2018: A YEAR IN REVIEW
It's always good to take time to reflect on the past year before you look ahead to set your goals fo
Global economy has been facing many challenges underpinned by risks related to trading environment. Tariff imposition by the US and retaliation by other major nations is likely impact global trade deteriorating the situation further for international trading markets. The other significant risk is policy normalization in advanced countries effecting capital flows mainly. Central banks are normalizing monetary policies on strong macroeconomic incoming data while credit conditions are tightening leading to short-term capital outflows from emerging economies. In this region, ASEAN economies are under pressure to adjust their monetary policies on accelerating capital outflows. However, given their strong fundamentals despite these emerging risks, the region is seen to remain resilient with steady growth driven by private consumption, strong investments in public infrastructure and robust exports.
Off recent times, rising geopolitical and international trade turmoil in the West is shifting focus on to the East of the globe. Economies of this side of the world are gaining importance based on their changing reform policies and strengthening domestic economy. To name a few, China, India, Japan, Singapore are standing on stable macroeconomic fundamentals. ASEAN member states have been adopting accommodative monetary policies coupled with fiscal initiatives which have strengthened the region’s economic credentials making it one of the rapid growing regions of the world. Developed economies are increasing relying on this region for investment and consumption markets. International policymakers are also eyeing growing dynamics of this part of the globe while prescribing policies and making decisions. In the light of these deliberations, it is crucial to take a look at the macroeconomic situation of the ASEAN region at present.
ASEAN GDP growth suggests that the region is losing momentum led by weakening external sector. The region grew by 5.2% on annual basis. The slowdown was primarily due to sluggish growth in Malaysia and Philippines. Net exports dragged growth in both economies offsetting stronger domestic demand. Thailand also lost some momentum on the back of slower government growth while Singapore economy dipped in Q2 on decelerating services sector although manufacturing sector continued its resilience. On the other hand, region’s heavy weight Indonesia, gained stem in Q2 negating much of the regional downturn. Firm domestic demand and healthy private consumption contributed to the improvement.
In this backdrop, we discuss the macroeconomic scenario of major countries of this region and their risks and outlook going forward.
INDONESIA | Stronger domestic demand to spur growth in 2018
Indonesian economy sustained its gradual growth momentum with GDP coming in at 5.3% y/y in Q2 2018. The rise was driven by sharp acceleration in government spending, while household spending rose moderately, and fixed investments grew slowly. Manufacturing PMI fell from a 26-month high of 51.9 in August to 50.7 in September on slower rise in output and new business. Industrial production growth increased to 4.9% y/y in August from 3.9% y/y in the month before. Business confidence data jumped to the highest since Q3 2009, at 112.8 in Q2 2018 from 106.3 in the previous quarter led by strong usage of production capacity and income expectations while consumer confidence rose to 122.4 in September from 121.6 in August. Production activity in the third quarter has started off on a positive note while consumption demand is moderate. Headline and core inflation moderated to 2.9% y/y and 2.8% y/y respectively in September from 3.2% y/y and 2.9%y/y in the previous month. The Central Bank raised key policy rates by 25bps to 5.50% to maintain stability in domestic financial markets and control current account deficit (CAD) within a desirable limit. The Government has been taking measurable steps to reduce the CAD by encouraging exports and lowering imports. Indonesia’s CAD in 2017 was 1.7% of its GDP which is expected to widen to 2.2% in the current year (ADB estimates). To reduce imports and strengthen currency, the Government announced a fiscal prudent 2019 budget in mid-August.
Growth is projected to gradually strengthen as government spending and investment pick up pace. Key risks to the country’s outlook stem from rising political noise ahead of the 2019 election or rising tensions on US-China trade. The ADB estimated GDP growth to rise by 5.3% in 2018 and 2019 respectively while inflation is forecasted at 3.8% in 2018 and 4.0% in 2019.
THAILAND | Domestic demand supports growth, external sector a drag
Economic growth eased to 4.6% y/y in Q2 2018, due to slagging external sector. Net exports contracted in the second quarter (0.4% y/y). Domestic demand continues to fuel growth with Private consumption expenditure rising by 4.5% y/y in Q2. Drag in government consumption and weaker inventories slower growth in the quarter. One of the key driving sectors, tourism, slowed to 9.1% in the quarter as compared to 15.4% in the previous one. Inflation remains modest at 1.3% y/y in September 2018 along with core inflation easing to 0.5% y/y. The accommodative monetary policy stance remains conducive to continued economic growth and targeted inflation of 2.5% average with a band of ± 1.5%. The policy rate has been left unchanged at 1.5% since 2015. Industrial production data suggests manufacturing activity is picking up although at the slow pace (1.5% y/y in August v/s 4.8% in July 2018). Manufacturing PMI soft data however remains stagnant at 50 in September reflecting fractional rise from 49.9 in August led by fall in output while new orders rose slightly along with deflationary pressures on prices. Business sentiment for September marginally increased to 51.5 from 51.4 in the previous month mainly due to slight rise in investment and cost sub-indices, others remaining largely unchanged from the previous month. Q3 has started on a muted note with soft and hard data both reflecting moderation in economic activity.
