Central banks to resume easing cycles soon - Capital Economics
Emerging Asia Economics

Central banks to resume easing cycles soon

Emerging Asia Economic Outlook
Written by Emerging Asia Economics Team
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With the virus under control in most of the region, Emerging Asia is bouncing back from the crisis faster than other parts of the world. But the pace of recovery is uneven. China is leading the way. In the countries hit worst economically, the Philippines and India, we estimate that GDP is still 10-15% below the pre-crisis level. For most, headwinds from high unemployment, increased bankruptcies and continued social distancing will slow recoveries over the year ahead, and output gaps are likely to persist – even by the end of next year GDP in most countries will still be around 5% below what it would have been had the pandemic not happened.

  • Overview With the virus under control in most of the region, Emerging Asia is bouncing back from the crisis faster than other parts of the world. But the pace of recovery is uneven. China is leading the way. In the countries hit worst economically, the Philippines and India, we estimate that GDP is still 10-15% below the pre-crisis level. For most, headwinds from high unemployment, increased bankruptcies and continued social distancing will slow recoveries over the year ahead, and output gaps are likely to persist – even by the end of next year GDP in most countries will still be around 5% below what it would have been had the pandemic not happened.
  • With inflation set to remain subdued, we think central banks in many places will resume their easing cycles soon (the PBOC is a key exception) and that interest rates will remain low for the foreseeable future. In contrast, financial markets are now leaning towards tightening before the end of next year in a number of countries.
  • China has become the first major economy to return to its pre-virus growth path, thanks to its rapid containment of COVID-19 and effective stimulus response. The rebound has leaned heavily on investment and exports but we expect a revival in consumption before long. While it has to some extent been overshadowed by the coronavirus, this year’s imposition of the National Security Law will probably have a more lasting impact on Hong Kong’s economy.
  • Over the next couple of years, strong fiscal spending in Korea should push GDP back close to its pre-crisis trend. While the tourism sector will remain a drag on prospects, Singapore’s economy should continue to rebound helped by the government’s huge fiscal stimulus programme. Taiwan’s success in eliminating the virus and strong demand for electronics mean it should continue to perform well.
  • Although restrictions are being lifted in Bangladesh and the economy is recovering strongly, GDP is still likely to contract this year. The continued rapid spread of the virus across India and the need for prolonged containment measures has plunged its economy into a double-digit contraction. A tepid fiscal response means the recovery will underwhelm too and the Reserve Bank will loosen policy further. With activity bouncing back strongly and inflationary pressures still a concern, Pakistan’s central bank is unlikely to loosen policy again this year. Despite the country’s success in containing the virus, a collapse in tourist arrivals will weigh heavily on the economic recovery in Sri Lanka .
  • With the recovery proving slow going, we think Bank Indonesia will cut interest rates again over the coming months, but the pace of easing is likely to be gradual. Malaysia’s economy has recovered strongly from the crisis, but fiscal tightening next year will drag on the recovery. A long lockdown and inadequate fiscal support is holding back the recovery in the Philippines. Despite Thailand’s success in containing the coronavirus, the country is likely to record one of the biggest falls in GDP in the region this year and one of the slowest recoveries. A surge in exports to the US is providing a boost to Vietnam’s economy, which is likely to be one of the few globally to expand this year.
  • Long-term Outlook – This Outlook contains our long-term forecasts for Emerging Asia updated to include the lasting impact of the pandemic.

Key Forecasts

Table 1: GDP & Consumer Prices (% y/y)

 

Share of

 

GDP

Consumer Prices

 

World 1

 

2019

2020

2021

2022

2019

2020

2021

2022

China

                   

Mainland China 2)

19.3

 

4.0

-1.0

11.0

4.0

2.9

2.5

2.0

2.0

Hong Kong

0.3

 

-1.9

-6.0

8.0

3.5

2.9

1.5

2.0

2.0

Newly Industrialised

   

 

   

 

     

 

South Korea

1.6

 

2.0

-1.7

5.0

4.0

0.4

0.5

1.0

0.7

Singapore

0.4

 

0.7

-5.5

7.5

3.5

0.6

-0.3

2.0

0.5

Taiwan

0.9

 

2.7

1.0

4.0

3.0

0.6

-0.5

1.5

1.0

South Asia

   

 

   

 

     

 

Bangladesh

0.6

 

8.0

-2.0

9.0

7.0

5.6

5.0

6.0

6.0

India

8.0

 

4.9

-10.0

11.5

7.0

3.7

6.2

4.0

4.3

Pakistan

0.8

 

3.3

0.0

5.0

4.0

9.4

9.0

8.5

6.5

Sri Lanka

0.2

 

2.3

-4.0

3.0

4.0

4.8

4.5

4.0

3.5

South East Asia

   

 

   

 

     

 

Brunei

0.03

 

1.0

-5.0

2.0

2.0

0.5

0.5

1.0

1.0

Cambodia

0.10

 

7.0

-8.0

12.0

7.0

2.5

2.5

3.0

3.0

Indonesia

2.6

 

5.0

-3.0

7.0

6.0

2.8

2.0

2.0

3.5

Laos

0.04

 

6.5

-1.0

9.0

7.0

2.0

2.0

3.0

4.0

Malaysia

0.8

 

4.3

-5.0

10.0

5.0

0.7

-1.0

2.0

0.5

Myanmar

0.3

 

6.5

0.0

8.0

8.0

7.0

7.5

7.5

8.5

Philippines

0.7

 

6.0

-8.0

12.0

8.5

2.5

2.3

2.8

2.5

Thailand

1.0

 

2.4

-7.5

6.0

5.5

0.7

-1.0

1.0

1.0

Vietnam

0.5

 

7.0

3.0

9.0

7.0

2.8

4.0

3.0

3.0

Emerging Asia

38.2

 

3.9

-2.5

7.0

5.4

2.5

2.0

2.7

2.6

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates). 2) GDP forecasts based on our China Activity Proxy (CAP).

Table 2: Central Bank Policy Rates

         

Forecasts

 

Policy Rate

Latest

Last Change

Next Change

End

End

End

   

(8th Oct.)

