Market Overview

Emerging Asia Pacific: Regional Economic Review – Q2 2014


Nations Deal with a Diverse Range of Economic Challenges


Emerging Asia Pacific countries dealt with several economic challenges during the second quarter of 2014. While China, the region’s largest economy, was trying to steady its swerving economy, export giants like South Korea and Thailand faced challenges arising from overseas demand. In some countries, political changes cast a shadow over their respective economies.

Many faced upcoming nationwide elections and in the interim their economies hovered in inertia during this period. India and Indonesia both faced democratic elections for the federal government. In India’s case, the outcome of a clear winner and stable government from the national elections provided an impetus for economic reforms that were considered long overdue. A regime change in Thailand too put an end to street violence that had engulfed the country’s capital Bangkok, bringing in much-needed stability.

Export-oriented countries too faced headwinds. South Korea was hampered by a persistently strong currency that affected its ability to export despite a recovery in overall global trade. Meanwhile, Taiwan’s exporters made merry as their component products found strong demand from the global consumer electronics boom.

On the inflation front, most countries faced only mildly rising inflation arising from higher prices of food and fuel. With this, the prospects for interest rate hikes in much of Asia Pacific remained low. However, as growth picked up further momentum, central banks in countries such as Philippines took note of a possible spike in prices.

At a Glance

China: An improvement in domestic sectors such as housing along with a rebound in exports helped the Chinese economy post growth figures of 7.5% during the second quarter. The Chinese government has set a growth target of 7.5% and an inflation target of 3.5% for the full year 2014.

India: After months of elevated inflation, India witnessed a relief from price rises during the second quarter of 2014. India expects GDP growth to be around 6.5% for 2014.

South Korea: With inflation accelerating and demand slipping, South Korea pared down its GDP forecast for 2014 to 3.8% from its previous estimate of 4%. Inflation too showed signs of acceleration, hitting consumer and business confidence.

Taiwan:Expects its 2014 output to grow at the fastest pace since 2011. Taiwan’s government forecast a growth rate of 2.98% for 2014 up from its previous forecast of 2.82%.

Indonesia:Amidst budget constraints and higher interest costs, Indonesia has cut its 2014 GDP forecast to range between 5.1%-5.5% from its previous guidance of 5.5%-5.9%.

Thailand:As the gloom surrounding consumption and investment seemed to lift towards mid-2014, Thailand expects its economy to regain some lost momentum. Thailand’s central bank estimated that the country’s GDP will grow 1.5% in 2014.

Philippines:Government expects to achieve a growth rate of 6.5% in 2014. Despite damages in agricultural output, the country’s economy was upbeat thanks to low unemployment and strong consumer demand.



A host of factors ranging from loosening credit conditions, rising fiscal spending and improving construction markets helped China accelerate its GDP growth to 7.5% during the second quarter of 2014. China’s GDP growth in the second quarter was the first acceleration in growth in three quarters.

In fact China’s second quarter growth exceeded consensus estimates of 7.4% as a series of economic indicators such as industrial production and fixed-asset investment growth were on an upswing.

After two quarters of decelerating growth Chinese authorities decided to calibrate both monetary and fiscal policy towards an expansionary stance in an attempt to stoke growth in early 2014. Increased funds for railways, housing and energy sectors in several provinces of China, a cut in the reserve requirement for banks and modest tax breaks aimed at select industries were instituted in early 2014. Furthermore, several local Chinese provinces also eased curbs on housing sector in an attempt to arrest a deceleration in the pace of growth. All these measures started trickling into the wider economy helping China to boost growth.

For instance, the value of housing transactions jumped 33% in June over May figures according to data from China’s Statistics Bureau. As a result, increased real-estate spending spilled over to the wider economy boosting the need for products such as electric machinery, household chemicals, and construction metals. In all, fixed-asset investment growth excluding rural households spiked 17.3% during the first six months of 2014 over the year-ago period. Even consumer spending too contributed to China’s second quarter growth with retail sales jumping 12.4% in June over May.

On the export front too, China saw improvement in the second quarter. After witnessing challenges in the first quarter, second quarter exports increased by more than 7% in May and June.


