Further slowdown in China, but recovery elsewhere - Capital Economics
Emerging Asia Economics

Further slowdown in China, but recovery elsewhere

Emerging Asia Economic Outlook
Written by Emerging Asia Economics Team
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Regional growth is likely to remain very weak, with slower growth in China likely to offset a modest recovery in the rest of the region. China’s economy has remained resilient in recent months. But with the boom in property construction coming to an end and headwinds from higher food inflation and the global trade war set to intensify, growth is likely to slow in 2020. The outlook is better in the rest of the region. Although India’s economy slowed sharply in the first half of the year, growth should accelerate over the coming year helped by recent interest rate cuts and fiscal loosening. Growth should also start to pick up in the rest of the region, with policy loosening and a recovery in the electronics sector likely to offset the drag from weak global demand.

  • Overview – Regional growth is likely to remain very weak, with slower growth in China likely to offset a modest recovery in the rest of the region. China’s economy has remained resilient in recent months. But with the boom in property construction coming to an end and headwinds from higher food inflation and the global trade war set to intensify, growth is likely to slow in 2020. The outlook is better in the rest of the region. Although India’s economy slowed sharply in the first half of the year, growth should accelerate over the coming year helped by recent interest rate cuts and fiscal loosening. Growth should also start to pick up in the rest of the region, with policy loosening and a recovery in the electronics sector likely to offset the drag from weak global demand.
  • The damage to China’s economy from the trade war is likely to remain modest even if trade tensions with the US continue to escalate. The protests in Hong Kong are weighing heavily on the economy. Even if they end soon, slowing global growth and a fragile property sector mean growth in the territory is likely to remain weak.
  • Looser fiscal and monetary policy should help to drive a recovery in Korea over the coming year. With exports weighing heavily on the economy, economic growth in Singapore is likely to remain very weak. With the economy rebounding, Taiwan is unlikely to follow other countries in the region by cutting interest rates.
  • Bangladesh has performed strongly in recent years, although further reforms are needed if the economy is to fulfil its potential. (See Page 16.) India economy slowed sharply in the first half of the year, but growth should recover on the back of policy easing. Pakistan’s recent deal with the IMF should ensure that a full-blown balance of payments crisis is avoided. (See Page 19.) A slump in tourism arrivals following the recent terrorist attacks will continue to weigh on Sri Lanka’s economy.
  • Indonesia’s long-term prospects will depend on the progress the government makes in addressing the country’s long-standing structural problems including poor infrastructure and a rigid labour market. With consumption and exports set to weaken and fiscal policy being tightened, GDP growth in Malaysia looks set to slow. A drop in inflation and looser monetary policy should help to drive a recovery in the Philippines over the coming year. Despite a recovery in the tourism sector, economic growth in Thailand is likely to remain very weak over the coming year. Vietnam’s economy should continue to grow strongly over the forecast period, helped by booming exports. Myanmar, Cambodia and Laos should continue to grow at a rapid pace, while Brunei’s economy is showing signs of a recovery.
  • Long-term Outlook – This Outlook contains our long-term forecasts for China, India and the rest of Emerging Asia.

Key Forecasts

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

 

Share of

2008-17

GDP

Consumer Prices

 

World 1

Ave.

2018

2019

2020

2021

2018

2019

2020

2021

China

                   

Mainland China 2(2)

18.7

7.1

5.4

5.2

4.5

4.0

2.1

3.0

3.5

1.5

Hong Kong

0.4

2.7

3.0

-0.5

1.0

1.5

2.4

2.8

2.2

1.0

Newly Industrialised

 

 

 

   

 

     

 

South Korea

1.6

3.1

2.7

1.8

2.5

2.5

1.5

0.4

1.3

1.5

Singapore

0.4

5.0

3.2

0.5

1.5

2.5

0.4

0.5

1.0

1.0

Taiwan

0.9

2.8

2.7

2.3

2.5

2.5

1.4

0.5

1.0

1.5

South Asia

 

 

 

   

 

     

 

Bangladesh

0.6

6.3

7.9

8.0

7.5

7.5

5.5

5.5

5.5

5.5

India

7.8

7.0

7.4

5.8

6.5

7.0

4.0

3.0

4.0

4.3

Pakistan

0.8

3.7

5.6

2.5

2.5

3.5

5.1

10.0

11.0

9.0

Sri Lanka

0.2

5.6

3.2

2.3

2.5

4.0

4.3

4.3

5.0

4.0

South East Asia

 

 

 

   

 

     

 

Brunei

0.03

-0.3

-1.0

1.0

1.5

2.0

0.1

0.5

0.5

1.0

Cambodia

0.05

6.2

7.3

7.0

7.0

6.5

2.5

2.5

2.5

3.0

Indonesia

2.6

5.5

5.4

4.5

4.5

5.0

3.2

3.0

3.5

3.5

Laos

0.04

7.6

6.5

6.5

6.5

6.0

2.0

2.0

2.0

3.0

Malaysia

0.7

5.0

4.7

4.4

4.0

4.5

1.0

0.6

1.5

1.5

Myanmar

0.2

6.3

6.2

6.5

7.0

7.0

7.1

7.0

7.5

7.5

Philippines

0.7

5.7

6.2

5.8

6.0

6.5

5.2

2.4

2.8

3.5

Thailand

1.0

3.2

4.1

2.3

2.5

3.0

1.1

0.8

1.0

1.5

Vietnam

0.5

6.0

7.1

7.0

7.0

7.5

3.5

2.7

3.5

3.5

Emerging Asia

37.3

6.4

5.5

4.8

4.7

4.7

2.7

2.9

3.5

2.6

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates). 2) 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

   

(10th Oct)

   

2019

2020

2021

China

             

Mainland China

7-day Rev. Repo

2.55

Up 5bp (Mar ‘18)

Down 25bp Q4 ‘19

2.30

1.80

2.25

Newly Industrialised

             

South Korea

Base Rate

1.50

Down 25bp (Jul ‘19)

Down 25bp Q4‘19

1.25

1.00

1.50

Taiwan

Discount Rate

1.375

Down 12.5bp (Jun ‘16)

None on horizon

1.375

1.375

1.375

South Asia

             

Bangladesh

Policy Rate

5.00

Down 100bp (Nov ‘03)

None on horizon

5.00

5.00

5.00

India

Repo Rate

5.15

Down 25bp (Oct ‘19)

Down 25bp Q4 ‘19

4.90

5.25

6.00

Pakistan

Discount Rate

13.25

Up 100bp (Jul ‘19)

Down 50bp Q1 ‘21

13.25

13.25

12.00

Sri Lanka

Deposit Rate

7.00

Down 50bp (Aug ‘18)

Down 25bp Q2 ‘20

7.00

6.50

6.00

South East Asia

             

Indonesia

7-day Repo Rate

5.25

Down 25bp (Sep ‘19)

Down 25bp Q4 ‘19

5.00

4.75

4.75

Malaysia

Overnight Rate

3.00

Down 25bp (May ‘19)

Down 25bp Q4 ‘19

2.75

2.75

3.25

Philippines

Overnight Rate

4.00

Down 25bp (Sep ‘19)

Down 25bp Q4 ‘19

3.75

3.50

3.50

Thailand

Repo Rate

1.50

Down 25bp (Aug ‘19)

Down 25bp Q4 ‘19

1.25

1.25

1.50

Vietnam

Refinancing Rate

6.00

Down 25bp (Sep ‘19)

None on horizon

6.00

6.00

6.00

Sources: Bloomberg, Capital Economics

Table 3: Financial Markets

   

Forecasts

  

Forecasts

 

Currency

Latest

End

End

End

Stock Market

Latest

End

End

End

  

(10th Oct.)

2019

2020

2021

 

(10th Oct.)

2019

2020

2021

China

          

Mainland

CNY

7.1

7.30

7.50

7.20

Shanghai

2,914

2,550

2,800

2,900

Hong Kong

HKD

7.8

7.80

7.80

7.80

Hang Seng

25,782

22,250

24,000

24,500

Newly Industrialised

          

South Korea

KRW

1,196

1,225

1,275

1,250

KOSPI

2,034

1,700

1,850

1,950

Singapore

SGD

1.38

1.40

1.43

1.40

Straits Times

3,087

2,900

3,000

3,200

Taiwan

TWD

30.8

30.5

30.5

30.0

TAIEX

10,890

8,500

9,675

9,975

South Asia

          

Bangladesh

BDT

84.7

85.0

85.0

85.0

BSE

4,832

4,900

5,300

5,500

India

INR

71.1

73.0

75.0

76.0

Sensex 30

37,888

37,500

42,000

44,250

Pakistan

PKR

157

160

170

175

Karachi 100

33,618

31,000

36,100

38,600

Sri Lanka

LKR

181

190

185

180

Colombo All

5,816

5,000

5,300

5,500

South East Asia

          

Indonesia

IDR

14,148

14,500

14,500

14,250

Jakarta.

