Asia: Regional Outlook Deteriorates

The outlook for ex-Japan Asia deteriorated this month following a stable outlook in the previous period. FocusEconomics panelists lowered their growth forecasts for 2014 by 0.1 percentage points to 6.2%. The deteriorating outlook mainly reflects lower growth prospects for Indonesia and Thailand. Projections for 11 of the 15 economies surveyed—including regional behemoths China and India—remained stable this month, whereas forecasts for Korea and Myanmar improved compared to the previous period. For 2015, forecasters polled by FocusEconomics left their growth projections unchanged at the previous month’s 6.4%.

Asia Infographic June 2014

Q1 GDP Stalls in U.S., Disappoints in Eurozone

Global economic prospects worsened slightly in recent weeks. In the United States, GDP stalled in Q1 due to weaker activity in investment and exports. Nonetheless, recent indicators point to a rebound in activity going forward; the unemployment rate fell to pre-crisis levels in April and the ISM manufacturing index recorded a stronger performance in the same month. Meanwhile, the Federal Reserve continued to wind down its asset purchase program at its 29—30 April meeting. At the current pace the program is on track to come to an end in December of this year.

On the other side of the Atlantic, growth in the Eurozone disappointed in Q1, increasing a seasonally-adjusted 0.2% over the previous quarter. Germany continued to outperform the rest of the Eurozone’s largest economies. European Central Bank President Mario Draghi stated on 8 May that he was “comfortable” taking action in June to address the risk of deflation. Meanwhile, further risk of military escalation in Ukraine following the secessionist referenda held in two eastern provinces on 11 May continued to dominate the headlines. Additionally, there could be a resurgence in violence ahead of the presidential elections scheduled for 25 May.

 Japan Steps Up Momentum, China Loses Steam

Japan’s economy regained momentum at the outset of the year, mainly due to robust private consumption ahead of the sales tax hike that was implemented in April. That said, the front-loaded increase in consumer spending has prepared the ground for a major downturn in the next period.

Within the region, China’s growth momentum weakened further at the beginning of the second quarter with both retail sales and industrial production moderating in April. In addition, urban fixed-asset investment growth slowed to the lowest level in over a decade in the first four months of the year. On the upside, the PMI inched up in April and both exports and imports rebounded in the same month. The across-the-board slowdown suggests that the economy has yet to stabilize. Despite President Xi Jinping’s call for the country to adapt to lower growth rates and the People’s Bank of China’s renewed stance on maintaining a “prudent” monetary policy, analysts have started to price in the possibility of rate cuts and reductions in the reserve requirement ratio as early as in the current quarter. FocusEconomics panelists left their growth projections for this year unchanged at 7.4%. Similarly, growth prospects for 2015 were left at the previous month’s rate of 7.3%.

Modi to Lead India’s First Absolute Majority in 25 Years, Positive Reaction from Markets

In India, opposition candidate Narendra Modi from the Bharatiya Janata Party (BJP) won the general elections by a landslide and will become the first prime minister to lead a party with an absolute parliamentary majority since 1989. The BJP-led National Democratic Alliance (NDA) won in 336 out of the 543 constituencies, according to the results the Election Commission of India presented on 16 May. The BJP won 282 constituencies, whereas the main opposition party, the Indian National Congress (INC) only won in 44. The results allow Modi and the NDA to form a strong government to implement the economic reforms that Modi’s BJP has advocated for during the campaign. That said, some analysts recognize that there is still a degree of uncertainty regarding the first moves that the new administration will make (see details on page 42). FocusEconomics panelists left India’s growth outlook for FY 2014/2015 unchanged at 5.3% for the fifth consecutive month. The panel sees GDP growth for FY 2015/2016 accelerating to 5.9%.

Tensions between China and neighboring Vietnam over a territorial dispute in the South China Sea resurfaced on 9 May after China began drilling for oil into waters that Vietnam also claims. A stand-off between ships from the two countries has developed around the rig. These incidents sparked anti-China protests across Vietnam. Protesters attacked foreign-owned businesses, in particular those believed to be Chinese, and there were some casualties during the incidents. The Vietnamese government condemned the violent episodes and a few hundred people were arrested.

Political Tensions Continue to Drag Down 2014 Growth Forecasts

Political developments took center stage elsewhere in the region. On 7 May, the Thai Constitutional Court ordered the removal of Prime Minister Yingluck Shinawatra along with nine Cabinet members after Yingluck was found guilty of nepotism. The remaining Cabinet members appointed Deputy Prime Minister Niwattumrong Boonsongpaisan to act as the new caretaker Prime Minister. Just a day after the Court forced Yingluck out of office, Thailand’s National Anti-Corruption Commission found enough evidence to indict her for negligence of duty for pursuing the controversial rice subsidy scheme. The decision was forwarded to the Senate to determine if she should be impeached. While Yingluck’s Pheu Thai Party is pushing for an election as early as 20 July, the Election Commission stated that it was “highly unlikely” due to the ongoing political unrest (see details on page 123). The latest economic data show that the economy contracted 0.6% in the first quarter of this year, which contrasted the 0.6% expansion tallied in Q4. Taking into account the deep political crisis, FocusEconomics panelists shaved off 0.2 percentage points from last month’s growth forecast and now expect Thai GDP to expand 2.4% in 2014, which is well below the 4.3% increase projected in January. For next year, the panel sees growth at 4.3%.

Central Banks Maintain Policy Rates, Inflation Declines Slightly

Against a backdrop of stable financial markets, steady economic growth prospects and moderate inflationary pressures, the central banks of Indonesia, Korea, Malaysia and the Philippines have decided to maintain their policy rates unchanged since late April. Despite the ongoing political turmoil that is hurting the country’s economy, the Bank of Thailand decided to keep the one-day repurchase rate on hold at its 23 April meeting, after having cut the key policy by 25 basis rate at previous meeting.

Photo by peretzp

Photo by peretzp

According to preliminary data, inflation in ex-Japan Asia decelerated in April, declining from 2.6% in March to 2.3%. The monthly decrease mainly reflects lower inflation in China. FocusEconomics Consensus Forecast panelists expect inflation in ex-Japan Asia to average 3.6% in 2014, which is unchanged from last month’s estimate. The panel also maintained its inflation projection for 2015 at the previous month’s 3.7%.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – June 2014. Published May 20th, 2014. The full report (156 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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