Resilient economic dynamics in East & South Asia

The economy of the East and South Asia (ESA) region continues momentum as accommodative monetary policies across the region, solid global trade flows and a moderate recovery in commodity prices continue to buttress growth. GDP growth is estimated to have been stable at 6.1% in the third quarter.

The long-touted managed slowdown of the Chinese economy seems to have taken shape in the third quarter following a stellar H1 performance. Leading data for Q3 shows a faster-than-expected deceleration in economic activity, with the property sector cooling on decreased affordability and liquidity tightening, and exports being slightly hit by ongoing geopolitical concerns and the relative strength of the yuan.

Chinese authorities have ramped up efforts to ensure that growth momentum remains strong next year amid rising global uncertainties and the expected slowdown in China’s property market. On 30 September, the Central Bank announced cuts to the reserve requirement ratio (RRR) that will take effect at the beginning of next year.

The decision is aimed at encouraging banks to increase lending to small businesses, who suffered more than their larger counterparts from the effects of financial deleveraging. The RRR cut should support near-term financial stability by improving liquidity conditions as well as reigniting speculative property demand, which could tame the cooling of the housing market.

However, focus has turned in recent weeks to China’s most important political event, the Communist Party of China’s twice-a-decade National Congress. At the 19th National Congress, President Xi Jinping cemented his grip on power, which should allow him to continue pursuing his economic and political vision of China without noteworthy resistance. The fact that President Xi has not yet signaled any candidate to replace him at the end of his second term in 2022 has triggered speculation that he could opt for an unusual third mandate.

The economic panorama is looking somewhat better elsewhere in the region. Leading data in India indicates that some of the economic slack observed at the outset of the fiscal year in April—when growth decelerated to an over four-year low—was caused by transitory effects linked to the residual impact of the demonetization shock and the implementation of the Goods & Services Tax (GST).

Industrial output bounced back in August on manufacturing restocking. PMI readings recovered from the downturn caused by the implementation of the GST, and exports leaped despite a stronger rupee. These upbeat dynamics are expected to yield a better GDP growth print in the July-to-September period, offsetting to an extent slower growth in the Chinese economy.

Meanwhile, Korean export growth reached a record high on a surge in tech-related shipments overseas and in spite of persisting geopolitical tensions. The country is expected to have grown at a steady clip in Q3 as consumption benefits from the government’s fiscal stimulus plan targeting job creation and welfare.

However, last month Korea agreed to begin amendment negotiations for the US-South Korea free trade agreement, which is expected to dampen business and consumer sentiment and weigh on fixed investment growth moving forward.

The managed economic slowdown in China is expected to weigh on the outlook next year, given its reverberating effects in other countries in the region. However, a strengthening economy in India and resilient dynamics elsewhere in the region will continue to sustain the economic momentum. It is expected that the ESA economy to grow 6.0% in 2018, which is unchanged from last month’s estimate.

For 2019, analysts project regional growth of 5.9%. This month’s stable outlook for 2018 reflects unchanged growth prospects for Bangladeshi, Hong Kong, Korean and Magnolia. Expectations and estimates are higher with China, Pakistan and Taiwan economies. Conversely, India’s economic forecast was downgraded as the country’s fiscal metrics deteriorate. The Sri Lankan economy is also expected to grow in 2018 at a slightly slower pace than previously forecast.

The Indian economy is expected to log the largest expansion in the region next year despite myriad structural issues, with panelists foreseeing growth of 7.3%. The Chinese economy is projected to grow healthily, at 6.4%. Conversely, Taiwan is expected to be the region’s laggard and grow a modest 2.2%. Among other major regional players, Hong Kong and China will grow 2.4% and 2.7%, respectively.

The twice-a-decade National Congress of the Communist Party will start on 18 October. Five of the seven members of the Standing Committee, Chinese top decision-making body, are expected to retire, along with nearly half of the Central Politburo. The congress is largely a political event, and specific economic policies for the next five years will be set later in 2018.

That said, President Xi Jinping would amass an amount of power unprecedented in China’s recent history, suggesting that his economic and political agenda will remain unscathed. Xi will start his second term with an economy performing strongly due to healthy external demand and solid activity at home. The manufacturing PMI jumped to an over five-year high in September, while trade figures also remained robust. A cooling property market, however, threatens to put downward pressure on overall growth.

The economy will continue its managed deceleration next year as policymakers try to achieve a more sustainable growth trajectory. Downside risks could materialize in the form of an abrupt slowdown in the property market and weaker global demand. FocusEconomics panelists forecast that the economy will grow 6.4% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, the economy is expected to grow 6.1%.

The economy seems to have regained momentum in Q2 FY 2017 following a dismal start to the fiscal year in April, when growth slid to a three-year low on account of a poorly performing external sector and disruptions caused by the implementation of the Goods and Services Tax (GST). Industrial production continued to recover in August from its June downturn, while  data for both services and manufacturing pointed to an improvement in operating conditions. However, investment remains weighed down by stressed assets in the banking system and overleveraged firms, while the government’s front-loading of spending in Q1 FY 2017 risks fiscal slippage.

The fiscal deficit reached 96.1% of the full-year target in the first five months of FY 2017, and the government’s recent decision to cut the excise duty on petrol and diesel is likely to lower public revenues by around USD 4.0 billion per year.

The economic outlook for India was downgraded in November as panelists factored in a lackluster Q1 FY 2017. Nonetheless, activity is expected to accelerate throughout the remainder of the year as the economy recovers from demonetization and the GST implementation. The economy is seen growing 6.7% in FY 2017, down 0.3 percentage points from last month’s estimate. In FY 2018 growth is estimated 7.3%.

According to the latest economic data, strong growth in the first half of the year was followed by another steady economic performance in the third quarter. Industrial production grew at a brisk pace in August. In September, the growth rate of exports reached a record high and Korea’s trade surplus hit an all-time high. Although this signals that the all-important external sector remained healthy, exports are expected to drop in October due to a long working holiday.

Furthermore, on 4 October, South Korea agreed to begin amendment negotiations for the U.S.-South Korea free trade agreement, after the U.S. threatened to scrap the deal if concessions were not made; the negotiations could begin as soon as early 2018. Uncertainty arising from the talks, coupled with heightened geopolitical concerns, could drag down business confidence in Korea going forward.The government’s proposed budget for 2018, which includes a significant increase in fiscal spending, should give the economy a boost. However, headwinds to the external sector, government measures to cool the housing market and weaker fixed investment growth could weigh on the economic outlook for 2018. Focus Economics panelists expect GDP to expand 2.7% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is forecast to again grow 2.7%.

Inflation in East and South Asia softened in September as price pressures in China and Korea moderated. Inflation eased from August’s eight-month high of 2.2% to 2.0% in September. Subdued inflationary pressures continue to warrant loose monetary conditions across multiple economies in the region.

Next year, panelists expect regional inflation to gradually gain momentum on the back of higher commodity prices and stronger global growth. They project an average of 2.6%, which is unchanged from last month’s estimate. Inflation is expected to inch up in 2019, with panelists forecasting average inflation of 2.7%.

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About Grate 15 Articles
Writer is Staff Reporter Mélange for Europe & Coordinator Center of Pakistan and International Relations (COPAIR).