6,032

5,650

6,500

7,150

Malaysia

MYR

4.19

4.30

4.30

4.20

KLCI

1,550

1,475

1,675

1,775

Philippines

PHP

51.7

54.0

56.0

56.0

PSEi

7,730

6,800

7,675

8,300

Thailand

THB

30.4

30.5

30.0

29.5

Thai SET

1,611

1,475

1,650

1,725

Vietnam

VND

23,201

23,250

23,500

23,750

Ho Chi Minh

990

900

1,000

1,100

Sources: Bloomberg, Capital Economics


Emerging Asia Overview

Recovery to be gradual, more rate cuts on the way

  • Regional growth has slowed over the past year (see Chart 1), but while most economies should start to stage a modest recovery over the coming quarters, with China set to slow, aggregate growth in Emerging Asia is set to remain very weak.
  • China’s economy has remained resilient in recent months, however, with the boom in property construction coming to an end and headwinds from higher food inflation and the global trade war set to intensify, growth is likely to slow in 2020.
  • The outlook elsewhere is better. After slowing sharply in the first half of the year, India’s economy should stage a decent recovery over the coming quarters, helped by looser fiscal and monetary policy.
  • The rest of the region is likely to stage a more gradual recovery. A key drag on many countries this year has been the collapse in demand for electronics products. But while electronics exports are continuing to contract in y/y terms, they have started to recover a bit in levels terms. (See Chart 2.) The headline growth numbers should start to look a lot better soon – even if the level of exports remains steady, they will start growing again in y/y terms by January. An improvement in the electronics sector means that overall export growth should start to pick up a little even if global demand remains weak. (See Chart 3.)
  • Most economies should also receive a boost from policy loosening. Thailand, Korea, Hong Kong and the Philippines have all recently announced expansionary budgets. The relatively healthy fiscal positions of most countries in the region (see Chart 4) means policy is likely to remain supportive.
  • Having raised interest rates steadily throughout most of 2018, the region’s central banks abruptly changed course at the start of the year and are now in full-on easing mode. Taiwan is the only major economy not to have cut interest rates at least once this year.
  • Further loosening looks likely. Policymakers have little to worry about on the inflation front. Inflation is very weak across most of the region and is likely to remain subdued (see Chart 5) if, as we expect, economic growth continues to disappoint.
  • Easing concerns about the risk of financial instability are also a factor. Until recently many central banks in the region were looking to tighten policy in order to slow the pace of credit growth and ease the build-up of risks in the financial system. But with credit growth now easing, these worries have dissipated.
  • Putting all this together, we think rate-easing cycles will last for a while longer, with the Philippines and Indonesia likely to be the biggest cutters. (See Chart 6.) Our forecasts are generally more dovish than the consensus and are also below what financial markets are pricing in.
  • We expect GDP growth in Emerging Asia to slow from 5.5% last year to just 4.8% in 2019, which would be the slowest rate in two decades. We then think growth will remain at around this rate for the remainder of the forecast period. Our forecasts for next year are below consensus for most countries. (See Charts 7 & 8.)
  • Finally, while the protests in Hong Kong have few regional repercussions, the territory’s loss of legal autonomy is eroding its appeal as a financial hub.

Emerging Asia Overview Charts

Chart 1: Emerging Asia GDP and GDP Tracker (% y/y)

Chart 2: Electronics Exports (US$bn, seasonally-adjusted)

Chart 3: Asian Export Volumes & Global GDP (% y/y)

Chart 4: Gross Government Debt (% of GDP, 2018)

Chart 5: Consumer Prices (CE Forecasts, % y/y)

Chart 6: Interest Rates Cuts (now – end 2020, bp)

Chart 7: Emerging Asia GDP (% y/y)

Chart 8: 2020 GDP Growth Forecasts (%-point Difference Between CE & Consensus)

 

Sources: Refinitiv, IMF, CE, Bloomberg, Focus Economics


China

Slowdown delayed not averted

  • China’s economy has remained resilient in recent months. But with the property construction boom on borrowed time and headwinds from higher food inflation and cooling global demand likely to intensify further, it is hard to see how a slowdown can be avoided in the quarters ahead.
  • Our China Activity Proxy (CAP) shows that, after a pick-up at the end of Q2, growth held up well during the first two months of Q3. And the manufacturing PMIs suggest that the economy ended last quarter on a strong note. (See Chart 9.)
  • The main prop to growth has been property construction, which has accelerated in recent quarters. (See Chart 10.) But the current pace of construction is not sustainable given underlying housing demand. Developers are now slowing the launch of new projects in response to tighter access to financing and subdued sales. (See Chart 11.) As a result, growth in floor space under construction has started to level off and is likely to decline in the coming months.
  • Meanwhile, the trade war has not been as damaging as many had feared, with a weaker renminbi and transhipment via ASEAN helping to offset much of the drag from US tariffs. Chinese exports have slowed during the past year, but this reflects a broader slowdown in global demand, and shipments continue to expand in line with GDP growth in China’s major trading partners.
  • As such, while we anticipate a renewed escalation in trade tensions and expansion of US tariffs, we think the near-term damage will remain modest. Nonetheless, with the global economy likely to weaken further in the near-term, the risks to export growth are still tilted to the downside. (See Chart 12.)
  • Household spending also looks ripe for a further slowdown given the recent surge in food prices, which will weigh on real income growth and consumer confidence. With pork supply still collapsing and few signs that officials are getting the spread of African Swine Fever under control, we think consumer price inflation will soon rise to a nine-year high.
  • Policy stimulus is unlikely to come to the rescue. After being loosened earlier in the year, fiscal easing has stalled in order to meet annual budget targets. (See Chart 13.) Budget constraints may ease again next year. But concerns about rising government debt and declining returns on infrastructure investment will probably limit the scale and impact of further fiscal support.
  • And while we expect the People’s Bank to engineer a further decline in interbank rates before long (see Chart 14), their easing efforts have so far failed to do much to boost the pace of lending. If anything, it continues to point to an economic slowdown. (See Chart 15.)
  • We expect growth to fall below 5% in the coming quarters and average 4.5% over 2020 as a whole. The official GDP data will show growth much higher. But even this measure will show a deceleration. (See Chart 16.) Our expectation for weaker growth, lower interest rates and a renewed breakdown in trade talks all point towards renminbi depreciation.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019

2020

2021

GDP (CE est.)1

7.1

5.4

5.2

4.5

4.0

GDP (Official)

8.3

6.6

6.2

5.8

5.6

Consumer Prices

2.6

2.1

3.0

3.5

1.5

      

Policy Rate2

2.55

2.30

1.80

2.25

Exchange Rate2,3

6.53

6.88

7.30

7.50

7.20

      

Current Account4

3.2

0.2

1.0

1.0

1.5

 

Sources: CEIC, CE. 1Derived from our China Activity Proxy 2end of period 3vs. US Dollar 4% of GDP


China Charts

Chart 9: Manu. PMIs & CE China Activity Proxy

Chart 10: Property Under Construction (sqm, % y/y)

Chart 11: Property Starts & Sales (3m % y/y)

Chart 12: Export Volumes & Trade Partner GDP (% y/y)

Chart 13: Fiscal Balance (% of GDP, 4Q sum)

Chart 14: Pledged 7-day Repo Rates (%)

Chart 15: Broad Credit & China Activity Proxy (% y/y)

Chart 16: GDP and CE China Activity Proxy (% y/y)

 