Growth is, expected to moderate as external demand slows; softening of exports and rising oil prices amidst growing trade tensions between the US and China pose downside risks on the economy. Domestic economy will continue to be resilient with private investment supporting growth and inflation remaining under control of the Bank of Thailand’s target. The large current account surplus (10.8% of GDP in 2017) is also seen to slightly ease at 8.0% of GDP in 2018 giving a breather to exchange rate devaluation and helping garner foreign reserves. Finally, the upcoming elections in February 2019 after over 4-years of military government rule is the key event to be watched for to further interpret the economic growth momentum. The Asian Development Bank (ADB) projects GDP growth at 4.0% and 4.1% in 2018 and 2019 respectively. Inflation is forecasted at 1.3% and 1.2% respectively for the same period.
MALAYSIA | Strong employment and investment drives growth
Malaysian economy decelerates with 4.5% y/y growth in Q2 2018 led by drop in exports while imports rebounded. Domestic demand remained strong owing to private consumption growth at 7.9% y/y and fixed investments recovering to 1.2%. Sentiments data suggest pick-up in economic activity with manufacturing PMI increasing to a 10-month high of 51.5 in September, for the first time since January 2018, driven by strongest rise in employment since July 2012. Consumer confidence rose to an all-time high of 132.9 in Q2 2018 from 91 in the previous quarter. Inflation eased to 0.2% y/y in August however the impact of consumption tax policy on headline inflation is expected to be transitory in nature and lapse towards the end of 2019. Core inflation fell 0.2% y/y the same pace as in July. Factory output rose 1.6% y/y in August, easing from 2.4% y/y in the previous month. The Central Bank’s monetary policy stance accommodativeness remains consistent and the MPC continues to monitor and assess the balance of risks around the outlook for domestic growth and inflation. In this respect, overnight policy rate remained unchanged at 3.25% in the latest meeting.
The external sector growth moderated in August with imports outpacing exports. Exports shrunk to 0.3% y/y while imports grew at a faster pace of 11.2% (v/s 10.3% in July) narrowing trade surplus to 1.6bn from 8.3bn previously. Economic growth should broaden as contributions from the external sector gain traction amidst downside risks to exports, while domestic demand is expected to be propelled by vibrant private consumption and higher investment spending. Nonetheless, the economy is susceptible to external shocks and downside risks of global trade tensions or regional geopolitical tensions.
PHILIPPINES | GDP growth outlook robust, investments the key driver
Philippines economic activity slowed in Q2 2018 with GDP growth at 5.9% y/y compared to 6.7% in the previous quarter. Imports grew faster than exports, rising by 19.7% y/y and 13.0% y/y respectively decelerating overall growth. Household and government expenditure eased to 5.6% y/y and 11.9% y/y respectively. Manufacturing PMI improved further to 52.0 in September signaling robust demand and upbeat business confidence. Industrial production growth moderated coming in at 9.3% y/y in August compared to 12.5% y/y in July. Inflation rose sharply by 6.7% y/y in September, hitting another 9-year high, after increasing by 6.4% y/y in the previous month. Core inflation fractionally eased to 4.7% y/y in September from 4.8% y/y in the month before. The Central Bank’s target of 2% inflation has been further exceeded while the policy rate was hiked 50bps in the latest meeting citing upside risks on inflation outlook and rising core inflation broadening price pressures amidst resilient demand conditions.
The Philippine economy continues to dominate the region as one of the fastest growing economies. The Government’s push for 10-point socioeconomic agenda for continuity in macroeconomic policies, infrastructure push, tax reforms and other structural reforms transformation are well taken at this stage to provide a thrust to further economic development. Current account deficit (CAD) at 0.8% of GDP in 2017 is seen to widen to 1.0% of GDP in 2018 as per ADB estimates. Also, growth is projected at 6.8% and 6.9% in 2018 and 2019 respectively while inflation is forecasted at 4.0% in 2018 and 3.9% in 2019. Major risks include regional slowdown and financial market instability amidst growing trade war like situation.
