Emerging Asia Pacific: Economy Trends Update - April 2017

China Stable; Others Improve on Rebound in Exports

During the first quarter, the majority of the eight economies under our coverage in the Emerging Asia Pacific region reported better-than-expected economic data. In China, growth accelerated and became more broad-based. However, the overheated property sector in the country remained a concern. India and the Philippines, two of the region’s fastest growing economies in recent times, lost momentum. But the good news is that this is most likely a temporary setback for either country. The other economies, Taiwan, Malaysia, Thailand, South Korea and Indonesia, picked up speed on the back of stronger exports.

At a Glance

China: Between January and March, GDP expanded 6.9% from a year ago, exceeding expectations and clocking its fastest pace of growth in six quarters.

India:India reported a host of rather discouraging data in recent months. Its GDP for the first quarter increased 6.1% in annual terms, a sharp deceleration from the 7% growth recorded in the previous quarter.

South Korea:After stepping into 2017 on a disappointing note, Korea made a smart recovery in the early months of the year. The economy expanded 0.9% from the previous quarter and 2.7% from a year earlier.

Indonesia:In the first quarter, Indonesia clocked 5% annualized growth, marginally improving its performance from the 4.9% expansion registered during the previous review period. However, GDP diminished 0.3% from the fourth quarter.

Malaysia:Between January and March, Malaysia’s GDP expanded 5.6% from a year ago, beating both expectations and the previous quarter’s growth rate of 4.5%.

Thailand:Between January and March, a solid recovery in exports propelled the Thai economy to its fastest pace of quarterly expansion in four years.

Philippine:During the first quarter, the Philippines lost a bit of its momentum but still managed to cling to its reputation as one of Asia’s fastest growing economies.

Taiwan:Between January and March, Taiwan’s GDP increased nearly 2.6% year on year, with exports climbing the most in six years.

CHINA: FURTHER SIGNS OF GROWTH STABILIZING, BUT PROPERTY BOOM REMAINS A CONCERN

China’s growth accelerated during the first quarter amid lingering concerns about the sustainability of its current momentum. Between January and March, GDP expanded 6.9% from a year ago, exceeding expectations and clocking its fastest pace of growth in six quarters. Key components of the economy, such as investments and exports, rose beyond projected levels for March, while the continuing property boom and higher government spending on infrastructure pushed industrial output for the first quarter to its highest level in more than two years.

In fact, between January and March, spending by local governments and Beijing soared 21% from a year ago, playing a significant role in taking the first-quarter growth rate above Beijing’s 2017 growth target of 6.5%. Other positive news is that private investment, which had lost vigor in recent years, rebounded in the first quarter. There were encouraging developments on the consumption front too. After decelerating for five quarters, disposable income growth picked up speed during the first quarter, recording its highest level since late 2015. Similarly, retail sales jumped 10.9% year-on-year and auto sales recovered following a brief slowdown early in the year when the government cut subsidies.

Given this set of upbeat data, China appears well placed to 1) do well in the second quarter too and 2) easily meet its annual growth targets. However, the possibility of a decline in the still surging property market remains a threat to China’s growth in the near term. Despite intense government efforts to control soaring home prices, new construction increased and real estate investment climbed 9.1% during the first quarter. Indeed, curbs on the property sector introduced late last year have been less than effective so far. On a more optimistic note though, around two dozen Chinese cities announced additional cooling measures for the property sector recently and collectively, these steps should curb real estate activity soon.

INDIA: CURRENCY MEASURE FINALLY TAKES A TOLL ON THE ECONOMY

India reported a host of rather discouraging data in recent months. Its GDP for the first quarter (the fourth quarter of India’s fiscal year 2016-17, ended March) increased 6.1% in annual terms, a sharp deceleration from the 7% growth recorded in the previous quarter. Gross value added (GVA) growth, another measure of economic expansion India has been tracking lately to exclude the impact of indirect taxes and subsidies, also slowed down from 6.7% in the fourth quarter to 5.6% in the first quarter. Needless to say, both these growth figures fell short of estimates.