Sources: Refinitiv, CEIC, WIND, Capital Economics


Hong Kong

Headwinds from protests and trade collide

  • Economic activity has slowed sharply in recent months as a result of the slowdown in global trade and the ongoing anti-government protests. Even if the unrest starts to ease soon, the recovery will be weak.
  • Hong Kong’s economy is the weakest it has been since the global financial crisis. Output fell in Q2 (see Chart 17) and Q3 appears even worse. As the anti-government protests have escalated tourist arrivals have collapsed while retail sales contracted at their sharpest pace on record in August. (See Chart 18.)
  • The economic outlook depends in large part on how the protests develop over the coming months and our forecasts are based on the relatively sanguine assumption that they will soon start to dissipate. But even if we are right, the recovery is likely to be slow going. (See Chart 19.)
  • On the plus side, the supply-side drag on GDP should ease as disruption from general strikes and blocked transport systems ends.
  • But any subsequent recovery will be sluggish as the demand-side damage from the protests will persist. In particular, mainland Chinese visitors – who make up three-quarters of tourists in the city – are unlikely to feel welcome again any time soon.
  • Another drag will come from the weakness in global trade. Hong Kong’s trade logistics sector – which generates almost a fifth of GDP – is suffering as growth in the volume of goods shipped through the city has slowed. Weak US-China trade – which make up a large portion of Hong Kong’s trade volumes – bears a lot of the blame, though exports to the rest of the world have not done well either. (See Chart 20.) The outlook remains bleak. There is no sign that the core issues in the US-China trade war will be resolved, and we believe weak global growth will drag on exports to other countries.
  • The property sector also remains a risk. The increasing divergence between housing prices and rental costs suggests that prices have been pushed up by speculation rather than a housing shortage. (See Chart 21.) This makes prices vulnerable to shifts in sentiment. With buyers likely to remain cautious even if the protests ease and stock market falls also likely to weigh on sentiment (see Chart 22), we think house prices will fall 15% this year, weighing on both consumption and construction.
  • Speculation about the sustainability of the Hong Kong dollar peg has intensified. The option-implied probability that the HKD’s peg will be broken has jumped from around 7% in early July to 40%. (See Chart 23.) But the HKMA has fought off similar bouts of speculation in the past (see Chart 24), and it has enough reserves to stand its ground this time too.
  • In terms of the long-run outlook, Hong Kong’s autonomy and the impartiality of its legal system, which have been crucial for its success as a business centre, are increasingly under threat. Without them, Hong Kong would risk being eclipsed by Shanghai in finance and other mainland ports in trade and logistics.

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

2.7

3.0

-0.5

1.0

1.5

Consumer Prices

3.2

2.4

2.8

2.2

1.0

      

Exchange Rate1,2

7.8

7.8

7.8

7.8

7.8

      

Budget Balance3

1.8

2.4

0.0

2.2

1.2

Current Account3

5.3

4.3

4.0

4.0

3.5

 

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


Hong Kong Charts

Chart 17: Historical GDP Growth

Chart 18: Retail Sales & Tourist Arrivals (% y/y)

Chart 19: GDP forecasts (% y/y)

Chart 20: Exports (HKD, % y/y, 3m ave.)

Chart 21: Rents and Housing Price Affordability

(Q1 1999 = 100)*

Chart 22: Property and Stock Prices (Jan. 1994 = 100

Chart 23: Option-implied probability of the HKD/USD touching 7.90 within six months*

Chart 24: Hong Kong Dollars per US Dollar

 

Sources: Thomson Reuters, Bloomberg, Capital Economics


Korea

Policy boost, but headwinds remain

  • Economic growth in Korea has slowed over the past year, but with policy support being ramped up and the technology sector likely to slowly recover, GDP growth should start to pick up soon. (See Chart 25.)
  • In response to the slowdown in the economy, the government has announced a major loosening of fiscal policy. The proposed 2020 budget envisages a budget deficit equivalent to 3.6% of GDP, up from an estimated 2.2% this year. (See Chart 26.) While some of this reflects the poor outlook for tax revenues, government spending is also set to increase sharply.
  • Meanwhile, one of the main headwinds to growth over the last year – the downturn in the global technology sector – should ease in the quarters ahead. Semiconductor export values have now bottomed out (see Chart 27) and the sector should start growing again in y/y terms by the beginning of next year.
  • However, a number of headwinds to growth are set to remain. Global growth is unlikely to bottom out until mid-2020 and the recovery is set to be very gradual, which will weigh on export demand.
  • There will also be domestic headwinds to contend with. The government’s U-turn on its plans for another sharp hike to the minimum wage at the start of 2020 will prevent extra strain being put on the labour market. The rate will now rise by only 2.9%. (See Chart 28.) But the minimum wage has still risen 30% in the last two years and other new regulations have further pushed up the cost of labour. The shock from these changes is likely to feed through to weak employment growth for some time to come. High household debt (see Chart 29) will also weigh on spending.
  • The poor outlook for growth means the Bank of Korea is likely to cut its main policy rate further over the coming months. We expect another two 25bps cuts, with the next in October. (See Chart 30.)
  • Rate cuts should also help to guard against the threat of deflation. Although the headline rate fell to -0.4% y/y in September, this was mostly due to temporary effects caused by a fall in food and fuel inflation. But with core inflation now at just 0.6%, underlying price pressures are also very weak. (See Chart 31.)
  • Looking further ahead, the key challenge for the government is the decline in the working age population. The UN Population Division estimate that the working age population has peaked in size and is likely to shrink by nearly 30% over the next 30 years. (See Chart 32.) This equates to a fall of around 1% each year.
  • The government has so far had little success in addressing the situation. Efforts to raise fertility rates have failed to reverse the trend. Meanwhile attempts to increase the proportion of women in work have had little success. As such, the working age population is likely to shrink at one of the fastest rates anywhere in the world over the coming decade. This will lower long-run growth and create a strain on public finances.

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

3.1

2.7

1.8

2.5

2.5

Consumer Prices

2.3

1.5

0.4

1.3

1.5

      

Policy Rate1

2.25

1.75

1.25

1.00

1.50

Exchange Rate1,2

1,140

1,125

1,225

1,275

1,250

      

Budget Balance3

1.2

-1.7

-2.2

-3.6

-3.0

Current Account3

4.1

4.4

3.2

4.0

4.0

 

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


Korea Charts

Chart 25: GDP (% y/y)

Chart 26: Consolidated Fiscal Balance (% GDP)

Chart 27: Korea Semi-Conductor Exports

(seasonally-adjusted, 2017=100)

Chart 28: Minimum Wage (% y/y)

Chart 29: Policy Rate (% y/y)

Chart 30: Household Debt (% GDP)

Chart 31: Consumer Prices (% y/y )

Chart 32: Working Age Population (million)

 

Sources: Refinitiv, Capital Economics, Ministry of Economy and Finance


Singapore

Recovery in growth to be slow

  • Policy loosening should help the economy to recover over the coming quarters, but with exports set to remain very weak, GDP growth in Singapore is likely to stay subdued for some time. (See Chart 33.)
  • Our Singapore GDP Tracker, which is constructed using monthly data for exports, retail sales and industrial production, suggests that economic growth remained very weak last quarter. (See Chart 34.)
  • The biggest drag on growth is coming from the export sector. The poor outlook for global demand means exports are likely to remain very weak. (See Chart 35.) A further escalation of the trade war would further drag on prospects.
  • With exports likely to remain in the doldrums, policy support is set to be ramped up. The FY2019 budget (Apr. – Mar.) is already targeting the largest overall deficit since 2015 at 0.7% of GDP (compared with a surplus of 0.4% of GDP last year). (See Chart 36.)
  • With growth set to remain weak and elections set to be held next year, we expect the government to ramp up spending further in its next budget, which will be announced in February. A strong fiscal position means it has plenty of space to do so.
  • Falling local interest rates should also help to support the economy. Having already cut rates by 50bps in recent months, we expect the US Federal Reserve to cut again in December. Domestic borrowing costs track rates in the US closely due to Singapore’s pegged currency, and have started to come down. (See Chart 37.)
  • The Monetary Authority of Singapore (MAS) is also likely to loosen policy by decreasing the slope of its nominal effective exchange rate (NEER) policy band at its meeting in mid-October. We think that MAS will act decisively, cutting the slope of the band straight to zero. (See Chart 38.)
  • Inflation is unlikely to trouble MAS. Having dropped back over the past 12 months, we expect core inflation to moderate further (see Chart 39) as weak growth weighs on underlying price pressures in the economy.
  • Overall, we expect GDP growth of just 0.5% this year, and 1.5% next.
  • Over the longer term, trend growth is set to slow. A tightening in immigration controls has contributed to a slowdown in the growth of the working age population. (See Chart 40.) Unless these are loosened, an aging population and a falling fertility rate are likely to cause the size of the workforce to stagnate in the years ahead.
  • We expect potential growth to slow to less than 2.0% in the medium-term. The consensus are forecasting growth of 2.5-3.0%.