   

2020

2021

2022

China

             

Mainland China

7d PBOC Rev Repo

2.20

Down 20bp (Mar ‘20)

Up 10bp Q1 ‘21

2.20

2.50

2.50

Newly Industrialised

             

South Korea

Base Rate

0.50

Down 50bp (May ‘20)

None on horizon

0.50

0.50

0.50

Taiwan

Discount Rate

1.125

Down 25bp (Mar ‘20)

None on horizon

1.125

1.125

1.125

South Asia

             

Bangladesh

Policy Rate

5.00

Down 100bp (Nov ‘03)

None on horizon

5.00

5.00

5.00

India

Repo Rate

4.00

Down 40bp (May ‘20)

Down 25bp Q4 ‘20

3.75

3.50

3.50

Pakistan

Discount Rate

7.00

Down 100bp (Jun ‘20)

None on horizon

7.00

7.00

7.00

Sri Lanka

Deposit Rate

4.50

Down 100bp (Jul ‘20)

Down 50bp Q4 ‘20

4.00

3.50

3.50

South East Asia

             

Indonesia

7-day Repo Rate

4.00

Down 25bp (Jul ‘20)

Down 25bp Q4 ‘20

3.75

3.50

3.50

Malaysia

Overnight Rate

1.75

Down 25bp (Jul ‘20)

Down 25bp Q4 ‘20

1.50

1.00

1.00

Philippines

Overnight Rate

2.25

Down 50bp (Jun ‘20)

Down 25bp Q4 ‘20

2.00

1.50

1.50

Thailand

Repo Rate

0.50

Down 25bp (May ‘20)

None on horizon

0.50

0.50

0.50

Vietnam

Refinancing Rate

4.00

Down 50bp (Oct ‘20)

Down 25bp Q1 ‘21

4.00

3.50

3.50

Sources: Bloomberg, Capital Economics

Table 3: Financial Markets

     

Forecasts

   

Forecasts

 

Currency

Latest

End

End

End

Stock Market

Latest

End

End

End

   

(8th Oct.)

2020

2021

2022

 

(8th Oct.)

2020

2021

2022

China

                   

Mainland

CNY

6.79

6.60

6.30

6.30

CSI 300 Index

4,587

4,700

5,200

5,800

Hong Kong

HKD

7.75

7.80

7.80

7.80

Hang Seng

24,063

23,250

26,250

30,250

Newly Industrialised

                   

South Korea

KRW

1,154

1,150

1,100

1,100

KOSPI

2,397

2,400

2,600

2,900

Singapore

SGD

1.36

1.37

1.35

1.35

Straits Times

2,535

2,700

3,200

3,201

Taiwan

TWD

28.7

29.0

28.5

28.5

TAIEX

12,868

12,450

13,200

14,000

South Asia

                   

Bangladesh

BDT

84.8

85.0

85.0

85.0

BSE

4,931

4,200

4,500

4,800

India

INR

73.3

77.0

80.0

81.0

Sensex 30

40,406

39,000

43,000

46,000

Pakistan

PKR

164

170

175

180

Karachi 100

41,806

43,000

47,400

52,100

Sri Lanka

LKR

184

185

185

185

Colombo All

5,811

5,000

5,250

5,250

South East Asia

                   

Indonesia

IDR

14,690

15,000

14,500

15,000

Jakarta.

5,034

5,150

5,650

6,250

Malaysia

MYR

4.15

4.20

4.10

4.10

KLCI

1,500

1,575

1,750

1,925

Philippines

PHP

48.3

47.0

47.5

48.0

PSEi

5,943

6,125

6,750

7,425

Thailand

THB

31.2

31.0

30.5

30.0

Thai SET

1,276

1,325

1,475

1,700

Vietnam

VND

23,191

23,200

23,200

23,200

Ho Chi Minh

917

1,000

1,100

1,250

Sources: Bloomberg, Capital Economics


Overview

China leading the way, India bringing up the rear

  • Economic activity is rebounding across the region, but only in China is the level of GDP likely to be back to its pre-virus path by the end of the year. Even by the end of next year GDP in most countries will still be around 5% below what it would have been had the pandemic not happened. With inflation set to remain subdued, we expect central banks in many places to resume their easing cycles soon. By contrast, markets appear to be expecting the next moves to be hikes.
  • Economic activity bottomed out in most countries around April and, with the virus now under control in much of the region, Emerging Asia is outperforming other parts of the world. (See Chart 1.) However, the pace of recovery is uneven.
  • China is leading the way. Taiwan and Vietnam are not far behind. In contrast, we estimate that GDP in the countries worst-hit economically, the Philippines and India, is still 10-15% below its pre-crisis level. Both places are struggling to contain the virus. Fiscal support has also been inadequate.
  • Recoveries are likely to slow from here. Lifting restrictions and re-opening economies led to a big jump in activity. But high unemployment, increased bankruptcies and continued social distancing will be lasting headwinds.
  • Exports have rebounded and should continue to perform well. Part of the resilience reflects strong demand for electronics products (see Chart 2), but a shift in consumer spending habits in the developed world away from services and towards goods may also be helping. A worsening of the trade war between the US and China should continue to boost exports from some countries, most notably Vietnam and Taiwan. (See Chart 3.)
  • Tourism sectors remain flat on their backs. Authorities have continued to push back planned dates for reopening of borders. This will continue to drag on recoveries in tourist destinations. Cambodia and Thailand stand out as having the most to lose. (See Chart 4.)
  • Central banks cut interest rates aggressively at the start of the crisis, but the pace of easing has slowed significantly in recent months. (See Chart 5.) The State Bank of Vietnam is the only central bank in the region to have lowered rates since July.
  • While the need for further aggressive rate cuts is over, we think most central banks will cut again over the coming months.
  • Inflation is set to stay low. (See Chart 6.) Headline rates have ticked up a little in recent months due mainly to an increase in oil prices and higher food price inflation. However, price pressures across the region remain very subdued. Five countries covered by our Emerging Asia service are currently in deflation, while inflation is above target only in two places, India and Pakistan. Large output gaps (see Chart 7) will help keep a lid on underlying price pressures.
  • The key risk for many countries is of a new wave of infections that prompts authorities to reintroduce restrictions. However, the encouraging story from countries which have already experienced “second waves”, including Korea, Hong Kong and Vietnam, is that outbreaks can be brought under control with minimum cost to the economy provided they are tackled promptly.
  • In aggregate terms, we think regional GDP will contract by 3.5% this year, followed by growth of 10.0% in 2021. (See Chart 8.)

