The outlook for ex-Japan Asia deteriorated this month. As a result, the downward trend that began in May continues. FocusEconomics panelists expect regional GDP to expand 6.2% in 2013, which is down 0.1 percentage points from last month’s forecast. The worsening outlook mainly reflects that lower projections for India, Indonesia, Malaysia and Thailand more than offset improving prospects for China, Hong Kong, Korea, the Philippines and Singapore. Panelists made no change to the outlook for Taiwan and Vietnam. For 2014, the panel expects the region to expand 6.5%, which is also down 0.1 percentage points from last month’s estimate.
Fed scales back tapering; Merkel ready for third term
The region’s deteriorating outlook comes within the context of stabilizing growth forecasts for the global economy, where an improvement in prospects for the Euro area and the United Kingdom compensated for worsening projections for the United States.
At its policy meeting on 17-18 September, the Federal Reserve announced that, despite the “growing underlying strength in the broader economy”, it would wait for more evidence of sustained progress before making adjustments to its asset purchase program. The decision came as a surprise to the market, which had anticipated that scaling back would begin in September. In Europe, Angela Merkel’s CDU/CSU party won the federal elections in Germany for a third term on 22 September. Merkel’s party fell short of securing a majority in parliament. Since her junior coalition allies—the Liberals (FDP)—failed to make it into parliament, Merkel is expected to start negotiations talks with the main opposition party—the Social Democratic Party (SPD)—to form a so-called “grand coalition” government. Analysts do not expect any significant shift in Germany’s stance regarding European policy as a result of the election. In Japan, economic recovery is firmly entrenched, although the outlook is still clouded by uncertainty regarding the decision to implement a controversial increase in the sales tax, which is scheduled for next year.
Panelists raise GDP growth forecast for China on improving economic data
Within the region, the outlook for China improved this month as recent data point to a broad-based recovery for the Chinese economy. In August, industrial production accelerated to a 10.4% increase—the strongest expansion in over a year. Investment improved in the same month, expanding 20.3%. Retail sales hit an eight-month high in August, rising 13.4% over the same month last year. In addition, the improvement in the Purchasing Managers’ Index (PMI) in August suggests that further gains are on the horizon. The external sector is also gaining some momentum; export growth accelerated to 7.1% in August, up from 5.1% in July. Meanwhile, Shanghai will launch its free trade zone on 29 September. The zone is expected to feature looser capital controls and fewer trade barriers. FocusEconomics panelists raised their 2013 GDP growth forecast for China by 0.1 percentage points to 7.6%. The outlook for 2014, however, was maintained at the previous month’s estimate of a 7.5% expansion.
Outlook for India worsens due to weak growth
In India, GDP expanded 4.4% annually in the April–June period—the first quarter of India’s 2013/2014 fiscal year. The expansion was below the 4.8% rise recorded in the previous quarter, although recent data suggest a modest pickup in growth. Industrial production rebounded in July, growing 2.6% annually and contrasting the 1.8% contraction observed in June. In addition, the trade deficit narrowed in August; exports increased a substantial 13.0% over the same month last year, while imports contracted for the third consecutive month. On 19 September, the government announced a series of austerity measures with which it intends to trim down expenditures. These measures, however, are expected to have a limited impact on fiscal deficit. FocusEconomics panelists lowered their growth forecast for the eighth month in a row, cutting the previous month’s FY 2013/2014 projections by 0.4 percentage points to 5.1%. The panel sees growth at 5.8% in FY 2014/2015.
Fed decision relief to emerging markets
The Fed’s decision to maintain its bond buying program came as a relief to emerging markets, following weeks of turmoil in financial markets that weakened most of the regional currencies and threatened to cause a surge in inflation. Nevertheless, market attention continues to be mainly focused on India and Indonesia—both countries have substantial current account and fiscal deficits. The Indian rupee halted its downward spiral, as the measures the Reserve Bank of India implemented in July have finally started to impact the exchange rate positively. The Indonesian rupiah, however, plunged further in recent weeks, falling to its lowest level since 2009 (see details on page 57).
Bank Indonesia and Reserve Bank of India increase main policy rate
The central banks of Korea, Malaysia and the Philippines have all kept their policy rates unchanged since late August. Meanwhile, Bank Indonesia (BI) increased the BI policy rate by 25 basis points to 7.25% at its 12 September monetary policy meeting. This increase followed a hike of 50 basis points, which was announced at the Bank’s extraordinary meeting on 29 August. With these moves, the Central Bank aims to control inflation, thereby stabilizing the rupiah and ensuring the current account deficit is managed at a sustainable level (see details on page 57). At its 20 September monetary policy meeting—the first meeting chaired by Raghuram Rajan—the Reserve Bank of India (RBI) raised the repurchase rate by 25 basis points to 7.50%. Moreover, the Bank also decided to ease some of the measures that have been in place since July in order to reduce volatility in the foreign exchange market (see details on page 43).
Regional inflation moderates in August
Inflation in ex-Japan Asia fell from 3.3% in July to 3.2% in August. The drop mainly reflects lower inflation in China, Korea, Malaysia, the Philippines, Taiwan and Thailand, which more than offset rising inflation in India, Indonesia and Vietnam. That said, FocusEconomics Consensus Forecast panelists left their forecast for annual average inflation in 2013 unchanged at 3.2%. In 2014, the panel expects average inflation in ex-Japan Asia to edge up to 3.6%, which is also unchanged from last month’s estimate.Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – October 2013. Published September 23rd, 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.