What’s worse, a break-up of these data suggest that nearly all areas of the economy, including mining, manufacturing, agriculture and finance, registered significantly diminished growth compared to the first quarter of 2016. For instance, financial sector activity grew a meager 2.2% in the first quarter compared to the 9% growth recorded a year ago. Construction, which employs a quarter of India’s labor force, actually contracted 3.7% compared to the 6% growth achieved in the first quarter of 2016.

Given India’s steady performance all throughout 2016, the consensus view among economists now seems to be that the sudden and swift reversal in the first quarter is a result of the Indian government’s controversial November 2016 move to invalidate nearly 86% of the currency in circulation. At the time, the government claimed that this step was a part of its drive against counterfeiting, unaccounted cash and terrorism funding, but many economists worried that the currency invalidation would have a significant negative impact on the large informal and cash-based part of India’s economy. Unfortunately, in the coming months too, the Indian economy is likely to continue suffering the effect of the currency invalidation move. Adding to the pessimism, both private sector investment and household consumption remain subdued in the country.

SOUTH KOREA: GROWTH ACCELERATES DESPITE POLITICAL UNCERTAINTY

After stepping into 2017 on a disappointing note, South Korea made a smart recovery in the early months of the year. Between January and March, the economy expanded 0.9% from the previous quarter and 2.7% from a year earlier. The data surprised economists, who had expected GDP to grow at a slower pace amid the political uncertainty in the country as well as the depressed state of consumption and exports.

A number of factors contributed to South Korea’s solid performance in the first quarter. For one, exports rebounded, growing 1.9% from the fourth quarter, when they had slipped 0.1%. Similarly, following a 1.7% decline in the fourth quarter, construction investment turned around to jump 5.3% in the first quarter. Private consumption and government spending too edged up during the review period.

In the coming quarters, prospects for the South Korean economy appear to be mixed. Korea’s relationship with China has deteriorated lately and the consequent decline in the inflow of Chinese tourists to Korea has hurt tourism-related industries. Also, the first-quarter export data rose from a very low base in the same period of last year and so, it remains to be seen whether Korea can sustain its trade momentum in the near term. However, with a new president in place, the country is no longer subdued by political uncertainty. What’s more, consumer sentiment has improved to levels seen before the beginning of the political scandal last year. Against this backdrop, both the International Monetary Fund and the Korean central bank have raised their 2017 growth projections for Korea.

INDONESIA: MARGINAL IMPROVEMENT ON THE BACK OF SPURT IN EXPORTS

In the first quarter, Indonesia clocked 5% annualized growth, marginally improving its performance from the 4.9% expansion registered during the previous review period. However, GDP diminished 0.3% from the fourth quarter, although the pace of quarterly contraction this time was significantly slower than the 1.8% decline recorded in the previous quarter. This has been the trend in Indonesia for two quarters now – output has been increasing in yearly terms, indicating an improvement in the economy compared to the situation prior to early 2016, but the pace of output growth has been flagging, signaling a continuous loss of momentum since the third quarter of 2016.

An 8% jump in exports drove first-quarter growth. Indonesia’s statistics bureau reported that improving global prices of commodities such as palm oil, coal, shrimp and tea led to the spurt in exports.

Stronger demand from the country’s major trading partners – China, the U.S. and Singapore – also helped exports. However, investment in the economy remained sluggish and private consumption, which accounts for more than 50% of GDP, increased at a diminished pace. Further, mining activity shrunk after growing for a few quarters due to a fall in production in some of Indonesia’s major mining companies as well as the oil and gas sector.

Moving forward, Indonesia’s economic outlook remains largely dependent on the momentum in the global commodities market. The good news though is that the government has promised to stop spending cuts as its revenue collection appears on track to reach targets. Notably, spending cuts have been partly responsible for the slack in output growth since the third quarter of 2016.