Overview Charts

Chart 1: GDP* (% y/y)

Chart 2: Emerging Asia* Merchandise Exports
(US$bn, Jan 2017=100)

Chart 3: US Imports by Country
(US$bn, 12 month average)

Chart 4: Tourism Receipts (% of GDP, 2019)

Chart 5: CE Emerging Asia Interest Rate Diffusion Index

Chart 6: Emerging Asia Consumer Prices (% y/y)

Chart 7: Real GDP at End-2021
(% Difference from Pre-Virus Forecasts)

Chart 8: Emerging Asia GDP (% y/y)

 

Sources: Refinitiv, IMF, Google, Apple, Capital Economics


China

Recovery set to broaden out

  • China has become the first major economy to return to its pre-virus growth path, thanks to its rapid containment of COVID-19 and effective stimulus response. The rebound has leaned heavily on investment and exports but, with the labour market tightening, we expect a revival in consumption before long.
  • After a sharp contraction in Q1, GDP rose year-on-year in Q2. Our China Activity Proxy (CAP) suggests that the recovery extended into Q3, with growth rising to near 5%, roughly the same pace seen late last year. (See Chart 9.)
  • The rebound has been led by construction and industry, with services activity still lagging. (See Chart 10.) Given the scale of stimulus and recovering foreign demand, these tailwinds should continue to support growth for a while.
  • China’s exports have been shored up by strong demand for COVID-related goods such as face masks. (See Chart 11.) They may also now be benefitting from a shift in consumer spending in major markets away from services toward goods. These props will fade as the virus situation improves globally, but at the same time broader foreign demand should pick up.
  • Meanwhile, investment growth looks set to remain rapid. Budget targets imply a further ramp-up in fiscal spending in the coming months. (See Chart 12.) And improving sentiment among manufacturers points to a sharp recovery in their capital spending.
  • Admittedly, the People’s Bank began pushing up short-term rates in May, reversing the bulk of the post-COVID decline. But quantitative controls on lending matter more than interest rates and tightening on that front has been modest. Credit growth will continue to support activity in the near term. (See Chart 13.)
  • The initial spike in joblessness earlier this year has already mostly reversed, especially among migrant workers. Continued strength in investment and exports should help absorb the remaining slack in the labour market.
  • Alongside fewer concerns about the domestic spread of the virus, this should boost consumer spending and services activity, broadening out the economic recovery. A surge in the savings rate earlier this year means that households can afford to spend more as confidence returns. (See Chart 14.) And the collapse in overseas tourism means that nearly all spending now takes place at home.
  • By early next year, we expect consumption growth to be largely back on track and for the PBOC to implement more overt tightening measures, including hikes to its policy rates. (See Chart 15.)
  • One consequence of the rapid recovery and PBOC tightening is that yields in China are unusually attractive relative to elsewhere. Coupled with a jump in the trade surplus, we think this points to further renminbi gains over the coming year. (See Chart 16.)
  • Further ahead, the outlook is less bright. We expect a renewed slowdown from late 2021 onwards as the prop from stimulus fades.

Table 4: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP (CAP-based)

3.2

6.1

-1.0

11.0

4.0

Consumer Prices

2.2

2.9

2.5

2.0

2.0

           

Policy Rate1)

2.50

2.50

2.20

2.50

2.50

Exchange Rate1)2)

6.50

6.97

6.60

6.30

6.30

           

Budget Balance3)

-2.9

-4.9

-6.5

-5.0

-5.0

Current Account3)

2.3

1.0

3.0

2.0

1.5

 

Sources: CE. 1)end of period 2)vs. US Dollar 3)% of GDP

China Charts

Chart 9: China Activity Proxy & Official GDP (% y/y)

Chart 10: China Activity Proxy – Sector Proxies
(3m % y/y)

Chart 11: Goods Exports ($, % y/y)

Chart 12: Fiscal Balance (% of trend GDP, 4Q ave.)

Chart 13: Aggregate Financing*

Chart 14: Consumption (% of GDP)

Chart 15: Repo Rates (7-day, %)

Chart 16: Renminbi per US Dollar

 

Sources: CEIC, Refinitiv, Markit, Capital Economics


Hong Kong

Economy past the worst as city enters new era

  • This year’s imposition of the National Security Law will have a more lasting impact on Hong Kong’s economy than the coronavirus crisis. The new law will shift Hong Kong’s role from that of an international business and financial centre to an offshore Chinese hub.
  • A third wave of coronavirus infections during the summer has been brought under control with targeted measures, voluntary social distancing and widespread testing. There has been substantial economic disruption. (See Chart 17.) Unemployment has spiked to its highest level in 15 years.
  • But the economic shock has been smaller than in places that had to resort to a full lockdown. The trade logistics sector is benefitting from strong global demand for Chinese exports. Consumer spending is continuing to recover and fiscal policy remains supportive. The recovery on the mainland should further boost activity among firms that do business across the border. A return of Chinese tourists is foreseeable in the not-too-distant future too, as long as virus numbers remain low in both places and protests don’t restart. That seems likely: the imposition of the National Security Law has chilled dissent. The shock to retail sales from last year’s protests was larger than that from COVID-19. (See Chart 18.)
  • The loss of Hong Kong’s legal autonomy has undermined the city’s appeal as a regional hub for multinationals. Hong Kong’s future instead is likely to be as the preferred location for Chinese firms to tap global capital markets. The number and share of mainland firms with headquarters in the city has been rising for a decade. (See Chart 19.) That trend is likely to accelerate as other global financial centres become less welcoming to Chinese companies amid pressure to decouple.

Chart 17: Google Mobility Data: Footfall by Location (% dif. from pre-COVID level, 7d ave.)

Chart 18: Retail Sales (Seas. Adj., May-19=100)

Chart 19: Mainland Companies’ Share of Regional Headquarters in Hong Kong (%)

Sources: Refinitiv, Google, Capital Economics

Table 5: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

2.8

-1.9

-6.0

8.0

3.5

Consumer Prices

3.0

2.9

1.5

2.0

2.0

           

Exchange Rate1)2)

7.8

7.8

7.8

7.8

7.8

           

Budget Balance3)

2.6

-5.2

-6.0

1.0

2.0

Current Account3)