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

5.0

3.2

0.5

1.5

2.5

Consumer Prices

2.4

0.4

0.5

1.0

1.0

      

Exchange Rate1,2

1.35

1.34

1.40

1.43

1.40

      

Budget Balance3

0.7

0.4

-0.7

-1.0

0.0

Current Account3

18.8

19.5

17.0

18.0

18.0

 

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


Singapore Charts

Chart 33: GDP (% y/y)

Chart 34: GDP and GDP Tracker (% y/y)

Chart 35: Singapore Exports & Global Growth (% y/y)

Chart 36: Overall Fiscal Balance (% GDP)

Chart 37: Interest Rates (%)

Chart 38: Nominal Effective Exchange Rate

Chart 39: Consumer Prices (% y/y )

Chart 40: Workforce (y/y, 000’s)

 

Sources: Refinitiv, Capital Economics, MAS, MoM


Taiwan

Bucking the regional slowdown and rate cutting trend

  • Taiwan’s economy has rebounded strongly since the start of the year, and should continue to perform reasonably well. The decent prospects for the economy mean Taiwan is unlikely to follow other countries in the region by cutting interest rates.
  • GDP growth picked up strongly to 2.4% y/y in the second quarter of the year. Our GDP Tracker suggest that the pace of growth has continued to strengthen. (See Chart 41.)
  • A key factor behind the recovery has been the strong performance of the export sector. This is in sharp contrast to the rest of the region. (See Chart 42.)
  • This outperformance is in large part the result of the trade war. Since the US started raising tariffs on Chinese goods, exports from Taiwan to China have fallen back sharply. Taiwan is a key suppliers of intermediate goods that are processed into finished goods in China before being shipped off to the US.
  • However, Taiwan has received an offsetting boost as US demand has shifted away from China towards alternative suppliers. (See Chart 43.) We estimate that the surge in exports to the US has more than offset the decline in exports to China. Despite the poor prospects for the global economy, with the trade war set to escalate further, exports from Taiwan should continue to perform strongly.
  • The outlook for domestic demand is also positive. The government is planning to double its spending on infrastructure projects this year. Given that central government debt has fallen as a share of GDP in recent years and remains comfortably below the statutory limit, there is room to increase spending even further in the years ahead. (See Chart 44.)
  • With the economy set to perform reasonably well, Taiwan’s central bank (CBC) is unlikely to join other central banks in the region by cutting interest rates.
  • One lingering concerning for the CBC is deflation. Headline inflation was just 0.4% y/y in September, and has averaged just 0.5% since the start of 2019, well below the central bank’s target of 2%. (See Chart 45.)
  • But we doubt fears about deflation will prompt the CBC into cutting. It is notable that the last two times the CBC lowered interest rates, GDP was contracting in y/y terms, and the economy was in deflation. (See Charts 46 & 47.) We are not yet in that territory.
  • Taiwan faces numerous structural headwinds over the medium term. For one, Chinese firms’ move up the value chain means that they are now producing more of the high-value intermediate goods (such as semi-conductors) that they previously imported from Taiwan. The country is also pushing up against the constraints of a rapidly aging population. The country’s working age population will shrink in coming years. (See Chart 48.) We think the country’s potential growth rate is around 2-2.5% at present, but that is likely to fall.

Table 3: Key Forecasts (% y/y unless otherwise stated)

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

2.8

2.7

2.3

2.5

2.5

Consumer Prices

1.1

1.4

0.5

1.0

1.5

      

Policy Rate1

1.82

1.38

1.38

1.38

1.38

Exchange Rate1,2

30.9

30.7

30.5

30.5

30.0

      

Budget Balance3

-1.5

-1.3

-1.8

-1.5

-1.5

Current Account3

10.5

11.6

11.0

11.0

10.5

 

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


Taiwan Charts

Chart 41: GDP & GDP Tracker (% y/y)

Chart 42: Merchandise Exports (% y/y)

Chart 43: Exports By Destination (TW$, % y/y)

Chart 44: Government Debt and Debt Limit (% of GDP)

Chart 45: Consumer Prices
(% y/y, average for Jan. and Feb.)

Chart 46: GDP Growth & Change in Policy Rate

Chart 47: Policy Rate (%)

Chart 48: Working Age Population
(UN Forecasts, 2015-35, Average % Annual Change)

 

Sources: Refinitiv, United Nations, Capital Economics


Bangladesh

Robust growth but reforms needed to achieve long-term potential

  • Bangladesh has performed strongly in recent years (see Chart 49), and we expect growth to remain robust over the forecast period. But reforms are needed if the economy is to fulfil its potential.
  • Provisional official estimates suggest that GDP growth picked up to 8.0% in FY2018-19 (July-June), helped in part by strong private sector credit growth and a pickup in remittances.
  • However, the main factor driving growth is the country’s booming low-end manufacturing sector. Low labour costs account for some of the success of the sector (see Chart 50). Although more recently exports have also been boosted by the escalating US-China trade war, which has led companies to source more products from Bangladesh.
  • If the economy is to achieve the government’s ambitious 9% annual growth target over the next five years, it must diversify out of low-end manufacturing into other sectors such as electronics and consumer durables where there is more scope to add value.
  • For this to happen, major improvements to the business environment are needed. Bangladesh came 176th out of 190 countries in the 2019 World Bank’s Ease of Doing Business rankings (See Chart 51). More encouragingly, however, the government has been making some progress on improving the country’s dreadful infrastructure. Work has recently started on the construction of the Padma Bridge and Dhaka Metro Rail projects. A recently introduced value-added tax is expected to raise US$13bn (4.1% of GDP) of revenue annually, which should generate the resources needed to finance further improvements to the country’s infrastructure.

Chart 49: Bangladesh GDP (% y/y)

Chart 50: Monthly Manufacturing Wages (US$)

Chart 51: World Bank Ease of Doing Business Rankings (2019, out of 190 countries)

Sources: Thomson Reuters, JETRO, World Bank, Capital Economics

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

6.3

7.9

8.0

7.5

7.5

Consumer Prices

7.3

5.5

5.5

5.5

5.5

      

Policy Rate 1

5.0

5.0

5.0

5.0

5.0

Exchange Rate 1,2

75.3

83.9

85

85

85

      

Budget Balance 3

-3.8

-4.3

-4.5

-4.0

-3.5

Current Account 3

0.9

-3.2

-2.5

-2.5

-2.0

 

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


India

Stimulus to drive rebound in growth

  • India’s economy slowed sharply in the first half of the year but, with policy support being stepped up, growth should gradually recover. We also remain optimistic about India’s longer-term prospects.
  • India’s much-maligned GDP data show that growth slipped to a six-year low in Q2. (See Chart 52.) Much of the slowdown appears to be related to a pullback in credit from the non-bank financial (NBFC) sector ever since a large-scale default last year. This has caused investment and consumption growth to slump.
  • But policy support has been stepped up. The Reserve Bank of India (RBI) has trimmed interest rates by 135bp so far this year while also unveiling other liquidity-inducing measures. This has helped to bring down funding costs for NBFCs. (See Chart 53.)
  • Meanwhile, fiscal policy has also been loosened, with the finance ministry recently announcing tax breaks for large firms. This should help to support growth over the coming quarters, albeit at the cost of the government running a wider budget deficit than it originally projected. (See Chart 54.)
  • In all, the acute weakness of the first half of the year is unlikely to persist, but the rebound is more likely to be gradual than spectacular. We are forecasting growth of 5.8% this year and 6.5 in 2020, from 7.4% in 2018.
  • The external position looks secure. Relatively lacklustre domestic demand and subdued oil prices should help keep the current account deficit in check. (See Chart 55.)
  • Headline inflation also remains comfortable and below the RBI’s 4.0% target. But if we are right that growth will recover, that will put upward pressure on underlying inflation, causing the headline rate to edge above target over the coming months. (See Chart 56.)
  • The current easing cycle still has a little further to run but, beyond the very near term, we think the MPC will opt for modest rate hikes before the end of 2020. (See Chart 57.)
  • The key risk is that inflation and interest rates increase by more than we expect beyond the next 12 to 18 months. The government’s continued attempts to undermine the independence of the RBI – most recently by strong-arming the central bank into transferring a windfall dividend to the finance ministry could cause an unmooring of inflation expectations over the coming years.
  • This is a blot on an otherwise fairly upbeat long-run outlook. Aided by the strongest electoral mandate since the early 1980s (see Chart 58) as well as a relatively stable consensus over the importance of reform, the Modi government is likely to gradually implement growth-enhancing measures over the course of its second term. Overall, we think the economy will be a star performer over the next decade. (See Chart 59.)

