Ex-Japan Asia: Economic outlook stabilizes after 2 months of deterioration

The outlook for ex-Japan Asia stabilized this month after having deteriorated in the prior two months. FocusEconomics panelists left their growth forecasts for 2014 steady at the previous month’s 6.4%. The stable outlook for the region mainly reflects unrevised projections for 10 of the 11 economies surveyed. Only India saw a deterioration in prospects this month. For 2013, the panel expects the region to expand 6.2%, which is also unchanged from last month’s estimate.

photo by dany13

photo by dany13

Major economies continue to recover slowly

The region’s stable outlook comes within the context of a positive news flow that suggests a slow but steady economic recovery for the world’s major economies. In the United States, economic growth gained momentum in the third quarter, with GDP expanding at a seasonally adjusted annualized rate (SAAR) of 2.8%, which was above the 2.5% growth recorded in the second quarter. In her first appearance before Congress on 14 November, Federal Reserve Chair nominee Janet Yellen defended the Fed’s massive quantitative easing program on the basis that unemployment is still too high to start tapering asset purchases.

The European Central Bank unexpectedly cut its reference rate to a new record low of 0.25% on 7 November in a reaction to the plunge in inflation in recent months. Moreover, Eurozone GDP expanded for the second consecutive period in the third quarter, rising a seasonally-adjusted 0.1% over the previous quarter. In Japan, GDP slowed in the third quarter, expanding 1.9% over the previous quarter in seasonally-adjusted terms. The print, which beat market expectations, represented the fourth consecutive quarter of expansion in the country’s output.

China announces reform roadmap

Within the region, the Communist Party of China (CPC) held the long-awaited Third Plenary Session of the Central Committee on 9–12 November. The meeting communique stressed the need for economic reforms and unveiled a series of guidelines to facilitate economic transformation, which include letting the market play a “decisive” role in allocating resources and introducing market-oriented reforms in State-owned companies. In the document, the CPC also vowed to accelerate interest rate liberalization, current account convertibility and exchange rate reform. The government will grant rural residents more property rights and will relax the hukou system of household registration. Other key areas of reform are social security, the fiscal system and governance. Ahead of the Third Plenary Session, Premier Li Keqiang stated that China needs a 7.2% growth rate in order to ensure the creation of 10 million jobs each year and to cap urban unemployment at 4.0%. On the economic front, growth remains resilient; PMI reached its highest level in 18 months in October and industrial production accelerated again in the same month. Moreover, exports rebounded in October, pointing to a mild turnaround in global demand. Meanwhile, the recent slowdown in new loans and total financing, along with the People’s Bank of China’s withdrawal of funds from the money market in October, suggest that the Central Bank is trying to maintain liquidity at a tightly-balanced level. FocusEconomics panelists left their growth projections unrevised at 7.6% in 2013. The outlook for 2014 remained stable, with a forecast of a 7.5% expansion in GDP.

Recent indicators suggest that India’s economy stabilizes

Recent developments and the latest available indicators suggest that the Indian economy will enter into a period of stability in the months to come. Industrial production expanded 2.0% annually in September. The print marked a substantial improvement over August’s 0.4% increase. The external sector is also gaining momentum; exports grew in the double digits for the fourth consecutive month in October. The strong evolution of exports is helping to reduce concerns over the current account deficit, which has threatened the stability of the Indian rupee in the recent months. FocusEconomics panelists left their growth projections for FY 2013/2014 unchanged at 4.8%, halting the downward trend that began in March. The panel sees growth at 5.5% in FY 2014/2015, which is down 0.2 percentage points over the previous month’s projection.

Stable outlook for the Philippines despite strongest storm in history

Typhoon Haiyan, one of the strongest storms in history, slammed the Philippines on 8 November. The magnitude of the devastation was tremendous and the final death toll is estimated at more than 3,000. Despite inevitable economic impact of the storm, analysts have emphasized the country’s strong macroeconomic fundamentals and maintain a positive outlook for the economy. Determining the scale of damage to the country’s infrastructure and lost productive activity will take time, however, and the true impact will likely only be visible starting with Q1 2014 data.

Mixed signals for the rest of the region

Elsewhere in the region, in Malaysia GDP expanded 5.0% in Q3, marking an acceleration over the 4.4% increase tallied in Q2. The government announced the 2014 budget on 25 October, which includes a new goods and services tax and a restructuring of the subsidy system. Meanwhile, Q3 GDP slowed in Hong Kong, Indonesia and Taiwan, mostly reflecting a deterioration in the external sector. While the external sector also deteriorated in Korea, economic activity accelerated in Q3 due to resilient domestic demand.

photo by Maks Karochkin

photo by Maks Karochkin

Regional inflation stabilizes

Against a backdrop of contained inflationary pressures and ongoing resilience in domestic demand, the central banks of Korea, Malaysia and the Philippines have chosen to leave their policy rates unchanged since late October. At its 12 November meeting, Bank Indonesia raised its policy rate by 25 basis points to 7.50% in an attempt to control a, “persistently large current account deficit.” Meanwhile, the Reserve Bank of India (RBI) lowered the Marginal Standing Facility (MSF) rate by 25 basis points to 8.75%. The aim of this move—which follows a similar 25 basis-point cut on 7 October—is to return the differential between the MSF rate and the repurchase rate to 100 points. Moreover, in an unscheduled communique released on 13 November, Governor Raghuram Rajan stated that there is, “no economic fundamental reason for volatility in the exchange rate.” The statement was released the day after the rupee hit a two-month low of 63.72 INR per USD.

Preliminary data showed that inflation in ex-Japan Asia stabilized at September’s 3.5% in October. In 2014, FocusEconomics Consensus Forecast panelists expect inflation in ex-Japan Asia to average 3.5%, which is down 0.1 percentage points from last month’s estimate. The decrease mainly reflects lower inflation projections for India, Indonesia, Korea and Thailand. The panel left their 2013 inflation forecast unchanged at 3.2%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – December 2013. Published November 19th, 2013. The full report (146 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.

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