4.3

6.3

6.0

5.0

4.5

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Korea

Fiscal bonanza will drive outperformance next year

  • Korea is likely to be one of the region’s best performing economies in 2020. Over the next couple of years, strong fiscal spending should push GDP back close to its pre-crisis trend.
  • The second wave in Korea now appears to have been bought under control. Daily new cases have averaged just 70 over the past week, compared with a peak of over 400 in August. (See Chart 20.)
  • The impact of the second outbreak on the economy has been relatively small. Although the hotel, restaurant and leisure sectors have been hit hard, the overall service sector shrank by just 1% m/m in August, albeit from a subdued base. This compares with much larger drops in February and March. (See Chart 21.)
  • Encouragingly, with cases falling, the government has continued to ease restrictions and the high-frequency data suggest that mobility and activity are improving.
  • The external impact of the pandemic is well past the worst. Exports are growing again in y/y terms. The recovery in global demand is likely to be slow from here. But the important electronics sector should continue to outperform (see Chart 22), as demand is buoyed by continued investment in datacentres and 5G infrastructure. Korea also stands to gain further from the deterioration in US-China trade tensions.
  • Fiscal policy is likely to remain supportive. The government has announced plans to keep spending high next year. (See Chart 23.) Low government debt, which we estimate will be 45% of GDP, means that it has space to do so. (See Chart 24.)
  • A resounding victory in April’s National Assembly election means the government shouldn’t have any trouble pushing its spending plans through parliament.
  • Monetary policy is likely to remain loose, with the base rate set to stay at its current all-time low of just 0.50% until at least the end of 2022. (See Chart 25.) The central bank has little to worry about on the inflation front. (See Chart 26.) While the headline rate is set to rise over the next few quarters due to higher fuel price inflation, it is still set to average around 1% in both 2021 and 2022.
  • Long term government bond yields have risen in recent months as the government has borrowed more to fund its stimulus plans. The BoK has reacted by buying long-dated government bonds to cap yields. This is likely to continue as the government ramps up borrowing. We expect the central bank to announce an explicit yield target to prevent rising long-term borrowing costs putting the brakes of the recovery.
  • Strong policy support means that, after shrinking by around 1.7% this year, the economy is set to grow by 5% in 2021 and 4% in 2022. (See Chart 27.) This would push GDP to less than 1% below its pre-crisis path by the end-2022, among the smallest gaps in the region.

Table 6: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

3.2

2.0

-1.7

5.0

4.0

Consumer Prices

2.0

0.4

0.5

1.0

0.7

           

Policy Rate1)

2.25

1.25

0.50

0.50

0.50

Exchange Rate1)2)

1,150

1,150

1,150

1,100

1.100

           

Budget Balance3)

1.2

-2.2

-6.1

-5.8

-4.5

Current Account3)

4.0

3.7

3.0

2.0

2.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP

Korea Charts

Chart 20: New Confirmed Coronavirus Cases

Chart 21: Service Sector Activity (Q4 2019 = 100)

Chart 22: Merchandise Exports
(US$bn, seasonally-adjusted)

Chart 23: Korea Fiscal Position
(% of GDP)

Chart 24: Government Debt (% of GDP)

Chart 25: Korea Policy Rate (%)

Chart 26: Consumer Prices (% y/y)

Chart 27: GDP (% y/y)

 

Sources: Refinitiv, Bloomberg, WHO, Transparency International, CE

Singapore

Strong rebound to continue, backed by massive stimulus

  • A collapse in visitor arrivals will remain a drag on Singapore’s prospects, but the economy should continue to rebound helped by the government’s huge fiscal stimulus programme.
  • Singapore’s economy contracted by 13.1% q/q in the second quarter. But a large part of this will already have reversed last quarter. (See Chart 28.) The economy will continue to recover over the coming quarter, albeit at a slower pace.
  • The government has announced stimulus and support packages worth over 20% of GDP. (See Chart 29.) With fiscal reserves equivalent to 100% of GDP, fiscal policy is likely to remain supportive throughout next year.
  • Despite the slump in global demand, Singapore’s export sector has held up remarkably well. The country has benefited from strong global demand in key industries such as pharmaceuticals and electronics. We expect demand to remain strong over the next year or more as vaccine production buoys demand for active pharmaceutical ingredients, while global investment in datacentres and 5G infrastructure supports demand for electronics.
  • Some parts of the economy will take much longer to recover. Restrictions on international visitors are set to be eased only very gradually, which will weigh on the tourism and entertainment industries.
  • With the economy bouncing back, the Monetary Authority of Singapore is unlikely to loosen policy any further. Meanwhile, given that the US Fed is set to keep interest rates very low for some time to come (Singapore’s pegged currency means local interest rates are largely determined by the US Fed), local interest rates are set to remain low. (See Chart 30.)

Chart 28: GDP (% y/y)

Chart 29: Fiscal Expenditure (% of GDP)

Chart 30: Fed Funds Rate and Local Interest Rate (%)

Sources: Refinitiv, Capital Economics, IMF

Table 7: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

5.0

0.7

-5.5

7.5

3.5

Consumer Prices

2.2

0.6

-0.3

2.0

0.5

           

Exchange Rate1)2)

1.35

1.35

1.37

1.35

1.35

           

Budget Balance3)

0.7

-0.7

-20.0

-5.0

-2.0

Current Account3)

19.0

17.0

10.0

15.0

15.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Taiwan

Strong exports supporting the economy

  • Having contained the virus without significant economic damage, Taiwan will be one of the few economies to grow in 2020.
  • GDP contracted by 0.7% y/y in the second quarter, which was the worst performance since the Global Financial Crisis, though mild compared to many economies this year. The economy has since rebounded. In September, the manufacturing PMI reached its highest level since March 2018. Our GDP Tracker suggests that the economy grew again in the third quarter. (See Chart 31.)
  • Two key factors account for the strong performance. The first is success in containing the virus. Taiwan avoided the needed for a damaging lockdown and has not had a single case of community transmission since April. Daily life is now broadly back to normal. This in turn is feeding through to an improvement in the labour market and a recovery in consumer spending. (See Charts 32 and 33.)
  • The second factor is the strong performance of exports. Despite the weakness of global demand, Taiwan’s exports hit a record high in August. Strong demand for electronics products (see Chart 34) accounts for much of this strength. The worsening relationship between the US and China has also been a factor. In the first eight months of the year exports from Taiwan to the US grew by 6% y/y as importers shifted from China to avoid US tariffs. With US-China relations likely to remain strained over the years ahead, this trend is likely to continue.
  • Negotiations between the US and Taiwan over a free-trade agreement are due to begin soon. The average US import tariff on industrial goods is currently just 2%, so the benefits to Taiwan from a limited FTA that focused only on lowering tariffs would be small. However, a more comprehensive deal, which included agreements on cutting non-tariff barriers, could produce bigger benefits and could further help Taiwan position itself as a favoured destination for firms decoupling from China. Korean exporters gained market share in the US after the Korea-US FTA (KORUS) came into force in 2012. (See Chart 35.)
  • Overall, we expect Taiwan’s economy to grow by 1% in 2020 followed by an expansion of 4% next year. By the end of 2022, GDP should be back on the pre-crisis path. (See Chart 36.)
  • With the economy holding up well, the central bank appears to have brought its easing cycle to an end. Interest rates have been left unchanged at 1.125% since March. If the economy performs as we expect, then further rate cuts are unlikely. (See Chart 37.) Financial markets are pricing in further cuts.
  • One concern for the central bank is the drop in inflation. The headline rate was -0.3% y/y in August, and is likely to remain negative for the coming months. (See Chart 38.) A temporary period of deflation should not be too much of a worry: inflation should rebound next year due to a rebound in fuel price inflation.

