China: Economic Snapshot for East & South Asia
Economic growth decelerates in Q3
Higher oil prices, contagion from this summer’s currency crises in Argentina and Turkey and mounting economic uncertainty sent economic growth in East and South Asia (ESA) to an over one-year low in the third quarter. Nevertheless, the region benefited from tight labor markets and supportive public policies in some countries, such as China and Korea. According to an estimate for the region produced by FocusEconomics, ESA countries grew an aggregated 6.1% year-on-year in the third quarter. While the print was considerably below the 6.4% expansion in the second quarter, it was still in line with the estimate reported last month.
Economic growth slowed in China in Q3 as financial deleveraging and the authorities’ efforts to crack down on shadow banking continued to take their toll. Escalating trade tensions between the country and the United States, meanwhile, appeared to have had a limited impact on the Chinese economy in Q3, aside from probably weighing on business sentiment. Export growth remained resilient in the quarter, and this dynamic seems to have carried over into Q4. Nevertheless, rather than reflecting strong momentum in the external sector, robust export growth figures are partially the result of a front-loading of shipments ahead of an increase in U.S. tariffs penciled in for January 2019. Although investment continued to be the main drag on overall growth in Q3, specific data for September suggests that the government measures unveiled in recent months to shore up economic growth have started to bear fruit. Therefore, growth is expected to remain resilient through to the end of the year.
In Korea and Taiwan, economic growth decelerated notably in Q3. Although the slowdowns were mostly the result of strong base effects from last year, there are some signs that underlying economic activity has started to falter in recent months. In Korea, the unemployment rate has ticked up in recent months, hampering household’s confidence and casting doubts over the new government’s ability to deliver on its promise to boost job creation. Moreover, an uncertain global economic outlook is hurting business sentiment. Taiwan is one of the most vulnerable countries to the trade conflict between China and the United States as the island is highly integrated into China’s production chain. Against this backdrop, Taiwan’s manufacturing PMI has declined steadily since July and, in October, hit the lowest value in over two years, suggesting that the economy has shifted into a lower gear.
Although Q3 GDP data is still outstanding for the remaining countries in the region, economic growth in India likely softened in the July–September period due to a worsening trade deficit and concerns about the health of the banking sector.
Against this backdrop, FocusEconomics Consensus Forecast panelists see the ESA region expanding 6.1% year-on-year in Q4.
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ESA’s economy withstands mounting headwinds, for now
Economic growth in the East and South Asia region will continue to slow next year due to tighter global financial conditions and high oil prices. Moreover, the impact of the ongoing trade war between China and the United States will be mostly felt next year when new tariffs are implemented. While the direct impact of the trade spat will be rather limited, negative spillovers will mostly steam from weaker growth in regional behemoth China.
Nevertheless, domestic demand is expected to remain robust in the region, allowing ESA economies to still post enviable growth rates. Moreover, most countries in the region enjoy solid fiscal and financial buffers to cope with slowing global growth and heightened volatility in the financial markets.
FocusEconomics panelists expect that economic growth in the ESA region will decelerate from 6.2% in 2018 to 5.9% in 2019. While this would represent the poorest performance in nearly two decades, the outlook was left unchanged from last month’s estimate. In 2020, the ESA region is seen expanding a slightly weaker 5.8%.
This month’s stable outlook for 2019 came on the back of unchanged growth prospects for China and India. Growth prospects for Bangladesh and Mongolia were also left untouched this month. Conversely, the remaining economies, including Hong Kong, Korea and Taiwan all received a downgrade this month.
Bangladesh and India are expected to log the fastest expansions in the region next year, with growth rates well above 7.0%. Despite growing economic uncertainties, China is seen expanding a robust 6.3%, while the more mature economies of Hong Kong, Korea and Taiwan are predicted to record the weakest growth rates, between 2.2%–2.6%.