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

7.0

7.4

5.8

6.5

7.0

Consumer Prices

7.8

4.0

3.0

4.0

4.3

      

Policy Rate1

6.25

6.50

4.90

5.25

6.00

Exchange Rate1,2

67.8

69.7

73.0

75.0

76.0

      

Budget Balance3

-6.9

-6.3

-6.6

-6.0

-6.0

Current Account3

-2.3

-2.4

-1.5

-2.0

-2.5

 

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


India Charts

Chart 52: GDP (% y/y)

Chart 53: NBFC AAA-Rated Corporate Bond Yield (%)

Chart 54: Central Gov’t Fiscal Deficit (% of GDP)

Chart 55: Current Account Balance (4Q Sum, % of GDP)

Chart 56: Consumer Prices (% y/y)

Chart 57: RBI Policy Rates (%)

Chart 58: Lok Sabha Election Results
(% of Seats Won by Leading Party)

Chart 59: CE GDP Forecasts (2018 – 2027)

 

Sources: Refinitiv, CEIC, Bloomberg, ABP News, Capital Economics


Pakistan

Tighter policy to weigh on growth, but crisis unlikely

  • While Pakistan’s recent deal with the IMF should ensure that a full-blown balance of payments crisis is avoided, recent fiscal and monetary policy tightening are likely to weigh heavily on economic growth over the next couple of years. (See Chart 60.)
  • Pakistan’s current problems date back to the start of 2016 when a combination of an overheating economy and an increase in imports of construction goods related to the China-Pakistan Economic Corridor led to a sharp widening of the current account deficit.
  • Although the deficit has narrowed a bit over the past year as the government has raised interest rates and allowed the currency to weaken it still remains a source of vulnerability. The other main concern for the economy is inflation, which reached 12.6% y/y in September, well above the central bank’s 6.0% target.
  • Having raised interest rates by a cumulative 750bp since the start of last year the central bank has signalled a halt to the tightening cycle. (See Chart 61.) That said, with inflation likely to remain elevated and the external position a continuing source of weakness, the central bank is unlikely to start cutting interest rates until 2021 at the earliest.
  • As the price for its loan deal, the IMF is demanding a number of structural reforms which, if implemented in full, would improve Pakistan’s long-run economic prospects. Under the terms of the deal, there is to be a renewed emphasis on tackling tax evasion and privatising inefficient state-owned industries. The IMF is also demanding an improvement in the country’s poor business environment (see Chart 62) and more transparency in its dealings with China.

Chart 60: GDP (% y/y)

Chart 61: Policy Rate (%)

Chart 62: World Bank’s Doing Business Survey
(Higher Rank = Worse Business Environment)

Sources: Refinitiv, Capital Economics, World Bank

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

3.7

5.6

2.5

2.5

3.5

Consumer Prices

 9.2

5.1

10.0

11.0

9.0

      

Policy Rate1


10.2

10.0

13.25

13.25

12.0

Exchange Rate1,2

 
93.3

138.8

160

170

175

      

Budget Balance3


-6.2

-6.5

-5.0

-4.5

-4.0

Current Account3

-2.7

-5.9

-3.0

-2.5

-2.0

 

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


Sri Lanka

Global and domestic headwinds continue to weigh on growth

  • A slump in tourism arrivals following the Easter Sunday terrorist attacks will continue to weigh on the country’s prospects. And with fiscal and monetary policy unlikely to be able to offer much support, we expect growth to remain weak. (See Chart 63.)
  • Although the tourism sector is showing signs of recovery, it remains very weak with arrivals down 34% y/y in Q3. (See Chart 64.) The economy is facing other external headwinds. We expect global growth to slow further over the coming quarters, which will drag on exports.
  • Fiscal policy is likely to weigh on economic growth. The government is committed to reducing its budget deficit under the terms of its deal with the IMF.
  • The Central Bank of Sri Lanka (CBSL) has cut interest rates by 100bps to support economic activity this year. While headline inflation is likely to remain subdued, the poor outlook for the currency will limit the scope for further cuts.
  • The slowdown in exports and slump in tourism revenues has caused the current account to fall back into deficit. This makes the currency vulnerable to sudden shifts in global risk appetite. Given our view that slowing growth in the US and the escalating trade war with China will weigh on demand for risky assets, we expect the currency to weaken further over the coming months. Sri Lanka’s high level of foreign-currency debt means the CBSL cannot afford to let the rupee depreciate by too much.
  • As such, we think the central bank has limited scope for further rate cuts. We have pencilled in just one further rate cut in the current easing cycle. (See Chart 65.)

Chart 63: Sri Lanka GDP (% y/y)

Chart 64: Tourist Arrivals

Chart 65: Interest Rates

Sources: Capital Economics, IMF

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

5.6

3.2

2.3

2.5

4.0

Consumer Prices

7.7

4.3

4.3

5.0

4.0

      

Policy Rate1

8.00

7.00

6.50

6.00

Exchange Rate1,2

127

183

190

185

180

      

Budget Balance3

-6.8

-5.3

-5.3

-4.7

-4.5

Current Account3

-3.8

-3.2

-3.1

-3.2

-3.0

 

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


Indonesia

Will Jokowi deliver on reform?

  • GDP growth according to the official figures will probably continue to come in at around 5% over the next year. We expect economic growth according to our Activity Tracker to come in closer to 4.5%. (See Chart 66.)
  • The export sector will remain a drag. We forecast that global economic growth will continue to ease over the coming quarters, which will weigh on export volumes. Lower prices for Indonesia’s two main commodity exports, coal and palm oil, will weigh on export revenues. (See Chart 67.)
  • Fiscal policy won’t provide any support to the economy. The finance ministry is planning to reduce the budget deficit from 1.9% of GDP this year to just 1.7% in 2020. The decision not to loosen fiscal policy represents a missed opportunity. Given that national debt as a share of GDP is under 30%, the government has plenty of scope to loosen policy.
  • What’s more, given the country’s huge infrastructure needs, it is disappointing that the government is only planning to increase infrastructure spending by 5.0% next year. This is well down from the double-digit increases that were recorded throughout most of President Jokowi’s first term. (See Chart 68.)
  • Against a backdrop of weak economic growth and subdued inflation (see Chart 69), the central bank has started to loosen monetary policy. Interest rates have been cut three times already this year, and further rate cuts are likely. (See Chart 70.)
  • However, the pace and timing of further rate cuts will be dependent on the performance of the currency. While the rupiah been relatively stable recently, we expect the US stock market to fall sharply and the US-China trade war to escalate further over the coming months. This should put downward pressure on risky assets, including the rupiah. (See Chart 71.) We doubt the central bank will want to cut interest rates aggressively in these circumstances.
  • The rupiah is particularly vulnerable to shifts in investor sentiment due to Indonesia’s large current account deficit and the high share of government debt owned by foreigners. (See Chart 72.)
  • Indonesia’s long-term prospects will depend on the government’s progress in addressing the country’s long-standing structural issues. Since his re-election in April, President Joko Widodo has made some encouraging noises about the need to reform the country’s rigid labour market, although no progress has been made so far.
  • More worryingly, there are signs that the government is going soft on its commitment to clamp down on corruption after parliament approved changes to how the country’s anti-corruption body (KPK) is governed. We are concerned that the move will weaken the KPK’s powers to investigate new corruption allegations. Indonesia is rated among the most corrupt countries in the region. (See Chart 73.)

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

5.5

5.2

5.0

5.0

5.0

Activity Tracker

5.5

5.4

4.5

4.5

5.0

Consumer Prices

5.5

3.2

3.0

3.5

3.5

           

Policy Rate1

6.7

6.00

5.00

4.75

4.75

Exchange Rate1,2

10,962

14,380

14,500

14,500

14,250

           

Budget Balance3

-1.4

-1.7

-2.0

-1.5

-1.5

Current Account3

-1.2

-3.0

-3.0

-3.0

-2.5

 

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


Indonesia Charts

Chart 66: GDP & GDP Tracker (% y/y)

Chart 67: Exports & Commodity Prices

Chart 68: Infrastructure Spending (Rupiah, trn)

Chart 69: Consumer Prices (% y/y)

Chart 70: Policy Rate (%)

Chart 71: Rupiah vs US Dollar

Chart 72: Foreign Ownership of Local Currency Bonds (% of Total)

Chart 73: Corruption Perception Index (score out of 100)

 

