects and lower food inflation that was below expectations, according to a bne IntelliNews report. Consumer prices rose by 1.02% month-on-month in January. Still, with inflation expected to remain above the central bank’s target for the year, the monetary policy committee of the bank is unlikely to resort to monetary easing in the near term despite pressure from the Erdogan administration to cut interest rates. The central bank’s official inflation target is 5%, though it forecast consumer price inflation to be at 7.9% by the end of 2018.

Bringing more cheer, Turkey’s tourism revenues marked a significant increase to about $26 billion in 2017. The uptick was mainly attributed to the resumed inflow of Russian tourists as the bilateral ties improved after the diplomatic row that followed Turkey’s downing of a Russian plane. Revenues from tourism are crucial in bridging Turkey’s wide current account deficit.

Meanwhile, Turkey’s government decided to continue the fiscal stimulus measures that breathed new life into the moribund economy last year. Economy Minister Nihat Zeybekci proposed a $21-billion investment in sectors such as healthcare and energy to reduce the country’s dependence on imports. Tax holidays for 10 years, government subsidies on employee insurance premiums and loans at attractive interest rates are some of the incentives being offered to firms that are participating in the scheme.

 

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Poland: Consumption, exports boost economic growth

The European Bank for Reconstruction and Development (EBRD) that oversees some 37 emerging economies in the region had forecast solid growth for several countries in 2017 due to the increase in wages and robust demand from the Euro-zone.

Not surprisingly, Poland’s economy expanded 4.6% during 2017, driven by domestic demand and higher economic activity in the region and the European Union, its main trade partners, according to a Reuters news report. Household consumption, which contributes about 61% of GDP, expanded 4.7% in 2017, aided by government spending and higher wages. Retail sales recorded a 9.2% year-on-year increase in December. The country, which is dependent on exports as well, benefited from a boost in economic activity in the region, including Germany, the top destination for its exports.

Moreover, investment into buildings and roads rose 5.4%, thanks to the increased availability of European Union funds. However, monetary policy makers cautioned that rising wages due to labor shortages could push inflation above the central bank’s target of 2.5%. The bank had left interest rates unchanged at 1.50% in January 2018.

On the political front, Poland’s new government under the leadership of Prime Minister Mateusz Morawiecki secured a vote of confidence in parliament in December. Mr. Morawiecki said while the focus on public spending and building domestic capital would continue, his administration will strive to improve the country’s foreign relations. He added that Poland is in talks with Hungary to form a development bank to make investments in the infrastructure sector in the region with the cooperation of Slovakia and the Czech Republic.

 

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Czech Republic: Political stalemate continues

Incumbent President Milos Zeman was re-elected for another five-year term in the polls held in the last week of January. Though the president has only a ceremonial role in country’s political system, his election assumes significance given the prevailing political uncertainty. Mr. Zeman has ardently backed billionaire Andrej Babis, who heads a minority government as prime minister. Moreover, Mr. Zeman’s anti-immigration stance and his perceived closeness to Russian President Vladimir Putin could have a bearing on the Czech Republic’s relationship with the European Union. The political impasse in the country, if left unresolved, is likely to hamper foreign investments in the country.

The Czech Republic that has registered fast growth in the recent quarters is displaying signs of overheating, Central Bank Governor Jiri Rusnok said, according to a Reuters news report. Mr. Rusnok added that the central bank would continue to normalize interest rates to rein in rising inflation. The central bank raised interest rates twice since August 2017 after keeping it close to near zero for nearly five years.

 

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Hungary: Consumer confidence highest in 15 years

The overall economic uptick in the central and east European region and the Euro-zone as well as low unemployment has helped the small, export-oriented economy of Hungary to clock healthy growth rates in the recent quarters. On the domestic front, a double-digit increase in wages coupled with low interest rates have fueled an unprecedented boom in consumer lending, giving a big boost to Hungarian banks’ profits. Predictably, consumer confidence in Hungary touched a 15-year high in December. Despite the surge in loan growth, the Hungarian central bank is confident that tight lending standards imposed after the financial crisis of 2009 would allay fears of a credit bubble. Credit ratings agency Moody’s said robust growth in Eastern Europe, fueled by higher consumption and low levels of private sector debt, gives ample room for credit expansion, Reuters reported.