CHINA | Economic growth cools in Q3 as uncertainty swirls
Amid rising trade tensions with the United States, economic growth decelerated in the third quarter to levels not seen since the trough of the global financial crisis in 2009. This has piled pressure on the Chinese government to reignite economic activity. On the upside, growth in fixed-asset investment ticked up in September, suggesting that the first bunch of stimulus measures have started to kick in. Moreover, the economy is benefiting from the front-loading of shipments ahead of planned additional tariffs to be imposed by the U.S. in January 2019, as well as by less restrictive anti-pollution policies. Meanwhile, on 20 October the government presented a new special deduction plan to be implemented in 2019, which builds upon the tax reform announced in August and hopes to support household consumption. More recently, President Xi Jinping vowed to support private companies in a meeting with top businesses on 1 November. State-owned firms enjoy preferential access to credit, which hurts private financing especially in a context of weak lending growth.
Looking ahead, China’s spectacular economic growth of recent decades will slow as authorities attempt to guide the country towards a more sustainable economic model. Moreover, headwinds from the tit-for-tat trade war with the U.S. and a potential sharp correction in the housing market are the main downside risks to growth. Despite this, a looser fiscal stance and a more accommodative monetary policy should cushion any sizeable economic downturn. FocusEconomics panelists see the economy growing 6.3% in 2019, which is unchanged from last month’s forecast, before decelerating slightly to 6.0% in 2020.
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INDIA | Pressure mounts on the Central Bank to ease monetary policy
Economic growth likely slowed in the second quarter of this fiscal year, which runs from April 2018 to March 2019. In Q2, the merchandise trade deficit increased by nearly 50% compared to the same quarter a year earlier, primarily due to surging oil imports. More positively, business activity in the private sector increased in Q2 at a faster rate than in Q1. Meanwhile, assembly elections are scheduled to take place across five states from 12 November and 7 December. These polls could become litmus tests for the political support of the ruling Bharatiya Janata Party (BJP) heading into the 2019 general elections. Possibly with this in mind, the BJP government has been pressuring the autonomously-run Reserve Bank of India for more accommodative monetary policy in recent weeks. This has sparked rare public rebukes from leading central bank officials.
This fiscal year, economic growth should accelerate due to faster private consumption and investment growth. However, recent signs of fiscal slippage in the run-up to the general elections, escalating global trade protectionism and higher oil prices weigh on the outlook. Our panel expects GDP growth of 7.4% in FY 2018, which is unchanged from last month’s estimate, and 7.4% again in FY 2019.
KOREA | Weak fixed investment weighs on growth in Q3
Annual economic growth decelerated significantly in the third quarter compared to the second quarter, although this was partly due to a high base effect. Notably, fixed investment dropped at the fastest pace in just under a decade in Q3, due to a slump in spending on construction and business investment. Meanwhile, private consumption growth slipped in Q3—amid falling consumer confidence and a higher unemployment rate—and government consumption expanded slightly slower than in Q2. The external sector’s contribution to economic growth increased to an over five-year high in Q3 due to growing exports and falling imports. In terms of Q4, the outlook looks mixed so far: Consumer confidence fell back into pessimistic territory in October, after briefly rebounding into optimism in September, while operating conditions in the manufacturing sector improved in October.
Next year, economic growth should remain broadly steady. Higher government spending should particularly boost activity. Furthermore, although monetary policy is set to tighten slightly, it will remain accommodative by historical standards. Rising global trade protectionism, an economic slowdown in China, elevated household debt and higher oil prices, however, weigh on prospects. FocusEconomics panelists forecast the economy will grow 2.6% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.6% again in 2020.
INFLATION | ESA inflation stabilizes but remains elevated in October
Inflation in East and South Asia was stable at September’s 2.7% in October; nevertheless, it remained at relatively high levels, as high oil prices and weak currencies fueled price pressures. The print was mainly driven by stable inflation in powerhouse China as well as in Bangladesh, while higher inflation in Korea and Pakistan was offset by lower readings in Sri Lanka and Taiwan. October data is still outstanding for Hong Kong, India and Mongolia, which could modify the final reading.
The Bank of Korea was the sole central bank in the region to hold a monetary policy meeting over the last month and decided to leave its key policy rate unchanged. Having said that, the Bank’s statement sounded more hawkish, making a rate hike in the coming months more likely.
Closing output gaps in some countries, a broad currency weakening in the region and higher energy prices will propel inflation going forward. Panelists polled by FocusEconomics project average inflation of 2.7% in 2019, which is unchanged from last month’s estimate, and 2.7% again in 2020.
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Ricard Torné
Head of Economic Research