Sources: Refinitiv, CEIC, ABO, Transparency International, CE


Malaysia

Slowdown around the corner

  • Malaysia’s economy has performed reasonably well over the past year, but with consumption and exports set to weaken and fiscal policy being tightened, we don’t think this resilience will last. (See Chart 74.)
  • Malaysia’s economy has been holding up much better than elsewhere in the region. The economy grew by 4.9% y/y in the second quarter of the year, but this is likely to be as good as it gets.
  • The scrapping of the Goods and Service Tax (GST) in June last year led to a sharp drop in inflation, which boosted consumer’s purchasing power and propped up spending. (See Chart 75.) But that boost has come to an end now that inflation has rebounded. (See Chart 76.) Households and businesses also received a one-off boost from the repayment of tax arrears and GST refunds equivalent to almost 2.5% of GDP.
  • Fiscal policy is set to be tightened. The decision to replace the unpopular GST with a Sales and Service Tax left a big hole in the government’s finances, which has only been made up for by a one-off “special dividend” worth RM30bn (2.1% of last year’s GDP) paid out of the cash reserves from the state-owned oil company, Petronas.
  • Petronas still has reserves worth RM175bn which the government could continue to dip into. But the situation is clearly not sustainable. Sooner or later, the government will have to raise taxes or cut spending to make up for the lost revenue if it is to meet its target of reducing the budget deficit. (See Chart 77.)
  • Exports are also likely to weaken, if as we expect, global growth continues to slow. (See Chart 78.)
  • The drag from weaker exports and tighter fiscal policy will be somewhat offset by a recovery in investment now that many of the infrastructure projects that were suspended after last year’s election have been revived. Inward foreign direct investment has rebounded since the start of the year. (See Chart 79.)
  • Meanwhile monetary policy is likely to remain very loose. Bank Negara Malaysia cut interest rates at the start of the year and with inflation set to remain subdued, it is likely to ease policy further. (See Chart 80.)
  • While interest rate cuts, weaker growth and elevated global risk aversion are likely to put downward pressure on the ringgit, we think a modest rise in oil prices will help it stabilise against the US dollar in 2020. (See Chart 81.)
  • On the political front, the handover of power from Prime Minister Mahathir to Anwar Ibrahim looks set to take place next year. On the downside, there is a risk that internal squabbling in the approach to the handover could weigh on investor confidence. More positively, a government led by Mr Ibrahim could lead to some progress on reforming Malaysia’s affirmative action policies. The system disadvantages non-ethnic Malays, acting as a drag on productivity.

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

5.0

4.7

4.4

4.0

4.5

Consumer Prices

2.6

1.0

0.6

1.5

1.5

      

Policy Rate1

3.00

3.25

2.75

2.75

3.25

Exchange Rate1,2

3.4

4.1

4.3

4.3

4.2

      

Budget Balance3

-4.1

-3.7

-3.4

-3.2

-3.2

Current Account3

10

2.3

2.5

3.0

3.0

 

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


Malaysia Charts

Chart 74: GDP (% y/y)

Chart 75: Consumer Spending (% y/y)

Chart 76: Consumer Prices (% y/y)

Chart 77: Fiscal Balance (% GDP)

Chart 78: Malaysia Exports and Global GDP (% y/y)

Chart 79: Inward FDI (4Q sum, % y/y)

Chart 80: Policy Rate (%)

Chart 81: Ringgit to US Dollar Exchange Rate

 

Sources: Refinitiv, Capital Economics, Ministry of Finance


Philippines

Growth unlikely to rebound strongly

  • We expect the Philippines to grow by around 6.0% y/y over the next couple of years. (See Chart 82.) While this would fall short of both government and consensus forecasts, it would still place the Philippines among the fastest growing economies in the region.
  • Growth slowed to a fresh four-year low of 5.5% y/y in Q2 due in part to a slump in infrastructure investment which was caused by delays in passing the 2019 budget. Since the budget was finally passed in mid-April, government spending has begun to recover (see Chart 83), but with the budget for 2020 envisaging an unchanged deficit of 3.2% of GDP, growth is unlikely to get a boost from fiscal policy over the coming year.
  • Another drag will come from the export sector. Slowing global growth and rising trade tensions mean exports are likely to remain weak.
  • On the positive side, low inflation will help boost consumer’s purchasing power, supporting spending over the coming quarters. The headline rate fell to just 0.9% y/y in September, and is likely to remain comfortably within the BSP’s 2-4% target range over the next year or so. (See Chart 84.)
  • Subdued inflation should also enable the central bank to continue loosening policy. The central bank (BSP) has already cut its policy rate by 75bps this year, partly unwinding 2018’s sharp 175bps tightening cycle. We expect a further 50bps of cuts by the end of next year. (See Chart 85.)
  • The BSP has also been loosening policy by cutting the reserve requirement ratio (RRR). The rate has already been reduced from 18% to 15% this year, and further cuts are likely over the next couple of years. (See Chart 86.)
  • The peso has performed well so far this year, helped in large part by a narrowing of the current account deficit. This mainly reflects delays to government infrastructure programmes, which has dragged on imports. However, the deficit looks set to widen again as infrastructure spending picks up (see Chart 87) and exports remain weak.
  • The worsening current account position is likely to make the peso vulnerable to sudden shifts in global risk appetite. We expect it to reach 56 to the US dollar by end-2020. (See Chart 88.)
  • In terms of the political situation, President Duterte has introduced a number of useful reforms, including changes to the tax system and big increases in infrastructure spending. However, these positive changes are being undermined by the president’s increasingly autocratic tendencies. These include his willingness to undermine political institutions and attack his opponents. Foreign investors look to have taken fright – approved foreign investments have fallen sharply since Duterte became president. (See Chart 89.)

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

5.7

6.2

5.8

6.0

6.5

Consumer Prices

3.5

5.2

2.4

2.8

3.5

      

Policy Rate1

N/A

4.75

3.75

3.50

3.50

Exchange Rate1,2

45.0

52.8

54.0

56.0

56.0

      

Budget Balance3

-1.6

-3.2

-3.2

-3.2

-3.2

Current Account3

3.7

-2.6

-2.2

-3.2

-3.5

 

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


Philippines Charts

Chart 82: GDP (% y/y)

Chart 83: Government Spending (% y/y)

Chart 84: Consumer Prices (% y/y)

Chart 85: Policy Rates (%)

Chart 86: Reserve Requirement Ratio (%)

Chart 87: Projected Infrastructure Spending (% GDP)

Chart 88: Current Account Balance

& Peso-US Dollar Exchange Rate

Chart 89: Approved Foreign Investments

(4Q sum, % of GDP)

 

Sources: Refinitiv, Capital Economics, Department of Finance, Bloomberg


Thailand

Growth to stay weak despite policy loosening

  • A slump in exports (see Chart 90) is weighing heavily on Thailand’s economy. We expect growth to remain weak over the coming year.
  • Economic growth in Thailand has slowed sharply over the past year. Our GDP Tracker suggests that the economy is currently growing by around 2.0%, down from around 5.0% a year ago. (See Chart 91.)
  • We think growth will remain weak. (See Chart 92.) On the plus side, fiscal policy is being loosened. Earlier in the year, the government announced an economic stimulus package worth US$10bn (approximately 2% of GDP) to support farmers and other low-income groups.
  • Although some of the money is coming from the current budget and so doesn’t count as new spending, the package of measures should still provide a useful support to growth. The government’s strong fiscal position means further stimulus is easily affordable if growth remains weak.
  • After a year in the doldrums, the tourism sector is also showing signs of life (see Chart 93) and should continue to recover over the coming months as the impact of the sharp drop in arrivals from China following last year’s ferry disaster drops out of the annual comparison. Chinese tourists make up around 30% of total visitors to the country.
  • However, the impact of increased government spending and a rebound in tourism is likely to be offset by the downturn in the goods export sector. Exports will continue to struggle if, as we expect, global growth continues to slow and the trade war between China and the US escalates further. A high level of household debt will constrain private consumption growth.
  • The central bank cut interest rates unexpectedly at its meeting in August and given the poor outlook for the economy, further rate cuts are likely. (See Chart 94.)
  • In addition to boosting economic growth, looser monetary policy should help to curb the appreciation of the baht (see Chart 95), which has been the top-performing Asian currency over the past year.
  • A rate cut should also help guard against the threat of deflation. Headline inflation was just 0.3% y/y in September and is likely to remain low over the forecast period. (See Chart 96.) Meanwhile, the risks of financial instability are starting to ease thanks to a slowdown in house price and credit growth. (See Chart 97.)
  • On the political front, Thailand’s pro-military government was left hanging by a thread after a second political party in Thailand’s ruling coalition announced in September it was leaving the coalition. The move reduced the government’s majority in the lower house. It now controls just 252 seats out of 500. The small majority will make it difficult for the government to push through key legislation, including the budget.