Table 8: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

3.4

2.7

1.0

4.0

3.0

Consumer Prices

0.8

0.6

-0.5

1.5

1.0

           

Policy Rate1)

1.61

1.38

1.13

1.13

1.13

Exchange Rate1)2)

30.8

30.0

29.0

28.5

28.5

           

Budget Balance3)

-1.6

-1.8

-2.5

-1.0

-0.5

Current Account3)

10.9

10.7

10.5

11.0

11.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP

Taiwan Charts

Chart 31: Taiwan GDP & CE GDP Tracker
(% y/y, latest)

Chart 32: Employment Change & Unemployment Rate

Chart 33: Taiwan Retail Sales

Chart 34: Taiwan Exports (US$,%y/y)

Chart 35: US Imports from Korea
(% of total US imports)

Chart 36: Taiwan GDP (Q4 2019 = 100)

Chart 37: Policy Rate (%)

Chart 38: Headline and Core Inflation (%y/y)

 

Sources: Refinitiv, CBC, Google, CE


Bangladesh

Climate change a big long-term threat

  • Economic activity in Bangladesh is rebounding, but this will not stop the economy from contracting this year.
  • The number of new daily cases has been falling. (See Chart 39). And while the low level of testing makes it difficult to gauge exactly what is happening on the virus front, the fact that the share of tests coming back positive has also fallen does suggest that there has been genuine progress bringing the outbreak under control.
  • The important point from an economic perspective is that the containment measures are being lifted rapidly. The high-frequency data suggest that activity is rebounding faster in Bangladesh than the rest of South Asia. (See Chart 40.)
  • We don’t have much in terms of reliable hard data. But the fact that imports have been rising in y/y terms also suggests that the domestic economy is getting back on its feet.
  • If Bangladesh can emerge from the pandemic without lasting economic damage, its prospects should be reasonably bright. Low wages mean the country is well placed to continue expanding its low-end manufacturing sector. A resumption of the US-China trade war, which boosted garment exports to the US, should provide a further boost to the sector.
  • Climate change is a key risk for the economy. (See Chart 41.) Some countries in Emerging Asia, most notably Singapore (which is planning a massive investment in its sea wall defences), have plans to deal with rising sea levels. But Bangladesh lacks the fiscal resources to build effective defences and is likely to be hit hard by rising global temperatures.

Chart 39: Daily New Coronavirus Cases

Chart 40: % Change in Number of People at Work (Baseline 3rd Jan to 6th Feb, 7-Day Avg.)

Chart 41: People Living Below High Tide by 2050 in High Emissions Scenario (% of population)

Sources: Refinitiv, Capital Economics, IMF

Table 9: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

6.5

8.0

-2.0

9.0

7.0

Consumer Prices

6.2

5.6

5.0

6.0

6.0

           

Policy Rate1)

5.0

5.0

5.0

5.0

5.0

Exchange Rate1)2)

77.0

84.8

85.0

85.0

85.0

           

Budget Balance3)

-2.0

-2.0

-6.0

-4.0

-3.0

Current Account3)

-0.5

-1.0

-3.0

-2.0

-1.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


India

Central banks to resume easing cycles soon

  • The rapid spread of COVID-19 in India and the need for prolonged containment measures has plunged the economy into a double-digit contraction this year. A tepid fiscal response means the recovery will underwhelm too. The dire outlook will prompt the Reserve Bank to loosen monetary policy further: we think markets are wrong to expect no further rate cuts over the coming months.
  • India has become the epicentre of the global pandemic. New virus cases have come down recently but are still the highest globally. (See Chart 42). Given the severity of the outbreak, social distancing will continue for a prolonged period. Restrictions may periodically be tightened in areas where outbreaks threaten to overwhelm healthcare capacity. This will hold back the post-lockdown recovery.
  • Supply disruptions have pushed up core inflation. But it still seems likely that broader price pressures will drop as the collapse in demand eventually offsets the impact of ongoing supply constraints. That has been the story in the rest of the world: India is currently an outlier. With food inflation also dropping following a bumper monsoon harvest, headline CPI inflation will soon fall back to more comfortable rates. (See Chart 43.)
  • All of this means that policymakers should be doing as much as they can to support the economy. As inflation concerns ease, the RBI is likely to resume easing policy. That is in contrast to market expectations for policy rates to stay on hold for some time. (See Chart 44.)
  • The finance ministry’s response has been timid. Demand-boosting measures are far lower than in many other countries. (See Chart 45.) The lacklustre policy response and protracted economic slump will leave a legacy of unemployment and firm failures that will take a long time to reverse.
  • A heavily-impaired banking sector will be another headwind to the recovery. India’s banks already have one of the highest ratios of non-performing loans among EMs (see Chart 46), and many more loans are likely to fail.
  • Bringing all of this together, real GDP in India is likely to contract by 10% this year, one of the most severe falls anywhere. (See Chart 47.) We think the economy will still be more than 10% smaller in real terms at the end of 2022 than would have been the case had the virus not existed. (See Chart 48.)
  • It is difficult to find many positives at the moment. Perhaps the most that can be said in the near term is that the weakness of domestic demand leaves the external position looking secure. The current account has flipped into a rare surplus. While this should prove temporary, the deficit will remain small for the foreseeable future. (See Chart 49.)
  • In addition, the BJP has recently expedited land and labour reforms that normally face stiff political resistance, ostensibly as part of efforts to support the recovery from the COVID-19 crisis. These will do little to boost demand in the near term. But if the virus is eventually contained, they could lay the foundation for faster growth further ahead.

Table 10: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

7.1

4.9

-10.0

11.5

7.0

Consumer Prices

7.6

3.7

6.2

4.0

4.3

           

Policy Rate1)

6.80

5.15

3.75

3.50

3.50

Exchange Rate1)2)

59.0

71.4

77.0

80.0

81.0

           

Budget Balance3)4)

-4.8

-3.6

-4.6

-10.0

-5.0

Current Account3)

-2.4

-1.0

1.5

-1.0

-1.5

 

Sources: Refinitiv, CE.