MALAYSIA: REVIVAL GAINS MOMENTUM AS EXPORTS SURGE

Strong exports and buoyant domestic demand lifted Malaysia’s growth to a two-year high during the first quarter. Between January and March, the country’s GDP expanded 5.6% from a year ago, beating both estimates and the previous quarter’s growth rate of 4.5%. Exports remained in an uptrend all through the quarter, soaring 26.5% in February and 24.1% in March on an annualized basis. Not surprisingly, the manufacturing sector, which caters to the export market in a significant way, benefited from the surge in overseas demand, especially for consumer electronics.

This solid first-quarter performance is extremely encouraging as it signals a renewed momentum in the Malaysian economy following a lackluster 2016. After growing 6% in 2014 and 5% in 2015 on a yearly basis, Malaysia’s GDP expanded only 4.2% last year, its slowest pace since contraction in 2009, largely due to weak demand for the country’s oil and other commodity exports. In fact, it is noteworthy that the latest review period marks three consecutive quarters of improvement for the Malaysian economy since the second quarter of 2016, when GDP growth slowed down to its lowest level in more than seven years.

THAILAND: EXPORTS ON RECOVERY TRACK PROVIDE A BOOST TO GROWTH

Between January and March, a solid recovery in exports propelled the Thai economy to its fastest pace of quarterly expansion in four years. During the review period, GDP in the country increased 3.3% from a year ago and 1.3% from the previous quarter, outpacing estimates. The comparable growth figures for the fourth quarter were 3% and 0.5%, respectively. Thailand’s National Economic and Social Development Board (NESDB) has said that household spending rose 3.2% and public investment inched up 1.7% while exports jumped 6.6% in annualized terms.

Encouragingly, it is now becoming increasingly evident that Thailand’s external trade, which accounts for two-thirds of the economy, is finally regaining momentum after a long period of decline. Following a 2.8% contraction in February, shipments abroad climbed 9.2% in March and 8.5% in April amid a rise in the prices of natural rubber products, one of Thailand’s key exports, and stronger external demand for electronic goods and food processing products. Notably, the NESDB has raised its export growth outlook for this year from 2.9% to 3.6%.

THE PHILIPPINES: GROWTH SLOWS DOWN AS IMPACT OF ELECTION SPENDING WANES

During the first quarter, the Philippines lost a bit of its momentum but still managed to cling to its reputation as one of Asia’s fastest growing economies. Between January and March, GDP in the country grew 6.4% from a year ago, failing to meet expectations. What’s worse, the growth rate turned out to be the slowest for the country since the last quarter of 2015. Nevertheless, it is likely premature to worry about the Philippine economy as officials have attributed the first-quarter performance to the absence of election-related spending by the government, which had provided a large fillip to growth a year ago. Moreover, the two key pillars of the economy, domestic consumption and exports, remain robust.

Indeed, the first quarter saw exports jumping 20.3% from a year ago and domestic consumption climbing 5.7%. On the other hand, government spending merely edged up 0.2% in the first quarter. Notably, government spending had grown 4.5% in the previous quarter and 11.8% a year ago. The good news though is that public spending is expected to improve in the coming quarters as the government has promised to spend as much as $180 billion on infrastructure over the next six years.

TAIWAN: GLOBAL COMPONENTS DEMAND KEEPS ECONOMY HUMMING

During the first quarter, Taiwan, a key player in the global electronics supply chain, rode on a surge in the demand for its component exports to report solid growth data. Between January and March, GDP increased nearly 2.6% year-on-year, with exports climbing the most in six years. The growth figures exceeded expectations but slightly lagged the 2.9% expansion recorded in the previous quarter. Not surprisingly, a private manufacturing survey indicates that Taiwanese firms hired aggressively in March.

Moving forward, the outlook for the Taiwanese economy remains strong as component suppliers within the country gear up for the launch of the iPhone 8 and a number of other new technology products. What’s more, in March the government announced a stimulus package worth 28.8 billion dollars to upgrade infrastructure over a period of eight years.

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