Credit ratings agency Fitch upgraded Hungary’s sovereign credit outlook to “positive” from “stable”, citing high current account surplus and good inflow of European Union funds, among other factors. The agency expects GDP growth to be 3.5% in 2018, driven by consumption, low unemployment, rapid rise in wages and subdued inflation.

 

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Greece: Factories start humming again

The beleaguered south European economy appears to be making small strides toward returning to normality, the latest green shoot being the rebound in the manufacturing sector. The uptick has to do with both domestic and external factors: falling wages have brought production costs down substantially, while the economic recovery in the Euro-zone has given an unexpected boost to Greece’s exporters. Small wonder that manufacturing, which makes up about 10% of the domestic economy, has recorded growth for several months in succession. The increase in tourism revenues also bodes well for the economy that has expanded for three quarters in a row. Athens hopes to exit its third international bailout program in 2018, after years of painstaking reforms that included massive cuts in public spending and privatization of government-owned firms.

Still, talks about a complete turnaround may be premature. Greece continues to have the highest unemployment rate in the Euro-zone at 21%. What’s more, national debt stands at a whopping 180% of the country’s economic output, limiting fresh government spending. Understandably, the private sector has to pick up the slack to keep the economy humming.

 

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Developed Europe: October 2017

December 8th, 2017

Growth picks up; political uncertainty in Germany, Spain

Following an excellent second quarter, the Developed Europe economy showed further improvement during the August-October review period. GDP in the single-currency Euro-zone, the largest and most significant part of Developed Europe, expanded 0.6% in the third quarter, matching the growth rate clocked in the second quarter. Year-on-year, the Euro-zone grew 2.5%, the fastest since early 2011. Not surprisingly, the European Commission has declared that 2017 will most likely see the Euro-zone post its best annual performance in a decade. What’s more, in October, the International Monetary Fund (IMF) raised its outlook for global growth citing the Euro-zone as the main reason for the upgrade.

Indeed, the Euro-zone appears to have garnered strong momentum now as its primary growth engine, Germany, continues to hum along and member economies that have been laggards until recently, such as Italy, seem to have turned the corner. During the third quarter, Germany’s GDP growth accelerated on the back of robust exports and investments while Italy remains on track to register its best yearly performance since 2010.

The Euro-zone has one persistent concern though. The currency area’s inflation growth remains largely inconsistent, which means that the efforts of the European Central Bank (ECB) to ensure a sustained price recovery have not succeeded so far. In October, the Euro-zone’s annual price growth declined to 1.4% from 1.5% in September. What’s worse, core inflation, which excludes volatile food and energy prices, fell below 1% for the first time in five months.

Given this situation, the ECB has adopted a conservative approach toward withdrawing its bond-buying stimulus program, despite the robust economic conditions. At its most recent policy meeting, the central bank decided to halve bond purchases beginning in January and to not raise interest rates until 2019.

 

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Germany: Economy robust but political uncertainty mars short-term outlook

The latest review period saw Germany retaining its pre-eminent position as the main growth driver of Developed Europe. But, political uncertainty following federal elections in September marred the optimism surrounding the country. Germany’s seasonally adjusted GDP climbed 0.8% between the second quarter and the third, outpacing the 0.6% quarterly expansion recorded at the end of June. The growth acceleration was chiefly driven by strong exports and business investments.

Overseas sales jumped 1.7% from the second quarter, accounting for half of the overall GDP growth between July and September. This data is significant since it marks the likely return of exports as the key driver of the German economy, which has relied on private consumption, state spending and a booming construction sector in recent quarters. Among other indicators, investments in machinery and equipment climbed 1.5% in the third quarter, but construction investment fell 0.4%. Household spending too slipped 0.1% and government spending stayed flat.

Notably, a comparison between the third quarter and the second reveals an interesting contrast. In the second quarter, both household spending and construction investment contributed significantly to GDP growth while net trade had a negative impact on growth. The situation appears to have reversed in the third quarter when exports drove the economy while household spending and construction investment faltered.