1)end of period 2)vs. US Dollar 3)% of GDP 4)Central Gov’t, Fiscal Years

India Charts

Chart 42: New Daily Recorded Coronavirus Cases
(Current Top 4 Countries, 7-day Average)

Chart 43: Consumer Prices (% y/y)

Chart 44: Repo Rate (%)

Chart 45: Direct Fiscal Responses to Coronavirus*
(% of GDP)

Chart 46: Non-Performing Loans
(% of Total Loans, Latest)

Chart 47: CE GDP 2020 Forecasts (% y/y)

Chart 48: Real GDP (2019 = 100)

Chart 49: Current Account Balance (4Q Sum, % of GDP)

 

Sources: WHO, CEIC, World Bank, Capital Economics


Pakistan

Strong recovery reduces need for further rate cuts

  • With the virus seemingly under control, the economy is bouncing back strongly from the crisis. Pakistan is likely to be the best-performing economy in South Asia this year.
  • Pakistan has done a good job of containing the virus. The number of daily new cases has fallen sharply since reaching a peak of nearly 7,000 a day in June. (See Chart 50.) This has allowed the government to relax social distancing measures and reopen the economy.
  • The high frequency mobility data published by Google point to a strong recovery in mobility. The hard data are also showing signs of improvement. Industrial production grew by 5.2% y/y in July, compared with a contraction of 42% in April. (See Chart 51.) Although exports and imports are still falling in y/y terms, in levels terms they have also rebounded strongly from the lows reached earlier in the year. Car sales are back to pre-crisis levels. Despite the downturn in the global economy, remittances have also held up well. They were up by 7% in the second quarter of the year.
  • Having cuts interest rates by 625bps in the first half of the year, the main policy rate has been left unchanged at 7.0% since June. With the economy recovering well, there is less need for further aggressive easing.
  • The central bank will need to keep a close eye on inflation. The headline rate in August came in at 8.2% y/y. (See Chart 52.) While this is well below the peak of 14.6% recorded in January, it remains above the central bank’s 6% target and is one of the highest rates in the region. Higher food price inflation, following recent flood-related damage and locust attacks, combined with a decent economic recovery will keep inflation above 6% throughout the forecast period.

Chart 50: Pakistan New Daily Coronavirus Cases

Chart 51: Pakistan Industrial Production (% y/y)

Chart 52: Pakistan Consumer Prices (% y/y)

Sources: Refinitiv, Capital Economics, IMF

Table 11: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

6.0

3.3

0.0

5.0

4.0

Consumer Prices

8.4

9.4

9.0

8.5

6.5

           

Policy Rate1)

8.5

13.25

7.00

7.00

7.00

Exchange Rate1)2)

20,426

155.0

170.0

175.0

180.0

           

Budget Balance3)

-3.2

-7.0

-9.0

-6.0

-5.0

Current Account3)

0.2

-5.0

-1.0

-2.0

-2.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Sri Lanka

Tourism slump to weigh on economic recovery

  • Despite the Sri Lanka’s success in containing the virus, a collapse in international tourism means the economy will contract by 4% this year. (See Chart 53.)
  • Despite a recent cluster of cases at a garment factory, Sri Lanka has done a better job at containing the virus than other parts of South Asia. This has allowed daily life to return to normal sooner than other parts of the region.
  • However, the large tourism sector, which accounts for roughly 15% of GDP, is still on its knees. International arrivals have fallen to essentially zero since late March. (See Chart 54.) The government recent announced that it was indefinitely delaying plans to re-open the country to tourists, after originally planning to do so from 1st August. We think the economy will contract by 4% this year.
  • In response to the slump in activity the central bank has cut interest rates by a cumulative 250bps so far this year. The subdued outlook for inflation means there is room for further cuts. Headline inflation was just 4.0% y/y in September, which is comfortably within the central bank’s “desired 4-6% range”.
  • However, a high level of foreign currency debt, which we estimate is equivalent to around 50% of GDP, means the central bank will be forced to take a gradual approach. (See Chart 55.)
  • Looking beyond the current crisis, the landslide victory by Sri Lanka People’s Party (SLPP) in August’s parliamentary elections has given President Rajapaksa the green light to consolidate power. This is likely to lead to an increase in corruption and nepotism and will also add impetus to Mr Rajapaksa’s plans to “restore relations” with China.

Chart 53: Sri Lanka GDP (% y/y)

Chart 54: Tourist Arrivals (‘000s)

Chart 55: Interest Rates (%)

Sources: Refinitiv, Capital Economics, CBSL

Table 12: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

5.4

2.3

-4.0

3.0

4.0

Consumer Prices

5.0

4.8

4.5

4.0

3.5

           

Policy Rate1)

8.80

7.00

4.00

3.50

3.50

Exchange Rate1)2)

136

181

185

185

185

           

Budget Balance3)

-3.2

-6.8

-10.0

-10.0

-10.0

Current Account3)

0.2

-2.0

-3.5

-3.0

-2.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Indonesia

Slow recovery despite increased policy support

  • The near-term outlook for Indonesia’s economy is dreadful. But a series of landmark reforms passed by parliament earlier this month could set the stage for faster growth further ahead.
  • Indonesia has been hit hard by the crisis. GDP contracted by 5.3% y/y in the second quarter (see Chart 56), which was the biggest contraction in the economy since the Asian Financial Crisis (AFC).
  • The recovery is proving slow going. While exports appear to have bottomed out, they are still falling in y/y terms. On the domestic front, vehicle sales have rebounded a little in recent months but were still down by 60% y/y in August. (See Chart 57.)
  • Unlike most of much of the rest of the region, Indonesia is a long way from bringing the coronavirus under control. (See Chart 58.) This means that social distancing requirements are likely to remain in place for longer. The government recently reintroduced mobility restrictions in the capital city, Jakarta, in response to a jump in cases of the virus.
  • The slump in the economy has prompted policymakers to step up to the plate. The government is planning to run a budget deficit of 6.3% of GDP this year (before the crisis, the deficit was not allowed to exceed 3% of GDP). Fiscal policy should remain supportive next year. (See Chart 59.) The government is targeting a deficit of 5.7% of GDP in 2021.
  • Meanwhile, Bank Indonesia has lowered interest rates by 100bps since the crisis begun. Further easing is likely, but the pace of rate cuts is likely to be gradual. (See Chart 60.) The central bank remains worried that aggressive easing would cause the currency to weaken further (see Chart 61), which would pose problems for the economy given the high level of foreign currency debt.
  • Proposed changes to BI’s mandate, which include a shift to focus more on growth and unemployment, could in principle lead to major changes in how the central bank operates. But we see no evidence that BI is considering ditching its conservatism, which is rooted in concerns born in the AFC that loosening could trigger a damaging currency sell-off. In practice, therefore, we doubt the proposed changes would make much difference to how monetary policy is set.
  • BI certainly has nothing to worry about on the inflation front. The headline rate fell to just 1.3% y/y in August, down from a peak of 3.0% in February. (See Chart 62.) The collapse in economic activity should keep inflation comfortably within the central bank’s 2.5-4.5% comfort zone for some time to come.
  • Long-term prospects received a boost this month when parliament passed a raft of reforms which include steps to free-up Indonesia’s rigid labour market. Indonesia has struggled to develop the labour-intensive manufacturing base that has underpinned the economic success of other countries, in large part because hiring and firing workers is so expensive. (See Chart 63.)

