The outlook for ex-Japan Asia deteriorated again this month. FocusEconomics panelists expect regional GDP to expand 6.4% in 2014, which is down 0.1 percentage points from last month’s forecast. The deteriorating outlook mainly reflects lower projections for India, Indonesia, Taiwan and Thailand, which were partially offset by improving forecasts for Korea, the Philippines and Singapore. Panelists made no change to the outlook for China, Hong Kong, Malaysia and Vietnam. For 2013, the panel expects the region to expand 6.2%, which is unchanged from last month’s estimate.
US Congress passes deal to avert default
The global news flow this month was dominated by the United States’ first government shutdown in 17 years and by the complicated negotiations between Democrats and Republicans regarding lifting the county’s debt ceiling. On 16 October, bipartisan leaders in the Senate announced a temporary agreement to fund the government until 15 January and to extend the government’s borrowing authority through 7 February. Although the Congress passed the agreement and averted a default, ongoing political wrangling between Democrats and Republicans threatens to further damage the country’s credibility.
Prime Minister Abe announces sales tax hike; Greece gets closer to third bailout package
In Japan, on 1 October, Prime Minister Shinzo Abe announced the implementation of a long-awaited 3.0% sales tax hike, which is scheduled for April next year. In order to cushion the economy from the negative effect of the sales tax increase, the government unveiled a stimulus package of JPY 5 trillion (USD 51 billion), which will include a series of tax breaks as well as handouts to low-income households. In Europe, Ireland and Spain are both on track to exit their international bailout programs in December. Portugal, however, unveiled new austerity measures amounting to EUR 3.2 billion in order to meet budget deficit targets and exit its bailout program next year. Meanwhile, Greece is edging closer to a third rescue package.
Chinese economy improves in third quarter
Within the region, China’s economic activity picked up in the third quarter; GDP expanded 7.8% annually, which was above the 7.5% rise tallied in Q2. The improvement partially reflects authorities’ efforts to bolster economic growth—mainly through tax breaks and investment in railways—in order to meet the 7.5% growth target set for this year. In the political arena, expectations for economic reforms have arisen ahead of the Central Committee of the Communist Party’s third plenary scheduled for November. According to analysts, the top decision-making body could unveil a series of economic reforms to ensure sustainable long-term growth, albeit at the expense of slower economic activity in the short run. FocusEconomics panelists left their growth projections for 2013 unchanged at 7.6%. The outlook for 2014 remained stable as the panel expects GDP to expand 7.5%.
Cloudier outlook for India amid Cyclone Phailin
In India, recent data suggest that economic activity bottomed out in the first quarter of the 2013/2014 fiscal year. Industrial production expanded for a second consecutive month in August, growing 0.6% annually (July: 2.8% year-on-year). In addition, the trade deficit shrank to a 30-month low in September as exports increased 11.2% over the same month last year, following the hefty 13.0% expansion registered in August. The expansion is likely to ease concerns over India’s ballooning current account deficit. Nevertheless, the recovery may be threatened by the impact of Cyclone Phailin, which hit the country’s eastern coast in mid-October and greatly disrupted economic activity. The scope of the disaster is still unknown, given the size of the affected areas. FocusEconomics panelists lowered their growth forecast for India for the ninth month in a row, cutting the previous month’s FY 2013/2014 projections by 0.3 percentage points to 4.8%. The panel sees growth at 5.7% in FY 2014/2015, which is down 0.1 percentage points over the previous month’s projection.
Recent data show slow recovery
Elsewhere in the region, recent data suggest that economic activity slowly recovered in the third quarter, although growth remained subdued. Singapore’s GDP contracted at a seasonally-adjusted annualized rate of 1.0% over the previous quarter in the third quarter, which was less than the 4.0% fall that markets had expected. In Korea, while industrial production grew at its fastest pace in seven months in August, September’s exports recorded their largest drop since February. Indonesia’s trade balance swung to a surplus in August after July’s record deficit, whereas August retail sales slowed to a 23-month low.
Reserve Bank of India lowers Marginal Standard Facility rate
The Fed’s decision to maintain its bond buying program and the end of the U.S. fiscal standoff came as a relief to the financial markets in emerging economies, following weeks of turmoil that weakened most regional currencies and threatened to cause a surge in inflation. Against this backdrop, the central banks of Indonesia, Korea, Taiwan and Thailand have all kept their policy rates unchanged since late September.
Meanwhile, the Reserve Bank of India (RBI) lowered the Marginal Standard Facility rate by 50 basis points to 9.00%. This move, which followed a 75-basis-point cut at the 20 September monetary policy meeting, is intended to narrow the differential between the MSF rate and the repurchase rate—currently at 7.50%—to 100 basis points and, thus, return to the normal monetary policy framework.
Inflation expectations stabilized in ex-Japan Asia
Preliminary data showed that inflation in ex-Japan Asia rose from 3.2% in August to 3.4% in September. The increase mainly reflects higher inflation for regional behemoths China and India. Inflation expectations have stabilized for both this and next year. FocusEconomics Consensus Forecast panelists made no change to the 2014 inflation forecast of 3.6% and they expect an average inflation of 3.2% for 2013.Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – November 2013. Published October 22nd, 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.