Nonetheless, this is unlikely to develop into a trend as the outlook for household spending remains positive amid the surge in business investment. As investments pick up speed, hiring is expected to gain momentum, which should boost consumption. In fact, given the current resurgence in exports, the German economy seems set to benefit from both domestic consumption and global trade in the coming quarters.

Be that as it may, there is a bit of trouble for Germany in the near term. After the federal elections in September yielded a fractured mandate, Chancellor Angela Merkel has been struggling to bring together rival factions to form a coalition government. So, until a new government is cobbled together, or a second vote is held for a fresh mandate, political stability may elude Germany.

 

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The U.K.: Modest growth despite Brexit fallout

At the end of September, the U.K. economy expanded 0.4% from the second quarter and 1.5% from the same period a year ago. The quarterly growth rate exceeded expectations as most analysts had projected a slower pace of expansion in view of the Brexit-related uncertainties prevailing in the country. The services, manufacturing and auto sectors contributed significantly to the third-quarter performance. However, growth was not broad-based. For example, while construction output declined 0.7% between the second quarter and the third, industrial production went up 1.0%. On the whole, most third quarter data showed that Brexit-related uncertainties took a toll on the economy.

The services sector, which accounts for two-thirds of GDP in the U.K., expanded at a modest pace in September, with sales growth decelerating to the lowest rate since August 2016. Notably, consumer spending was chiefly responsible for the moderate sales growth while new orders from businesses actually declined, signaling that business confidence has been subdued lately. Separate surveys of the U.K. manufacturing and construction sectors also showed a mixed picture in September.

In the coming quarters too, the outlook for the British economy appears to be muted. The U.K.’s Brexit negotiations with the European Union have started, but the discussions remain mired in complexity, without any significant headway. So, business confidence is expected to stay subdued for a while now. Unfortunately, consumer confidence in the country has also been weakening since the middle of 2017 and the recent interest hike rate by the Bank of England is likely to exacerbate the problem.

 

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France: Labor reforms unveiled amid continued strength in the economy

France reported a mixed set of data in the latest review period. The economy grew 0.5% between July and September, slightly underperforming the 0.6% growth clocked in the second quarter. However, year-on-year, GDP climbed 2.2%, recording its fastest pace of expansion since the second quarter of 2011. What’s more, the third quarter marked four consecutive quarters of solid growth for France.

Just as in the broader economy, news from the French labor market was also mixed. Between the second quarter and the third, the country’s unemployment rate rose from 9.5% to 9.7%, indicating that recent optimism notwithstanding, economic conditions have not improved sufficiently to bring down unemployment on a sustained basis. The good news though is that in late September French President Emmanuel Macron kick started his reforms program by signing five decrees overhauling labor norms.

The new rules, which are expected to take effect by the beginning of 2018, give businesses greater flexibility to hire and fire employees. They also place a ceiling on payouts for dismissals that are deemed to be unfair. Notably, these are only the first stage of labor reforms and President Macron has indicated that the next phase of changes is in the pipeline.

Moving forward, it seems unclear whether France will be able to sustain its current growth momentum in the short term. In October, a measure of confidence in the country’s manufacturing sector reached its highest level in almost a decade but consumer confidence, which was the key driver of third-quarter growth, slipped 1.9% from the previous three months. The French government has projected 1.7% growth in 2017, which would be the country’s strongest performance in a calendar year since 2011.

 

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Italy: Improved data point to strengthening recovery

At the end of the second quarter, Italy, the Euro-zone’s perennial laggard, surprised commentators with a solid set of statistics. Since then, the country has reported even better economic data, providing more evidence of its strengthening recovery. Between the second quarter and the third, the Italian economy expanded 0.5%, outdoing the 0.4% growth recorded from April to June. With this, Italy also registered its eleventh consecutive quarter of growth.