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

3.2

4.1

2.3

2.5

3.0

Consumer Prices

2.0

1.1

0.8

1.0

1.5

      

Policy Rate1

2.15

1.75

1.25

1.25

1.50

Exchange Rate1,2

32.7

30.6

30.5

30.0

29.5

      

Budget Balance3

-0.2

0.8

-0.5

-1.0

-1.0

Current Account3

4.7

7.4

8.0

8.0

7.0

 

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


Thailand Charts

Chart 90: Exports (US$, % y/y)

Chart 91: GDP and GDP Tracker (% y/y)

Chart 92: GDP (% y/y)

Chart 93: Tourist Arrivals (% y/y)

Chart 94: Thailand Policy Rate (%)

Chart 95: Baht vs US Dollar

Chart 96: Consumer Prices (% y/y)

Chart 97: Private Sector Credit & House Prices (% y/y)

 

Sources: Bank of Thailand, Bloomberg, Refinitiv, CE


Vietnam

Beneficiary of the trade war

  • Vietnam’s economy should continue to grow strongly over the forecast period (see Chart 98), helped by booming exports.
  • While exports from the rest of the region have struggled over the past year, Vietnam’s export sector has continued to grow strongly. Low labour costs, political stability, an improving business environment and its close integration into the supply chains of southern China are some of the factors behind its export success.
  • However, a more recent factor behind the outperformance has been the US-China trade war, which has seen US demand shift away from China. Exports to the US have surged since the trade war began.
  • The surge in Vietnam’s exports to the US has not gone unnoticed. Earlier this year President Trump threatened to introduce tariffs unless more was done to reduce Vietnam’s trade surplus with the US. If tariffs are implemented, Vietnam would be hit hard. The domestic value-added embodied in Vietnam’s exports to the US is equivalent to around 5.5% of its GDP. (See Chart 99.)
  • Vietnam is working on measures to reduce its surplus with the US. (See Chart 100.) It has already unveiled plans to make it harder for Chinese companies to re-route their goods via Vietnam to bypass tariffs. Vietnam has also pledged to increase its imports from the US by buying more LNG and Boeing aircraft.
  • The outlook for domestic demand is less positive. Credit growth has continued to slow. Fiscal policy is also likely to become less supportive. Vietnam’s high level of public debt and large budget deficit are a key vulnerability.

Chart 98: GDP (% y/y)

Chart 99: Origin of Value-Added in US Total Imports
(CE Estimates, % of domestic GDP, latest)

Chart 100: US-Vietnam Trade Balance (US$bn)

Sources: Refinitiv, Capital Economics, IMF

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

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

GDP

6.0

7.1

7.0

7.0

7.5

Consumer Prices

8.4

3.5

2.7

3.5

3.5

           

Policy Rate1

8.5

6.25

6.00

6.00

6.00

Exchange Rate1,2

20,426

22,425

23,250

23,500

23,750

           

Budget Balance3

-3.2

-4.5

-4.0

-4.0

-3.5

Current Account3

0.2

5.1

3.5

4.0

4.0

 

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


Myanmar, Brunei, Cambodia & Laos

Strong growth but risks remain

  • Growth in Myanmar is likely to remain strong (See Chart 101.) Booming Chinese investment as part of China’s Belt and Road Initiative (BRI) and the rapidly-expanding tourism sector are likely to remain the main drivers of the economy.
  • The key risk to the economy is the deteriorating fiscal position. Tax exemptions and loopholes, alongside falling SOE profits have sharply reduced government receipts over the past few years. (See Chart 102.) In conjunction with the government’s ambitious infrastructure spending plans, the budget deficit looks set to widen to around 6.0% of GDP in 2020. Finally, if the economy is to meet its full potential, more needs to be done to improve the poor business environment. (See Chart 103.)
  • Having contracted in 2019, Brunei’s economy should continue to stage a gradual recovery over the next couple of year. (See Chart 104.) Construction on the Brunei Fertilizer Industries plant and the Temburong Bridge have boosted output in 2019. As part of its long-term development plan “Brunei Vision 2035”, the government is aiming to diversify the economy away from oil and gas production, which accounts for close to two-thirds of Brunei’s GDP. The success of the development plan will depend on further efforts to improve the business environment.
  • Cambodia should continue expanding at a relatively solid pace. (See Chart 105.) The tourism sector is growing rapidly, supported by a rise in the number of airlines operating international flights to Cambodia. The external position will remain precarious over the forecast period (see chart 106), as slower global growth will act as a drag on exports. Tighter fiscal policy should help to reduce the budget deficit but at a cost of weaker economic growth.
  • In order to boost the country’s long-run growth prospects, Cambodia has announced plans to improve the country’s education system. The government’s National TVET Policy 2017-2025 aims to closely link the school curriculum with the needs of businesses. The government is hoping to diversify the economy away from its dependence on the garment sector, which makes up 80% of total exports.
  • Growth in Laos is likely to remain strong over the coming years (see Chart 107), supported by the booming tourism sector and strong investment under the BRI, including the construction of the Laos-China railway. However, mounting public debt remains a key concern. (See Chart 108.) Given the country’s high level of foreign denominated debt, a significant fall in the currency would increase the likelihood of a debt default.

Table 18: Key Forecasts (% y/y)

 

Ave.

 

Forecasts

 

08-17

2018

2019

2020

2021

Myanmar

     

GDP

6.3

6.2

6.5

7.0

7.0

Consumer Prices

5.9

7.1

7.0

7.5

7.5

Brunei

     

GDP

-0.3

-1.0

1.0

1.5

2.0

Consumer Prices

0.2

0.1

0.5

0.5

1.0

Cambodia

     

GDP

6.2

7.3

7.0

7.0

6.5

Consumer Prices

5.0

2.5

2.5

2.5

3.0

Laos

     

GDP

7.6

6.5

6.5

6.5

6.0

Consumer Prices

4.0

2.0

2.0

2.0

3.0

Sources: Refinitiv, Capital Economics.


Myanmar, Brunei, Cambodia & Laos Charts

Chart 101: Myanmar GDP (% y/y)

Chart 102: Myanmar Government Revenues (% GDP)

Chart 103: World Bank Ease of Doing Business Ranking (2019, out of 190)

Chart 104: Brunei GDP (% y/y)

Chart 105: Cambodia GDP (%y/y)

Chart 106: Cambodia Current Account Balance (% GDP)

Chart 107: Laos GDP (% y/y)

Chart 108: Laos Government Debt (% of GDP)

 

Sources: Thomson Reuters, IMF, ADB, CE


Long-run forecasts: China

  • China’s economy faces structural headwinds from slowing capital accumulation and a shrinking labour force. With policymakers showing little appetite for the reforms needed to boost productivity growth, we expect the trend rate of economic growth in China to slow significantly over the decades ahead.
  • China’s public capital stock per capita is now well ahead of what even the most investment-intensive economies like Japan sustained at the same income level. (See Chart 109.) This front-loading of infrastructure construction has helped to prop up GDP growth in recent years but is generating diminishing returns and cannot be sustained.
  • Other forms of investment won’t be able to pick up the slack. Slowing urban household formation means that fewer new homes will need to be built each year. Meanwhile, China’s size limits its ability to further expand its manufacturing sector to serve global demand. If it were to add factories at the same pace over the coming decade as it did in past decades, this would result in severe overcapacity that the world would be unable to absorb.
  • China’s working-age population peaked in 2013 and employment will start to shrink before long, possibly as soon as this year, which will become an increasing headwind to economic growth. (See Chart 110.)
  • Attempts by the government to boost the birth rate, including the abolition of the one-child policy at the start of 2016, have so far had little effect. And China is simply too big to lean heavily on immigration to supplement its workforce. We estimate that the drag on growth from shrinking employment will rise to around 1%-pt by 2035.
  • One way policymakers could counter these headwinds is by implementing market-based reforms to boost productivity growth. But rather than liberalise the economy further, policy has recently been focused on increasing Party control and emphasising the importance of state-owned firms.
  • China’s rising debt burden also poses a major barrier to reform since there is a growing risk of financial instability if state support were withdrawn. In theory, the government could provide a temporary back-stop while the financial system adjusted to a new policy regime. But a smooth transition to market pricing of credit risks would be increasingly challenging to pull off.
  • More likely, the financial system will continue to direct a disproportionate amount of credit to favoured firms. This will worsen the misallocation of resources in China’s economy and drag productivity growth down further.
  • All told, we think the sustainable rate of economic growth in China will slow from about 5% currently (on our estimates) to 2% by the end of the next decade. (See Chart 111.)
  • In other words, we think China will fall off the path of rapid development laid down by the Asian growth stars of Japan, Korea and Taiwan. Instead, China is likely to increasingly resemble most other EMs whose income levels have converged with developed economies much more slowly, if it all. (See Chart 112.)

