The outlook for ex-Japan Asia deteriorated for the third consecutive month with FocusEconomics panellists projecting regional GDP to expand 6.4% in 2013, which is down 0.2 percentage points from last month’s forecast. The downward revision reflects lower growth prospects for eight out of the 11 economies that configure the ex-Japan Asia region, including regional behemoths China and India. On the other hand, growth prospects improved for the Philippines, while panellists left their projections unchanged for Singapore and Vietnam. Meanwhile, forecasts for 2014 were also revised downwards with panellists expecting the region to expand 6.8%, which is down 0.1 percentage points from last month’s estimate.
Speculation about the possible timing and pace of the Federal Reserve’s exit strategy from its quantitative easing (QE) programme has taken the headlines recently. According to Ben Bernanke, Chairman of the Federal Reserve, the Fed may start tapering the QE program later this year, as “the downside risks to the outlook for the economy and the labour market have diminished since the fall”. On the other side of the Pacific, on 5 June, Japanese Prime Minister Shinzo Abe unveiled its long-awaited growth strategy, the latest of his “three arrows”, which will comprise, among others, creating special economic zones, mobilising women in the workforce and enforcing a deregulation process to promote private initiative. However, the announcement failed to impress markets given the lack of details and the absence of bold measures. Meanwhile, the Eurozone remains mired in the longest recession in its history, which prompted the European Central Bank to trim down its growth projections for both 2013 and 2014.
Chinese leaders tolerate slower growth while prioritizing structural reforms
Within the region, the outlook for China deteriorated for the third month in a row, as economic data continue to point to a slow-but-steady deceleration. In May, industrial output moderated and investment hit a nine-month low. Moreover, exports slowed to their lowest level in more than year, after the crackdown on inflated trade invoices. That said, Chinese leaders have indicated their willingness to tolerate slower growth, while promoting deep structural reforms, instead of using stimulus measures to shore up short-term growth. Meanwhile, concerns on a possible credit crunch in China took centre stage recently, after the country’s interbank interest rates shot up in early June, owing to tighter financial conditions due to a more “prudent” stance adopted by the People’s Bank of China (PBOC). Against this backdrop, according to some market analysts, Chinese banks are pressuring the PBOC to cut the required reserve ratio in order to free up liquidity into the financial system. FocusEconomics panellists lowered their 2013 GDP growth forecast for China by 0.2 percentage points to 7.7%.The outlook for 2014 also deteriorated, with panellists cutting their projections by 0.1 percentage points to 7.8%.
Hopes for significant pick-up in Indian economy vanish
In India, GDP grew 4.8% annually in the final quarter of the FY 2012/13, which marked a slight improvement over the 4.7% increase seen in the previous period. However, hopes for a significant pick-up in growth at the outset of the current fiscal year are vanishing, as recent data confirm the sluggishness of the economy. FocusEconomics panellists lowered the growth forecast for the fifth month in a row, by cutting fiscal year 2013/14 projections a notch over last month to the current 5.8%. Next year, the panel sees growth at 6.7%. Elsewhere in the region, in Indonesia, the parliament approved a long-awaited hike in the price of subsided fuel, which will relieve pressures on the country’s budget deficit. Similarly, in Thailand, the government announced that it will cut a subsidy on rice exports, which had resulted in a drag to national coffers.
Asian currencies weaken amid speculation on Fed’s tapering QE
Volatility in financial markets has increased markedly all around the world, with stock prices falling and bond yields rising in recent weeks. In addition, the U.S. dollar appreciated against most emerging market currencies, as a shift in the current ultra-loose monetary policy in the United States could end the large capital flows that have been flooding developing economies in recent years. As a result, several Asian currencies depreciated in recent months, with the Indian rupee trading at levels never seen before and the Indonesian rupiah weakening to its lowest level in almost four years.
Regional central banks to deal with challenging environment
On the monetary policy front, central banks in the region are facing a challenging environment defined by slowing economic growth, exchange rate volatility and, in some countries, mounting inflationary pressures. On one hand, Bank Indonesia raised interest rates to tackle inflation as well as to support the weakening rupiah, whereas the Bank of Thailand cut its key policy rate to shore up growth. Meanwhile, the Reserve Bank of India, the Bank of Korea and the Central Bank of the Philippines all remained on hold.
Regional inflation moderates
Regional inflation continues to moderate, falling from 2.8% in April to 2.6% in May. In fact, regional inflation has fallen to levels not seen since November 2009. FocusEconomics Consensus Forecast panellists have cut their forecast for annual average inflation in 2013 from the 3.5% projected last month to the current 3.4%. In 2014, the panel expects average inflation in ex-Japan Asia to edge up to 3.8%.Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – July 2013. Published June 25th, 2013. The full report (140 pages, covering 11 major Asian economies is available for immediate download at the FocusEconomics Online Store). For more information and a free sample of the report please visit our website.