What’s more, in the eight months from January to August, the country’s export volumes climbed 2.8% from the same period last year, which likely means Italian businesses that are globally competitive are doing well now. Taking into account these encouraging developments, Standard & Poor’s recently raised Italy’s sovereign credit rating for the first time in 35 years. The agency said growing investment and employment had improved Italy’s outlook.

On a cautionary note though, it is important to be mindful that Italy is still not completely out of the woods. The country is yet to deal with most of its structural weaknesses, including red tape, corruption, high public debt, banking sector problems and low labor productivity. Moreover, its unemployment rate remains in double digits and among the highest in the European Union. So, how long the country can sustain its current revival is anybody’s guess. Nevertheless, the most immediate worry for Italy in the short term is the imminent scale-back of the ECB’s sovereign bond buying program. With an enormous public debt and annual debt-servicing costs of around 70 billion euros, Italy has been one of the biggest beneficiaries of the low-interest-rate environment the ECB’s bond purchases have created.

 

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Spain: Political crisis likely to hurt momentum

Continuing the impressive turnaround it has achieved over the past few years, Spain reported one of the highest growth rates for the third quarter among Euro-zone peers. However, a recent political crisis has weakened the outlook for the country in the near term.

Spain’s GDP jumped 0.8% in the third quarter, meeting estimates but slightly underperforming the 0.9% growth recorded in the second quarter. Year-on-year, output expanded 3.1%, the same annualized pace at which it had increased in the second quarter. Also, encouragingly, the country’s unemployment rate declined from 17.2% to 16.4% between the second quarter and the third, which is a nine-year low.

Nonetheless, these positive developments were overshadowed by the Catalonia region’s demand for independence in early October. The Spanish government has already dismissed the president of Catalonia and his cabinet but the regional leader, who is in self-imposed exile in Belgium, has called for a Brexit-style vote on whether Catalonia should exit the European Union too.

With this crisis simmering, Spain’s short-term outlook appears to have weakened. There has been an exodus of businesses from Catalonia, which accounts for about 20% of Spain’s GDP. Not surprisingly, the Spanish government has trimmed its 2018 GDP growth forecast from 2.6% to 2.3% as the current uncertainty could affect investment decisions and tourism.

 

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Developed Europe: July 2017

September 15th, 2017

Outlook brightens; recovery stronger and broad-based

The newfound optimism around Developed Europe grew unabated during the May-July review period. GDP in the largest and the most significant part of the region, the single-currency Euro-zone, expanded 0.6% in the second quarter, meeting estimates but outpacing the 0.5% growth clocked in the first quarter. On an annual basis, seasonally adjusted output surged 2.2% at the end of June, outperforming the 1.9% growth achieved in the first quarter.

The individual GDP data from most of the 19 member-countries in the Euro-zone underscored the broad-based nature of the recovery underway in the region. Among the larger economies, Germany and Spain continued to lead the pack of outperformers while France signaled that its economy was finally on a sustainable rebound. Italy shed its ‘laggard’ tag to post encouraging growth figures. Several smaller economies in the Euro-zone, including the Netherlands, expanded faster than expected. Besides GDP data, other indictors tracked during the second quarter, such as economic sentiment, the unemployment rate and manufacturing output, also pointed to the robust health of the Euro-zone economy.

For the current and future quarters too, the outlook for the Euro-zone looks bright. According to Bloomberg, a measure of economic sentiment reached its highest level in a decade at the end of July. Further, a recent European Commission report says that “manufacturers are working at a higher capacity” and price expectations have risen in all sectors. Even European Central Bank (ECB) President Mario Draghi has expressed confidence that the Euro-zone recovery is likely to strengthen in the second half of 2017 and trigger a sustained pickup in inflation. Notably, the ECB is waiting for cues from inflation figures to start planning the gradual withdrawal of its quantitative easing or bond-buying program. At the end of July, the Euro-zone’s annual inflation stood at 1.3%, a level that is currently below the ECB’s target inflation of “less than, but close to, 2%.”

 

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Germany: Strong consumption, public spending sustain upswing

Germany’s upswing continued during the latest review period. The country’s seasonally adjusted GDP climbed 0.6% between the first quarter and the second, recording its 12th consecutive quarter of growth. On an annual basis, output expanded 2.1% at the end of June, which is slightly higher than the 2% year-on-year growth achieved in the first quarter. The second-quarter performance was chiefly driven by strong consumer and government spending.