After months of discouraging news, India’s economy took a turn for the better. During the second quarter of 2014, India’s consumer price inflation slowed a bit after hovering at elevated levels for months. As well, a host of other indicators measuring manufacturing and industrial output indicated that economic activity was on an uptick.

Nonetheless, despite the encouraging news, India’s central bank commented that although inflation showed recent signs of tempering, it would remain cautious. With India’s agricultural regions receiving only a modest rainfall, the central bank is concerned that the price of grains and vegetables will shoot up and rekindle inflation of these essential goods.

In the past, India has frequently overshot the amount it borrowed every year for spending and this has often led to rapid price gains in a number of goods and services. India’s new government, which came to power in early 2014, was widely expected to rein in the nation’s profligate finances and introduce much needed reforms, such as the retooling of tax regimes and measures to improve the investment climate.

The country’s new government retained its predecessor’s commitment of fiscal consolidation to limit federal government debt at 4.1% of GDP. India currently plans to achieve this by raising the pace of tax revenues but keeping spending at current levels.

In a move aimed at structural reform, India’s new regime signaled its openness to additional foreign direct investment in industries such as defense and retail super marketing.


South Korea’s economy failed to keep its momentum up during the second quarter of 2014. The export-driven nation commenced 2014 on an especially strong note on the back of healthy exports and surging investments. The South Korean expansion was so strong that even the central bank predicted a hike in borrowing costs in 2014 after maintaining interest rates for the past many quarters.

But South Korea’s second quarter began on a more somber note primarily due to weakness in demand. Both consumers and manufacturers showed signs of strain during the quarter with manufacturing confidence dropping to a four-month low in June and consumer sentiment falling to its weakest level in over eight months.

Meanwhile, the heavily industrialized base of an export-oriented country selling such wares as electronics, cars and ships increasingly felt the burden of a strengthening domestic currency. In fact, the South Korean won jumped 11% in 2013, the biggest jump for any of the 31 most developed countries in the world. Ever since, the currency has hovered near six-year high figures. Until last year, South Korean exporters took the strengthening of the won in stride. Nonetheless their ability to work under the burden of a strong domestic currency indefinitely has come under question. Some South Korean exporters have already issued profit warnings arising from the loss of competitiveness due to the strong won.

After these developments, even the country’s central bank backtracked on the prospects of a rate hike. Despite the weakness in demand emanating from foreign markets, inflation has been eating into the purchasing power of ordinary Koreans. During the second quarter of 2014, inflation jumped to 1.7% in May, the fastest pace of acceleration since October 2012.

Faced with weak external demand and faster price rises, Korea’s central bank has cut its GDP forecast for the year to 3.8% for 2014 from its previous guidance of 4%.


Thanks to rising production of smartphones, semiconductors and other electronic components, Taiwan’s industrial base fired on all cylinders to produce strong economic performance during the first half of 2014.

Some of Taiwan’s integral firms in the global electronic supply chain have driven the overall economic performance. For instance, increasing orders to a leading Taiwan semiconductor company and one of the world’s largest suppliers of memory chips and microprocessors for the global smartphone market contributed to more than 10% growth in the country’s industrial output index in May this year.

Taiwan’s prospects in general have improved as trade and exports between the country and its trading partners such as Japan, the European Union and the U.S. have somewhat recovered over the past year. The global demand for consumer electronics goods has been in fact a godsend for the island, boosting both employment and consumer confidence.

Thanks to the uptick in the export markets, consumer confidence as measured by Taiwan’s educational institutions jumped to 84.7 in June from 79.6 in the previous month – the best improvement in the region and far exceeding the readings recorded in mainland China, Hong Kong and Macau. As a sign of improved demand, Taiwan’s inflation shot up to average 1.6% in the first quarter of 2014 after hovering under the 1% mark since March 2013. Despite the mild upturn in prices, inflation has been well under the Taiwanese central bank target. As a result, the country’s central bank, which has not hiked interest rates for more than three years since 2011, opined that the economy has more room to grow without requiring higher interest rates.

It appears that the upbeat economy has also attracted the attention of foreign investors. During the second quarter of 2014, inflows into Taiwan’s equity markets surged at the fastest pace in nearly five years.