Table 13: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

5.5

5.0

-3.0

7.0

6.0

Consumer Prices

5.5

2.8

2.0

2.0

3.5

           

Policy Rate1)

6.7

6.00

3.75

3.50

3.50

Exchange Rate1)2)

10,962

14,380

15,000

14,500

15,000

           

Budget Balance3)

-1.4

-2.3

-6.5

-5.5

-5.0

Current Account3)

-1.2

-3.0

-3.0

-3.0

-2.5

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP

Indonesia Charts

Chart 56: GDP (% y/y)

Chart 57: Vehicle Sales

Chart 58: New Confirmed Cases

Chart 59: Budget Balance (% of GDP)

Chart 60: Policy Rate (%)

Chart 61: Rupiah vs US Dollar

Chart 62: Consumer Prices (% y/y)

Chart 63: Severance Pay for Workers with Five Years of Tenure (weeks of salary)

 

Sources: Refinitiv, Bloomberg, WHO, World Bank, CE


Malaysia

Quick rebound, but fiscal headwinds looming

  • GDP growth is likely to rebound strongly next year (see Chart 64), but Malaysia’s output is still likely to be around 4% below its pre-crisis path at the end of 2022.
  • Malaysia recorded a record 17.1% y/y contraction in GDP in the second quarter. However, monthly GDP data show the economy rebounded strongly at the end of the quarter. GDP was down by only 3.2% by June. More recent monthly data suggest the recovery carried on into the third quarter.
  • The central bank has cut interest rates by a cumulative 125bps since the start of the crisis. Rates were left unchanged in September. But we think further easing is still needed. (See Chart 65.) Although merchandise exports and industry are performing well, a collapse in spending by tourists (which was equivalent to 5.5% of GDP in 2019) will remain a drag on the economy.
  • What’s more, a period of fiscal austerity is likely. Malaysia’s fiscal position was already precarious going into the crisis. Increased fiscal support and a drop in tax revenues are likely to push the deficit to around 10% of GDP this year.
  • Debt servicing charges are set to breach the upper limit of 15% of revenues set out in the government’s fiscal guidelines. As such, the government is likely to begin tightening fiscal policy next year. (See Chart 66.)
  • Another concern for BNM is the outlook for inflation. Consumer prices fell by 1.3% y/y in July and inflation is likely to remain negative for the rest of the year. A temporary period of deflation is not too much of a worry, but if demand remains weak, there is a danger that deflation becomes permanent and starts to distort economic behaviour.

Chart 64: GDP (% y/y)

Chart 65: Bank Negara Malaysia Policy Rate (%)

Chart 66: Fiscal Deificit (% of GDP)

Sources: Refinitiv, Capital Economics, IMF

Table 14: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

5.0

4.3

-5.0

10.0

5.0

Consumer Prices

2.5

0.7

-1.0

2.0

0.5

           

Policy Rate1)

3.00

3.00

1.50

1.00

1.00

Exchange Rate1)2)

3.40

4.10

4.20

4.10

4.10

           

Budget Balance3)

-4.0

-3.4

-9.0

-5.5

-4.0

Current Account3)

10

3.5

1.0

2.5

4.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Philippines

A slow recovery

  • Inadequate fiscal support is holding back growth in the Philippines and, unless this improves, the recovery will continue to underwhelm.
  • GDP contracted by 16.5% y/y in the second quarter, one of the biggest falls in Asia. While activity is now recovering, the country’s failure to contain the virus is holding back the recovery. Restrictions were recently reimposed in the province of Lanao del Sur, in the south of the country. We estimate that the economy only made up around half of Q2’s slump last quarter. (see Chart 67).
  • The recent hard data add to evidence of a sluggish recovery. Labour market data show that the unemployment rate stood at 10.0% in July. While this represented a fall from a peak of 17.7% in April, it is still almost double the rate at the start of the year. Industrial production was still down 15% y/y in July, among the lowest in the region.
  • In response to the slump in activity monetary policy has been loosened aggressively. The central bank (BSP) has cut interest rates by a cumulative 175bps since the start of the crisis. Although it has left interest rates unchanged at its last two meetings, we think further easing is likely. (See Chart 68.)
  • Inflation is no impediment to more rate cuts. The headline rate dropped back in September to 2.3% which is comfortably in the bottom half of the BSP’s 2-4% target range. Weak economic activity should continue to keep inflation subdued in the coming months. (See Chart 69.) Lacklustre fiscal support puts pressure on the BSP to do more. The government has so far unveiled fiscal support packages equivalent to around 3% of GDP, but local governments have been very slow to disburse the funds.

Chart 67: Real GDP (Q4 2019 = 100)

Chart 68: Policy Rates (%)

Chart 69: Consumer Prices (% y/y)

Sources: Refinitiv, Capital Economics, WHO

Table 15: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

5.9

5.9

-8.0

12.0

8.5

Consumer Prices

3.2

2.5

2.3

2.8

2.5

           

Policy Rate1)

N/A

4.00

2.00

1.50

1.50

Exchange Rate1)2)

45.0

51.0

47.0

47.5

48.0

           

Budget Balance3)

-1.6

-3.2

-10.0

-5.0

-3.8

Current Account3)

3.7

-0.1

1.0

-0.5

-1.5

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Thailand

Slump in tourism to delay recovery

  • Despite Thailand’s success in containing the coronavirus, the country is likely to record one of the biggest falls in GDP in the region this year and one of the slowest recoveries.
  • Thailand has recorded just one case of community transmission of the coronavirus in over 100 days. The country’s success in containing the disease has allowed the economy to reopen domestically.
  • However, the country’s success in keeping out the virus has only been achieved through a strict border policy. This has hammered the tourism sector (see Chart 70), which before the crisis generated around 10% of GDP. The government has announced tentative plans to reopen borders, but a full recovery in tourism will probably take many years. A slump in the automotive sector is also holding back the economy. (See Chart 71.)
  • Monetary and fiscal policy have been loosened aggressively in response to the slump in the economy. With interest rates now at just 0.5%, there is limited scope for them to be lowered further. (See Chart 72.) As such the onus will be on the government to increase fiscal spending. The authorities have already announced stimulus measures worth around 10%. A low level of debt means further stimulus is affordable.
  • A possible return of unrest and violence is another concern following recent demonstrations in universities across the country. The key risk is a return of the violent protests which took place between 2010 and 2014, which knocked around 0.7%-points off GDP growth. Perversely, the impact would be lower this time as tourist numbers have already plummeted, but business and consumer confidence would still be hit.