Buoyed by rising wages, a robust employment outlook and low interest rates, private consumption jumped 0.8% in the second quarter, while Berlin’s mounting expenditure to accommodate the nearly one million refugees who have arrived in Germany since the beginning of 2015 boosted construction investment 0.9%. In fact, strong domestic demand pushed up imports as much as 1.7% during the second quarter whereas exports managed to grow only 0.7% in the same period. So, ironically for export powerhouse Germany, net trade had a negative impact on second quarter growth.

Notably, Germany’s current economic strength is a source of great optimism not just for the wider Euro-zone economy but also for Chancellor Angela Merkel. General elections are slated to be held in the country in the last week of September and Chancellor Merkel is seeking a fourth term in office. So, the recent positive data will most likely boost her economic credentials before the polls. 

Irrespective of how the elections will shape Germany’s political landscape, the country’s economy appears well-placed to sustain its momentum. Business confidence among German manufacturers remains strong as they continue to invest in labor and equipment to fulfill new orders. Incidentally, new orders in the manufacturing sector increased twice as much as expected in June. The construction sector should also stay buoyant on the back of government spending on refugee rehabilitation. In the first half of 2017, construction companies saw orders growing 5.5% from the same period last year, which augurs well for business in the coming months.

 

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The U.K.: Economy stays subdued as Brexit uncertainty lingers

Most of the data Britain reported during the May-July review period reinforce concerns that Brexit-related uncertainties are taking a toll on the economy. GDP in the country edged up 0.3% in the second quarter, which is only a shade faster than the 0.2% growth achieved in the previous quarter. More importantly though, the latest GDP growth rate is significantly weaker than the U.K.’s average growth rate over the past few years.

Also, worryingly, household spending merely inched up 0.1% from April to June, clocking its weakest pace of increase since 2014. Further, according to Bloomberg, investment remained subdued all through the second quarter. In fact, during this period the only bright spot in the economy was the services sector, which recovered following a brief slowdown in the first quarter. The sector expanded at its fastest pace in 10 months at the end of June.

Nevertheless, it appears that the outlook for the British economy is likely to remain subdued in the coming months too. According to the National Institute of Economic and Social Research, services sector activity softened again in the beginning of the third quarter. Further, the pound’s weakness since the Brexit vote has pushed up inflation, which is likely to continue hurting household spending. Annual inflation stood at 2.6% in July, having risen from 1.8% at the start of the year. The Brexit impact on investment decisions is also expected to linger as businesses wait for clarity on the kind of deal Britain will strike with the European Union.

 

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France: Well-placed for Macron’s reforms

The French economy expanded 0.5% from April to June. In fact, according to national statistics bureau Insee, GDP grew 1.4% during the first half of 2017, which is as much as the European Commission had forecast for the entire year. Both investments and exports advanced in the first quarter, with net trade comprising the largest contribution to GDP for the first time in more than seven years. Notably, France has now recorded its fourth consecutive quarter of growth, which is most likely a sign that the economy is finally on a rebound after years of inconsistent progress.

Indeed, with political stability returning to the country following the presidential election in May and tax cuts by the previous administration beginning to take hold, a record level of consumer confidence was observed in July. The same month saw business confidence soar to its strongest level since 2011. What’s more, Insee’s production outlook indicator climbed to its highest level since 2001. The strength of these confidence indicators reflects the optimism around new President Emmanuel Macron’s reforms agenda.

President Macron has promised to implement the first phase of his labor-market reforms by the third week of September. This set of reforms is expected to focus on providing businesses with a greater say in fixing working hours and wages as well as putting a ceiling on severance pay. The Macron administration also plans to reduce taxes, slash public spending by 20 billion euros next year and cut the budget deficit to below 3% of GDP.

