The outlook for ex-Japan Asia was stable this month following a deterioration in the previous period. FocusEconomics panelists maintained their growth forecasts for 2014 at 6.2%. The stable outlook mainly reflects unrevised projections for 8 of the 15 economies polled by FocusEconomics, which include regional powerhouses China and India. Prospects for Hong Kong, Indonesia, the Philippines, Thailand and Vietnam deteriorated this month, whereas the forecast for Brunei and Malaysia improved compared to the previous period. For 2015, forecasters surveyed by FocusEconomics also left their growth projections unchanged at the previous month’s 6.4%.
Fed Expected to Wind Down Asset Purchase Program by Year-end
The stable outlook for the region contrasts lower growth prospects for the global economy due to downward revisions to the United States and the Euro area. In the United States, despite Q1’s dismal economic performance, which revealed the first contraction in GDP since 2011, the Federal Reserve decided to continue to wind down its asset purchase program at its 17–18 June meeting. At the current pace, the program is on track to come to an end in December of this year. On a positive note, total employment returned to the pre-crisis peak in May.
ECB Cuts Deposit Rate Below Zero to Boost Eurozone Recovery
On the other side of the Atlantic, the European Central Bank loosened its monetary policy and lowered the refinancing rate from 0.25% to 0.15% at its 5 June meeting in order to support the region’s incipient recovery and dissipate fears of deflation. In a historic move, the Bank also cut its deposit rate from 0.00% to minus 0.10%. Furthermore, the ECB will lend funds to banks for up to four years at a fixed rate of 0.25%. Some analysts agree that this move has paved the way for the use of other measures such as quantitative easing.
According to revised data, Japan’s economy soared 6.7% over the previous quarter in seasonally adjusted annualized terms (SAAR) in Q1, which marked the fastest pace of expansion since Q3 2011. That said, Q1’s strong figures, which came on the back of a front-loaded increase in consumer spending ahead of the April tax hike, have prepared the ground for a major downturn in the next period. Meanwhile, on 16 June, Prime Minister Shinzo Abe unveiled a draft of the long-awaited growth strategy, or the so-called third arrow, which includes a reduction in the corporate tax. While full details are expected later this month, the government signaled that the corporate tax would be lowered from 35.0% to under 30.0%.
Chinese Government Will Focus on “Targeted Measures” to Support Economic Growth
Within the region, China’s growth stabilized in May, with both retail sales and industrial production accelerating slightly. In addition, the HSBC manufacturing PMI hit the highest level in seven months in June. Conversely, urban fixed-asset investment growth continued on a downward trend, falling to the lowest level since 2001. On 10 June, Premier Li Keqiang stated that authorities would focus more on targeted measures to prop up growth rather than unveiling a big stimulus.
On 9 June, the People’s Bank of China unveiled a new targeted cut of 50 basis points in the reserve requirement ratio for commercial banks that lend to the agriculture sector and to small- and medium-sized enterprises. On 16 June, the Bank expanded this measure to three medium-size commercial banks. That said, the impact of the cut will be limited as the cap for major banks was maintained at 20.0%. 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 Establishes Action Plan to Increase Productivity Country-wide
Narendra Modi took office as India’s 15th Prime Minister on 27 May. Although the government has not yet unveiled a concrete action plan for the economy, President Pranab Mukherjee addressed the parliament on 9 June and restated Modi’s broad economic view. Modi is aiming to improve conditions for industry and infrastructure and to increase productivity across the country. He sees this program as having three characteristics, what he calls “3S”: Skills, scale and speed. In addition, Modi is expected to promote a port development program, known as “5T”, which refers to tradition, talent, tourism, trade and technology. Meanwhile, GDP expanded 4.6% annually in the January–March period, which mirrored the previous quarter’s result. FocusEconomics panelists left India’s growth outlook for FY 2014/2015 unchanged at 5.3% for the sixth consecutive month. The panel sees FY 2015/2016 GDP growth accelerating to 6.0%.
Thai Military Faces Tough Economic Challenge Pending New Interim Government
Political developments continued to dominate the headlines in Thailand. On 22 May, the military took control of the country and declared a coup d’etat, thus ending the rule of Yingluck Shinawatra’s party. While new elections are not expected to be held for at least a year, a new interim government will be set up by the end of August or the beginning of September. In addition, the military government vowed to replace Yingluck’s multi-billion dollar rice scheme with a less costly cultivation subsidy and give farmers low-interest loans (see details on page 123). FocusEconomics panelists shaved off 0.8 percentage points from last month’s growth forecast and now expect Thai GDP to expand 1.6% in 2014, which is well below the 4.5% increase that was projected in November last year when the political crisis began. For next year, the panel sees growth at 4.2%.
Most Central Banks to Remain on Hold Throughout the Year
Against a backdrop of stable international financial markets, steady economic growth prospects and moderate inflationary pressures, the central banks of India, Indonesia, Korea, the Philippines and Thailand have decided to maintain their policy rates unchanged since late May. In fact, panelists do not foresee major changes in policy rates in the second half of this year. Only Malaysia and the Philippines are expected to adopt a tightening bias due to increasing inflationary pressures. In turn, some panelists expect the Bank of Korea to start normalizing interest rates later this year by hiking the country’s base rate.
Vietnam Central Bank Devalues Dong Against U.S. Dollar
On 18 June, the State Bank of Vietnam decided to devaluate the mid-point exchange rate between the Vietnamese dong and the U.S. dollar by 1.0% to 21,246 VNF per USD. Stable inflation so far this year and improving international reserves have allowed the Central Bank to weaken the national currency in order to spur economic growth (see details on page 139). Meanwhile, the Korean won appreciated strongly in recent months on the back of sustained economic growth and a healthy current account surplus (see details on page 73).
Panelists Revise Down Regional Inflation Forecast
According to preliminary data, inflation in ex-Japan Asia accelerated in May, rising from 3.0% in April to 3.4%. The monthly increase mainly reflects higher inflation in China. A downward revision to China’s inflation outlook for 2014 drove FocusEconomics Consensus Forecast panelists to cut their projections in ex-Japan Asia by 0.2 percentage points from last month’s estimate to 3.4%. For 2015, the panel lowered their inflation forecasts by 0.1 percentage points to 3.6%.Note: This is an excerpt from the FocusEconomics Consensus Forecast Asia – July 2014. Published June 23rd, 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.