SINGAPORE | Economic growth remains on steady expansion path
Economic growth eased in Q2 2018 coming in at 4.0% y/y giving up 0.5pp from the previous quarter. Government and private spending decelerated in the quarter while exports stood steady against rising imports. Much of the slag resulted from sluggish domestic and external factors. According to production approach, manufacturing and services sectors slowdown at 8.6% y/y and 3.4% y/y respectively (v/s 9.7% y/y and 4.0% y/y) contributed to moderation in Q2 GDP growth while construction continued to contract for the seventh straight quarter (-4.4% y/y v/s -5.2%y/y). Soft data suggests manufacturing remaining muted with PMI contracting to 49.6 in September. Alongside, industrial production too moderated to 3.6% y/y in August (v/s 6.2% y/y in July). Headline inflation inched up to 0.8% y/y in September while core CPI marginally dipped to 1.8% y/y in the same period. The Monetary Authority of Singapore (MAS) sees upward pressure on core inflation underpinned by improving labor market rising gradually towards upper limit of 1-2% target range in 2018 while headline inflation is projected to be in the upper half of 0-1% forecast range for 2018. Trade surplus moderated to SGD 3.3bn in September compared to SGD 6.3bn in August led by rise in exports (6.2% y/y) against sharp increase in imports (9.5% y/y).
External sector being a significant driver of growth, global trade movements and conflicts led by the US against its key trading partners-China and European Union are posing threats to the economic development. Merchandise exports account for 120% of the country’s GDP and thus protectionism and tariff competition are creating upside risks to economic growth and activity.
Thus, from the current macroeconomic scenario of ASEAN and major economies of the region it is evident that for most nations external sector and exports have been on the downside, albeit being early signs in H1 2018. The growing US-China tariff war situation would have repercussion effects on this part of the world. For instance, ASEAN’s trade in iron and steel comprised 3.4% of its total trade in 2016, with exports amounting to US$20.3 billion vis-à-vis imports of US$56.9 billion. At US$3.3 billion, the US’ accounted for 1.5% of ASEAN’s total iron and steel trade in that year; the direct impact of the recent US tariffs on ASEAN is hence expected to be small. More of a concern is the overall impact given the possible repercussion effects, for both exports and imports, from major partners that may be affected by the tariffs. This is particularly true for China, which at US$24.1 billion accounted for 31.2% of ASEAN’s total iron and steel trade. The outturn on global trade is likely to impact emerging markets given China being one of the top trading partners of ASEAN. Largely, the risks surrounding the growth outlook of this region, is attributed to tariff competition and protectionism by the major powers of the globe.
Our estimates point towards slight slowdown in economic activity for most of these major economies in this region over the next couple of quarters in the unlikely event of further stiff competition in global trade negating strengthening domestic demand. Even though the countries are performing well on the domestic front laid on strong foundations, healthy private and public consumption and steady investments growth, overall future economic activity might take a setback, decelerating growth. Inflation too continues to be a concern of the monetary policy authorities and upside risks to headline and core inflation persists. Accommodative monetary policy stance with inflation targeting remains the focus of the Central Banks. On further global economic turmoil and geopolitical uncertainties the region is likely to face financial markets sell-off, exchange rate fluctuations and FII outflow from emerging markets on ripple effect of advanced economies cautious macroeconomic condition. In the ASEAN, government initiatives and fiscal policies would be ensuring sustainability in economic development. Amidst rising to balanced growth in developed countries contributing to expanding world economic growth, we see the ASEAN region growing steadily but with downside risks resulting in below par growth and upsides to inflation. The macroeconomic outlook remains stable and positive for the next two years supported by robust domestic growth with global uncertainties weighing down.
In our view, markets and corporates are watchful of development of incoming data. Manufacturing and investment remain upbeat in most economies and the region therefore continues to be positive on this front. Q2 2018 reflected a slowdown in growth for most nations led by decelerating external sector but it seen to be supported by domestic demand with broadly balanced short-term risks, although downside risks over medium term prevails. However, corrective measures are to be adopted only after further movement of data on growth and inflation is observed. The year is expected to end on a steady note and thus immediate reactions from corporates and investors are on a pause. The stability of manufacturing sentiments translating into growth momentum going forward continues to remain a concern and under increasing cost burdens and weakening currencies, manufacturers remain under pressure and further pickup in industrial activity would alter change in directions. Food manufacturing, basic metals, petroleum products and automotive industries are few sub-sectors under focus.
by Antara Mukherjee, Head of Research, Intueri Consulting LLP
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