 

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Italy: Economy shrugs off bad-loan problems, marches ahead

After many quarters of lackluster performance, Italy finally mustered a set of encouraging economic data during the May-July review period. From April to June, the Euro-zone’s third largest economy expanded 0.4% quarter-on-quarter, its tenth consecutive quarter of growth. Notably, this pace of expansion was slower than the Euro-zone average of 0.6%, but several other indicators pointed to a strengthening momentum in Italy’s recovery.

For instance, year-on-year, GDP increased 1.5% at the end of June, which marked Italy’s best annual growth rate since 2011. What’s more, both the services sector and industrial output registered robust growth between April and June while exports improved despite a stronger euro. Also, the country’s unemployment rate remained in a downtrend all through the second quarter, falling to 11.1% in June from 11.3% in May and 11.8% in January. Italy appears placed to do well in the third quarter too. The PMI for the country’s services sector recently reached its highest level in 10 years. In fact, with all these positive developments, the International Monetary Fund (IMF) has upgraded its 2017 growth forecast for Italy.

Nevertheless, on a cautionary note, the country is not without short-term risks. The Italian banking sector remains beset with bad loans worth about $350 billion, which is not just crimping bank profitability but also hurting lending in the economy. Further, consumer confidence is still subdued in the country, given that wages have hardly improved since the financial crisis.

 

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Spain: Outlook improves as recovery momentum gains strength

In line with the trend over the past few years, Spain reported yet another round of impressive data during the May-July review period. The country’s GDP jumped 0.9% in the second quarter, recording its fastest pace of expansion in two years. On an annualized basis, output increased 3.1%. Official statistics reveal that strong exports and tourism sector activity played a key role in the second-quarter performance. Exports climbed 10% in the first half of 2017 and the number of foreign tourist arrivals in Spain surged 12% during the same period. What’s more, household expenditure growth nearly doubled to 0.7% from April to June.

This is a significant development because at the start of the year, economists had projected a gradual moderation in household spending due to stronger inflation and a rise in energy costs. But apparently, recent labor-market improvements helped Spaniards shrug off the impact of higher prices. Speaking of the labor market, between the first quarter and the second, Spain’s unemployment rate fell from 18.8% to 17.2%, its lowest level in eight years.

Not surprisingly, given these indicators, the 2017 growth estimates for Spain have been upgraded by both the government and the IMF. In fact, describing Spain’s recovery as “impressive,” the IMF recently upgraded its forecast (from 2.6% to 3.1%) for the second time in seven months. Further, assuming Spain’s continued recovery and budget consolidation, both S&P Global Ratings and Fitch have revised their outlook for the country’s credit rating from ‘stable’ to ‘positive.’

 

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Emerging Asia Pacific: July 2017

September 15th, 2017

China sustains momentum; India underperforms

During the May-July review period, most of the eight economies under our coverage in the Emerging Asia Pacific region reported encouraging data. China shrugged off government efforts to control risky lending to record a robust momentum while relatively smaller economies such as Indonesia, Malaysia, Thailand and the Philippines witnessed accelerated GDP expansion. However, the Indian, South Korean and Taiwanese economies registered subdued growth, with India suffering the most among the three.

China: Strong growth in Q2, but deleveraging weighs on second half outlook

The Chinese economy remained robust in the May-July review period despite a softening of the property sector and government efforts to control risky lending. However, more recent data reveal that the expected policy-induced slowdown will likely be visible in the second half of this year.

For the second quarter, the country clocked 6.9% annualized growth, beating estimates and matching the momentum achieved in the first quarter. Strong industrial production, spurred by a revival in exports, rising investment, solid retail sales and very low inventory, drove the second-quarter performance. China’s statistics bureau has said that the strength of the economy in the first two quarters of this year should help meet the target of 6.5% or higher growth in 2017.

The second-quarter data also reveal two encouraging nuggets about the current state of the Chinese economy. The first is that the economy appears much more rebalanced now than it was just a few years back – consumption contributed more than 60% to GDP growth in the first half of 2017 and services accounted for nearly 55% of GDP in the same period. Secondly, it is clear that Beijing has so far been able to impose curbs on risky lending or financial deleveraging in a calibrated way, without any significant adverse effect on the economy.