Chart 70: Daily Arrivals, Bangkok Airport, (‘000s)

Chart 71: Exports (US%, % y/y)

Chart 72: Policy Rate (%)

Sources: Refinitiv, Capital Economics, IMF

Table 16: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

6.0

2.3

-7.5

6.0

5.5

Consumer Prices

8.4

0.7

-1.0

1.0

1.0

           

Policy Rate1)

8.5

1.25

0.50

0.50

0.50

Exchange Rate1)2)

20,426

30.2

31.0

30.5

30.0

           

Budget Balance3)

-3.2

-1.0

-8.0

-6.0

-3.0

Current Account3)

0.2

6.8

3.0

6.0

5.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Vietnam

Outperformer

  • Continued trade tensions between the US and China are providing a significant boost to Vietnam. Having also successfully contained the virus without significant economic damage, Vietnam is likely to be one of the only economies in Emerging Asia to grow this year. (See Chart 73.)
  • Although Vietnam experienced a jump in cases in July, this appears to have been successfully contained with minimum cost to the economy. New daily cases have slowed to a trickle. The high frequency data suggest that daily life has now returned to normal.
  • The economy grew by 2.1% y/y in the first three quarters of the year, up from 1.8% in the first half. We expect the recovery to continue.
  • Despite the slump in global demand, Vietnam’s exports are at a record high. The key factor has been the worsening trade relationship between the US and China. So far this year exports from Vietnam to the US grew by 20% y/y as importers have shifted from China to alternative suppliers to avoid US tariffs.
  • Vietnam’s exports of networking equipment to the US have increased by 300% respectively since the first half of 2018. (See Chart 74.) With US-China relations likely to remain strained over the years ahead, this trend is likely to continue.
  • To cushion the blow to the economy from the crisis, the central bank has cut interest rates by 200bps, with the most recent cut coming in October. With inflation very subdued – the headline rate was just 3.0% y/y in September – the central bank has room to ease further. (See Chart 75.)

Chart 73: GDP (% y/y)

Chart 74: US Imports of Cellular Network Equipment
(US$bn, seasonally-adjusted, latest = July)

Chart 75: Policy Rate (%)

Sources: Refinitiv, Capital Economics, IMF

Table 17: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

09-18

2019

2020

2021

2022

GDP

6.0

7.0

3.0

9.0

7.0

Consumer Prices

8.4

2.8

4.0

3.0

3.0

           

Policy Rate1)

8.5

6.00

4.00

3.50

3.50

Exchange Rate1)2)

20,426

23,200

23,200

23,200

23,200

           

Budget Balance3)

-3.2

-3.5

-6.0

-5.0

-4.0

Current Account3)

0.2

4.0

3.5

3.0

2.0

 

Sources: Refinitiv, CE. 1)end of period 2)vs. US Dollar 3)% of GDP


Long-term Outlook

Structural factors to weigh on growth after the pandemic has passed

  • We are hopeful that the pandemic will not have a major impact on the region’s long-run prospects. But slowing productivity growth and less favourable demographics will still cause the trend rate of growth across the region to decline after the pandemic has passed.
  • The supply side of the economy should not be too badly affected by the crisis. Admittedly, investment growth in some countries will be weak over the coming years, denting the growth of the capital stock. However, the virus has not led to destruction of productive capacity as occurs in wars or natural disasters. What’s more, the crisis will increase the incentive for companies to invest in new technologies, which may raise productivity.
  • We are more worried that the drag from the crisis on demand will take years to fade. Households, governments and companies that are now taking on extra debt will require a period of retrenchment, which will drag on consumption, government spending and investment. And with bankruptcies rising, banks’ non-performing loans look set to rise, impairing their capacity to lend in the future.
  • Overall, while output in a few places, most notably China and Vietnam, should return to its pre-virus path relatively quickly, economies in South Asia, along with Thailand will take much longer to recover.
  • Looking beyond the pandemic, other structural factors will also weigh on growth prospects. Demographics will become less supportive everywhere. In China, as well as the original Asian Tiger economies of Hong Kong, Singapore, Korea and Taiwan, working age populations will fall over the coming decades. In the rest of the region, the growth rate of the working age population will slow. (See Charts 76 & 77.)
  • China’s initial success in rebounding from the current crisis will also come at a cost. The stimulus there is focused on state-directed investment and is likely to leave of legacy of further resource misallocation. The country already has a capital stock far more developed than other investment-intensive economies had at similar income levels. (See Chart 78.)
  • The Tiger Economies are now among the most developed in the world, and productivity in these countries has been declining for decades. (See Charts 79 & 80.) Although innovations in robotics and AI may help to boost productivity, this is unlikely to offset the fall in their working age populations.
  • Elsewhere, the outlook is more positive. India, along with other parts of South and South East Asia have the potential to boost productivity by shifting the labour force from low to high productivity sectors and replicate the best practice of richer economies. At the state level, India’s BJP has used cover of the COVID crisis to enact labour and land reforms that could bear fruit over the long-term.
  • Improvements to its business environment, political stability, and low wages all bode well for Vietnam’s future. (See Chart 81.) However, low-income countries are not guaranteed rapid catch-up growth. (See Chart 82.) We think political uncertainty will drag on prospects in the Philippines and Thailand.
  • South East Asia and South Asia are vulnerable to climate change. The biggest threat comes from rising sea levels, with Vietnam, Thailand and Bangladesh likely to be worst affected. (See Chart 83.) Some countries, most notably Singapore, have plans to deal with rising sea levels. Most others lack the fiscal resources to build effective defences and are likely to be hit hard by rising temperatures.

Long-term Charts

Chart 76: Projected Annual Change in Working-age Population (%, annual average)

Chart 77: Working Age Populations (millions)

Chart 78: Public Capital Stock vs Income Level
(US$ thds, 2011 prices, PPP adjusted, latest=2017)

Chart 79: GDP Per Head (PPP, US = 100)

Chart 80: Labour Productivity Growth in NIEs *
(%, annual average)

Chart 81: Monthly Manufacturing Wages (US$, Latest)

Chart 82: Productivity Growth & GDP per capita

Chart 83: Numbers Living Below High Tide by 2050 in High Emissions Scenario (% of population)

 

Sources: Refinitiv, CEIC, ABO, World Bank, CE, Climate Central