Emerging Asia Pacific
Economy Trends Update July 2017
AT A GLANCE
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.
Subscribe to get our global publications by email.