Nevertheless, there are signs that the impact of the financial deleveraging on the economy is likely to be more pronounced in the second half of 2017. In July, both import growth and retail sales stood at their lowest levels since December and October, respectively. Also, during the same month, annualized industrial output growth failed to meet estimates and softened from the strong June readings.

 

 

India: Economy slows down further; short-term outlook weakens

Most of the data India reported recently turned out to be weaker than those published for the previous review period. For one, annualized GDP growth slowed down from 6.1% in the first quarter to 5.7% in the second quarter. Economists had projected at least 6.6% expansion in the second quarter. With this, India lost the label of “the world’s fastest growing large economy” to China for the second quarter in a row.

Nevertheless, this slowdown is not entirely a surprise owing to two factors — 1) the lagging effect of the government’s controversial November 2016 move to invalidate nearly 86% of the currency in circulation as a drive against counterfeiting and unaccounted cash and 2) teething problems related to the launch of the pan-India Goods and Services Tax (GST) on July 1. Indeed, manufacturing growth decelerated to 1.2% in the second quarter from 5.3% in the previous quarter as manufacturers cut production and dealers offered heavy discounts on goods such as cars in order to reduce their inventories ahead of the GST launch. Private consumption also moderated between April and June.

The good news though is that construction activity, which had declined 3.7% in the first quarter due to the currency invalidation, recovered 2% in the second quarter. The largely cash-based construction economy is one of India’s biggest employers. Also, government spending, which has been a key contributor to growth in recent times, surged 9.5% in the second quarter.

Moving forward, the latest economic survey by the Indian government has lowered its fiscal year (April 2017 through March 2018) growth forecast. The survey indicated that the country will remain bogged down by the stressed banking sector, the weak investment climate and the over-leveraged corporate sector.

 

 

South Korea: Outlook brighter despite second-quarter growth deceleration

After picking up speed in the first quarter, the South Korean economy lost a bit of its momentum during the latest review period. Between April and June, GDP in the country increased 0.6% from the first quarter and 2.7% from a year ago. This pace of expansion is fairly strong but slightly disappointing on a relative basis given that the first quarter had recorded significantly faster growth.

Moreover, exports, which had risen 1.9% between the fourth quarter of 2016 and the first quarter, declined 3% in the second quarter while construction investment, which had surged 6.8% in the first quarter, merely edged up 1% in the second quarter. On an encouraging note though, private consumption recovered from a period of modest growth to climb 0.9% in the second quarter, posting its biggest gain since 2015. In fact, the short-term outlook for South Korea appears much brighter than the overall second-quarter data might suggest. 

A strong tailwind for the economy will be the additional budget the South Korean parliament approved recently. The extra spending, which will be implemented from the third quarter, is expected to push up South Korea’s 2017 growth rate to about 3%. What’s more, the newfound momentum in private consumption is likely to continue as President Moon Jae-in’s job-promoting policies have boosted consumer sentiment. Nevertheless, it is noteworthy that a key part of the economic outlook for South Korea is the seemingly perennial risk of heightened geo-political tensions with North Korea.

 

 

Indonesia: Quarterly decline stops but economy still under pressure

Between April and June, Indonesia’s GDP increased 4% from the first quarter and 5% from a year ago, bucking a worrying trend that had emerged over the previous two quarters. In the fourth quarter of 2016 and the first quarter, output grew in yearly terms, but declined on a quarterly basis.

A 5.4% rise in investment and a nearly 7% surge in construction sector activity played a key role in Indonesia’s second-quarter performance. Notably, the pace of GDP growth in the second-quarter would have been higher. But the growth rate fell short of estimates as a 1.9% fall in government spending affected output expansion. Since the beginning of the slump in the prices of Indonesia’s commodity exports, public spending, driven by President Joko Widodo’s focus on infrastructure building, has been the mainstay of the economy. However, with increased spending on infrastructure, the budget deficit has reached a level close to its legal limit, which is 3% of GDP, and the government is now under pressure to curb expenditures.