Long-run Charts: China

Chart 109: Public Capital Stock vs Income Level
(US$ th, 2011 prices, PPP adjusted, latest=2015

Chart 110: Employment

Chart 111: Labour Productivity & GDP
(% y/y)

Chart 112: GDP per Capita
(% of US level, current US$, log scale)

 

Sources: CEIC, IMF, World Bank, Penn World Table, Capital Economics

Key Forecasts (% y/y, Averages, unless otherwise stated)

 

2000-2008

2009-2013

2014-2018

2019-2023

2024-2028

2029-2038

Real GDP*

9.2

8.0

5.2

4.1

2.9

1.7

Real consumption*

11.1

9.4

6.3

4.5

3.5

2.0

Productivity*

8.5

7.6

5.0

4.4

3.2

2.6

Employment

0.6

0.4

0.2

-0.2

-0.3

-0.9

Unemployment rate (%, end of period)

4.2

4.1

3.8

4.0

4.0

4.0

Wages

15.3

12.4

9.5

6.7

5.2

4.6

Inflation (%)

2.2

2.7

1.8

2.0

1.9

2.0

Policy interest rate (%) 1

4.1

2.6

2.8

3.0

3.0

Ten-year government bond yield (%) 2

2.7

4.6

3.3

3.5

4.0

4.0

Government budget balance (% of GDP)

-1.6

-0.7

-3.2

-3.6

-3.1

-3.0

Gross government debt (% of GDP)

27

35

44

51

54

60

Current account (% of GDP)

5.0

2.9

1.8

1.1

1.6

1.7

Exchange rate (RMB per US dollar, end of period)

6.8

6.1

6.9

6.8

6.0

5.5

Equity market (Shanghai Composite, end of period)

4,329

2,211

2,494

3,476

5,089

10,081

Nominal GDP ($bn)

2,313

7,369

11,674

15,863

23,687

35,122

Population (millions)

1,295

1,344

1,383

1,428

1,440

1,435

*based on CE China Activity Proxy; 1PBOC 7-day reverse repo rate, end of period; 2Local currency, end of period


Long-term Outlook: India

India to remain a global outperformer

  • We expect India to sustain growth of 5-7% per year over the next two decades, making it the fastest-growing major economy in the world. As a result, its economy should triple in size and its share of world GDP should almost double. (See Chart 113.)
  • Employment is likely to increase rapidly for two reasons. First, the expansion in the working-age population is set to continue. India will replace China as home to the world’s largest labour force by 2025. (See Chart 114.)
  • Second, female employment is likely to increase from its current very low levels. (See Chart 115.) India’s low female participation rate is often attributed to entrenched cultural norms. But we think it reflects a historic failure to implement labour market reforms and develop the strong manufacturing base that has been the gateway for women in poor countries to enter formal employment.
  • Labour market reform will probably continue to be sluggish in the near term, but we are more optimistic about long-run prospects. Some of India’s more progressive states – such as Rajasthan – have been rolling out reforms to ease the process of hiring and firing workers and reduce trade union power. Such reforms should eventually spread to other states and influence policymaking by the central government.
  • Similarly, other productivity-boosting reforms should continue. Prime Minister Modi’s BJP secured the largest single-party majority in the Lok Sabha since the early 1980s in this year’s election, which should lay the platform for continued gradual reform. Further ahead, growing pressure from businesses and investors should ensure that politicians continue to make progress on reform regardless of who is in power.
  • Our optimism about long-run productivity prospects is underpinned by structural factors. India’s low per capita income means it has the potential to deepen its capital stock, shift the labour force from low to high productivity sectors, and replicate the best practices of richer economies. India should also benefit from high savings and investment rates.
  • The combined central and state budget deficits will remain fairly high, but public debt is still likely to come down gradually as a share of GDP due to the economy’s rapid growth rate.
  • The broad trend is that inflation typically falls as emerging economies converge with advanced economies. Under the stewardship of Shaktikanta Das, the RBI appears less focussed on reining in inflation. But a complete reversal of the inflation-taming success of recent years is unlikely. And we suspect that the RBI will further reduce its inflation target over time, as central banks in many wealthier EMs have done.
  • India is likely to run a small but permanent current account deficit over the long term. After all, domestic investment is likely to remain higher than domestic savings given the government’s tendency to run a budget deficit.
  • The real exchange rate is likely to continue appreciating over the coming years due to strong productivity gains. And given structurally lower rates of inflation now, the pace of depreciation in the nominal rupee exchange against the US dollar will be slower than it has been over the past couple of decades. (See Chart 116.)

Long-term Charts: India

Chart 113: Share of World GDP (%, PPP Exch. Rates)

Chart 114: Working Age Population (Millions)

Chart 115: Female Labour Force Participation (%, 2018)

Chart 116: Rupee vs. US$

 

Sources: UN, CEIC, Thomson Reuters, Bloomberg, Capital Economics

Key Forecasts (%y/y, Averages, unless otherwise stated)

 

2000-2007

2008-2012

2013-2017

2018-2022

2023-2027

2028-2037

Real GDP

7.1

6.4

6.7

6.7

6.2

5.5

Real consumption

5.5

7.7

6.9

7.5

6.0

5.0

Productivity

5.1

6.6

5.3

5.2

4.6

4.0

Employment

2.0

0.3

1.6

1.5

1.5

1.5

Inflation (%, year average)

4.9

9.7

6.1

4.2

4.0

2.8

Policy interest rate

(Repo rate, %, end of period)

7.8

8.0

6.0

6.5

7.0

7.0

Local currency 10-year gov’t bond yield

(%, end of period)

7.8

8.2

7.5

7.3

7.8

7.8

Government balance (% of GDP)

-8.6

-8.6

-7.0

-6.9

-6.0

-6.0

Government debt (% of GDP)

79.3

70.7

69.0

68.0

66.7

68.0

Current account (% of GDP)

-0.1

-5.1

-1.4

-2.0

-1.7

-1.7

Exchange rate (INR per USD, end of period)

41.4

53.4

65.1

77.0

80.0

85.0

Equity market (Sensex, end of period)

20,287

19,426

34,056

46,000

59,305

140,240

Nominal GDP ($bn)

1,238

1,805

2,136

3,510

5,493

10,351

Population (mn)

1,116

1,230

1,309

1,383

1,451

1,538


Long-run forecasts: Other Emerging Asia

Slower growth, SE Asia a bright spot

  • Growth in the rest of Emerging Asia (i.e. excluding China and India) is likely to slow over the coming decades due to a combination of less favourable demographics and reduced scope for catch-up. The best performing countries are likely to be the least-developed economies in South and South East Asia, with the Tiger economies of Hong Kong, Singapore, Taiwan and Korea bringing up the rear.
  • The Tigers have some of the most extreme demographics in the world. Populations are ageing rapidly as rising life expectancy is driving up the proportion of the population which is retired. Meanwhile, fertility rates are lower than nearly anywhere else in the world. (See Chart 117.) One consequence of lower fertility is that the working age populations of these countries will fall. (See Chart 118.) A fall in the size of the labour force will drag down potential GDP growth unless ways can be found to boost productivity growth.
  • But this will not be easy. The Tigers are some of the richest economies in the world. In order to raise productivity growth, they will need to become more innovative, pushing the technological frontier forward. This is harder than just playing catch up.
  • In other words, the slowdown in labour productivity that began in the 1990s is unlikely to be reversed anytime soon. (See Chart 119.) We estimate that annual growth in these economies will average around 1.5-2.0% over the next couple of decades, significantly below what they have been used to growing by.
  • The outlook for South and South East Asia is brighter. Although growth in the working age population is likely to slow over the next decade, Thailand is the only one among these countries where the working age population is forecast to contract. Meanwhile, working age populations will still grow at a fairly rapid pace in countries such as the Philippines, Malaysia and India.
  • What’s more, these economies are much poorer than the Tigers, and so have the potential to rack up rapid rates of productivity growth. However, being poor is no guarantee of success. (See Chart 120.) If an economy is poor today, it is because it has, in the past, failed to raise labour productivity. With weak institutions and bad policymaking, potential will be squandered.
  • For Asia’s poorest economies, the key to achieving faster productivity growth is developing a competitive manufacturing sector. (See Chart 121.) The country best placed to perform strongly over the coming decades is Vietnam. Improvements to its business environment, political stability, low wages (see Chart 122) all bode well for the future.
  • Productivity growth is likely to remain strong in Indonesia, but further reforms to free-up its inflexible labour market and improve its dreadful infrastructure (see Chart 123) are needed if it is to fulfil its potential.
  • We have become more pessimistic on the outlook for the Philippines since the election of President Duterte, whose growing authoritarianism appears to be scaring off foreign investors. (See Chart 124.) Meanwhile, years of political turmoil appear to have taken their toll on Thailand’s institutions.

Long-run Charts: Other Emerging Asia

Chart 117: Fertility Rate & Life Expectancy

Chart 118: Projected Annual Change in Working Age Population (%, annual average)

Chart 119: Labour Productivity Growth (%, annual average)

Chart 120: Productivity Growth & GDP per capita)

Chart 121: Annual Labour Productivity Growth
in EMs (2000-2015 average, %)

Chart 122: Monthly Manufacturing Wages (US$ per month)

Chart 123: World Bank Logistics Performance Index (higher number = better infrastructure

Chart 124: Approved Foreign Direct Investments (US$bn)

 

Sources: Refinitiv, UNDP, JETRO, OECD, World Bank, IMF