The full impact of an aggressive interest rate hike in the past year to contain a ballooning current account deficit in Indonesia is showing its effect on the country’s economy. Indonesia’s economic expansion declined to 5.2% during the first quarter of 2014, the slowest pace of quarterly growth since 2009.

Still, many economists consider the interest rate hike of the past year unavoidable. The mounting deficit coupled with persistently high inflation had pulled the rug out from under the country’s currency, the rupiah. An exodus of capital that duly followed shook Indonesia’s capital markets and its economy.

In fact, after the aggressive interest rate hikes of the recent past, Indonesia has seen a marked improvement in its current account deficit and price gains. The consumer price index in the archipelago has fallen to around 7% in recent months, while Indonesia’s current account deficit declined to 2.5% 2014 from 3.3% in 2013.

Despite the upturn, economists predict that Indonesia’s economy is likely to face more challenges. The country’s new president, due to govern the country in the coming months, must face ballooning fuel and electric subsidy costs. Economists also express concern over other structural issues arising from higher interest rates and lower investment. For instance, the country’s foreign direct investment (FDI) growth rate, which was steadily rising until 2012, fell to around 3% of GDP in 2013.

Amidst these conditions, Indonesia’s central bank, Bank Indonesia, reported a marked improvement in the Consumer Confidence Index (CCI) in the second quarter of 2014 over the year-ago period raising expectations for a consumer-driven growth.


A political struggle in Thailand took a toll on the country’s output during the first half of 2014. As protests between Thailand’s ruling government and its opposition played out violently in the state’s capital, Bangkok, Thailand’s economic output shrank.

Thailand’s ruling government was eventually replaced by the country’s army during the second quarter of 2014. Encouragingly, the ascent of the country’s army has put an end to street violence in Bangkok. But Thailand watchers comment that the deterioration in many of Thailand’s industries over the past three months will hamper the economic recovery that the country so desires.

Central bank officials have predicted a contraction of 0.4% for the Thai economy during the second quarter of 2014. Thailand’s famed export industry that churns out a variety of items such as hard disks, auto parts, and agricultural products have all come under a cloud. Unfortunately, the country’s billion-dollar shrimp industry has been affected by an infectious disease, causing output to collapse. The falling prices of Thailand’s agricultural exports such as sugar and rubber have also hit the export numbers. In fact, exports during the second quarter of 2014 were down 1.2% over the year-ago period.

Tourism, the other key engine of Thailand’s growth has been severely hampered. Threatened by violence, many of Thailand’s would-be tourists put off their travel plans. The number of tourist arrivals dropped 12.2% for the entire second quarter of 2014 over the year-ago period according to Thailand’s Office of Tourism Development.

With employment and income suffering, consumer confidence in Thailand has dwindled. A key gauge of local consumption activity has progressively weakened throughout the year although the pace of decline towards mid-2014 slowed.

The new regime run by the Thai army is trying to boost the economy by initiating tax cuts, reviving infrastructure projects and freeing up funds for agriculture. To support a recovery, the country’s central bank has kept the key lending rate at 2%, the lowest level since 2010.


Despite the widespread damage caused by typhoons to its agriculture and infrastructure in mid-2014, the Philippines posted economic numbers that still suggest economic momentum gaining steam.

The typhoon named ‘Rammasun’ played its wrecking hand mainly south of the country’s capital, Manila in mid-2014. The fishing and agricultural economy indeed faced substantial damages. But the overall impact of the typhoon on the economy is expected to be limited as the Philippines itself does not depend heavily on agriculture, which comprises less than 10% of the country’s GDP.

In other parts of the Philippines, consumers and businesses contributed to their country’s economy in their typical manner. Both consumer and business confidence was upbeat, with demand for automobiles rising and the unemployment rate falling. Although the first quarter of 2014 saw the country register its slowest pace of growth in nine quarters, economists consider it as a blip rather than a trend. With investments and exports looking upbeat, economists have predicted GDP growth to be over 6.5% in 2014.

But with rising growth, a possible spike in inflation has been identified as an issue by the Philippine central bank. The country’s central bank expects inflation to touch 4.1% in 2014 before settling to 3.8% in 2015.



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