In the coming months, the prospect of a faster pickup in the Indonesian economy appears unlikely. Whether or not the government is in a position to raise spending again remains to be seen, and on the other hand, the prices of Indonesia’s main exports — coal and palm oil — have started easing again following a brief recovery at the start of the year.

 

 

Malaysia: Economy in excellent health

After posting a strong revival in the first quarter, the Malaysian economy continued its impressive run during the May-July review period. In the second quarter, the country’s output grew 5.8% from a year ago and 1.3% from the first quarter. The growth rates exceeded expectations and the corresponding GDP figures for the first quarter. All areas of the economy picked up steam in the second quarter.

Services, the biggest part of the economy, advanced 6.3% from a year ago while manufacturing growth accelerated to 6% from 5.6% in the first quarter. Exports, another key sector, surged 9.6% and investment climbed 7.4%. According to Bloomberg, consumer spending increased 7.1% and likely made the biggest contribution to second-quarter GDP growth.

Notably, Malaysia has now recorded four consecutive quarters of a solid recovery and the country’s current economic climate suggests that this trend will most likely continue. In fact, the World Bank recently raised its 2017 growth forecast for Malaysia to 4.9%, the most it raised for any country in East Asia.

 

 

Thailand: Farm sector, exports drive strong growth; outlook stays positive

Like its neighbour Malaysia, Thailand too recorded a set of very encouraging data during the May-July review period. In the second quarter, GDP expanded 3.7% from a year ago, outpacing both estimates and the first-quarter growth rate of 3.3%. On a quarterly basis, output increased 1.3%. The second-quarter performance was chiefly driven by farm sector growth, which accelerated from 5.7% in the first quarter to 15.8% in the second quarter. Tourism and exports also posted robust growth all through the quarter. In May, exports surged 13.2% from a year ago, with electronics exports soaring 24%.

However, unlike Malaysia’s broad-based growth in the second quarter, the Thai economy strengthened only in pockets. Manufacturing growth decelerated from 1.3% in the first quarter to 1% in the second quarter while the construction sector contracted 6.2%. Moreover, both private sector investment and consumer spending remain subdued amid the political uncertainty prevailing in the country following the military coup in May 2014.

Still, the Thai economy is expected to continue to do well in the coming months given its accommodative monetary conditions and revived export sector.

 

 

Taiwan: Surprise deceleration in growth; export outlook still strong

In the second quarter, Taiwan’s GDP expanded 2.1% on an annualized basis, recording its second consecutive quarter of growth deceleration. The economy had expanded 2.9% in the final quarter of 2016 and 2.6% in the first quarter. The second-quarter growth rate surprised analysts and commentators, who had projected a faster pace of expansion given the improved outlook for Taiwan’s electronics and components exports ahead of the launch of Apple’s iPhone 8. Exports, which account for two-thirds of the Taiwanese economy, increased 4.9% from April to June following a much stronger spurt in the first quarter. Capital spending by the major semiconductor manufacturers in the country also declined during the second quarter.

Moving ahead, the outlook for Taiwan appears mixed. The modest export growth and lower capital spending by manufacturers in the second quarter notwithstanding, Taiwanese exporters continue to expect better business later this year. However, the economy remains vulnerable to tensions with China and other geopolitical events in the region.

 

 

Philippines: Momentum intact despite risks

During the latest review period, the Philippines once again reinforced its ability to clock higher-than-6% growth amid domestic and global challenges. The economy expanded 6.5% on an annualized basis from April to June, posting its 8th consecutive quarter of above-6% growth. The performance was driven by both consumer demand at home and President Rodrigo Duterte’s focus on infrastructure development. Consumer spending, which accounts for 70% of the GDP, climbed 5.9% and government spending surged 7.1% during the second quarter.

The International Monetary Fund (IMF) has projected 6.8% growth for the Philippines this year. However, a few risks prevail. The country is struggling to contain political insurgency in some parts, which is creating both fiscal pressures and an uncertain economic climate. Further, imports are soaring while the domestic currency has slumped to a record low. Consequently, import costs have been rising, potentially creating a situation in which the Philippines may have a current account deficit for the first time in 15 years.

 

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