Most countries set for gradual recovery, China to slow - Capital Economics
Emerging Asia Economics

Most countries set for gradual recovery, China to slow

Emerging Asia Economic Outlook
Written by Emerging Asia Economics Team
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Most countries in Emerging Asia should stage a gradual recovery over the coming year helped by continued policy support. Several have announced expansionary budgets or fiscal stimulus packages, while most central banks are likely to cut interest rates further. A gradual recovery in global demand should also provide a modest boost to exports. The key exception is China. With the boom in property construction coming to an end, we think GDP growth in China will slow in 2020 even if the trade deal with the US holds.

  • Overview – Most countries in Emerging Asia should stage a gradual recovery over the coming year helped by continued policy support. Several have announced expansionary budgets or fiscal stimulus packages, while most central banks are likely to cut interest rates further. A gradual recovery in global demand should also provide a modest boost to exports. The key exception is China. With the boom in property construction coming to an end, we think GDP growth in China will slow in 2020 even if the trade deal with the US holds.
  • Cooling property construction in China is likely to weigh on economic activity in the coming quarters. But with external demand starting to stabilise, the slowdown should be gradual. Hong Kong’s economy should pick up gradually, helped by a combination of fiscal stimulus, fewer demonstrations and improving export conditions.
  • GDP growth in Korea should accelerate this year, helped by further policy support and a recovery in the technology sector. Policy loosening should help Singapore to recover over the coming quarters, but the rebound in growth is likely to be weak by past standards. Taiwan has emerged as one of the main beneficiaries of the trade war, and we expect the economy to perform well over the year ahead.
  • Bangladesh has grown rapidly over the past decade and should continue to perform strongly over the forecast period. After a year to forget in 2019, a combination of policy loosening and more decisive measures to deal with problems in the shadow banking sector will push economic growth in India back up to a healthier pace in 2020. A sharp fall in the rupee and a series of aggressive interest rate hikes is leading to a welcome fall in Pakistan’s external imbalances. With the tourism sector rebounding following last year’s Easter Sunday terrorist attacks and fiscal policy turning supportive, we expect Sri Lanka’s economy to grow strongly this year.
  • In Indonesia, GDP growth according to the official figures will probably continue to come in at around 5% over the coming year. We expect economic growth according to our Activity Tracker to come in closer to 4.5%. Fiscal tightening will drag heavily on Malaysia’s economy this year, and we expect growth to come in well below what the central bank and other private sector analysts are forecasting. With inflation in the Philippines set to remain weak, the central bank is likely to cut interest rates further this year. We think the worst is now over for Thailand’s economy, and that growth should accelerate over the coming quarters on the back of loser fiscal and monetary policy. Vietnam is likely to remain one of the region’s fastest growing economy, helped in large part by the booming export sector. 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

18.7

7.1

5.4

5.5

5.0

5.0

2.1

2.9

2.5

1.5

Hong Kong

0.4

2.7

3.0

-1.5

0.0

1.5

2.4

2.9

2.5

1.5

Newly Industrialised

 

                 

South Korea

1.6

3.1

2.7

1.9

2.5

2.7

1.5

0.4

1.0

1.5

Singapore

0.4

5.0

3.2

0.7

1.7

2.5

0.4

0.6

1.0

1.5

Taiwan

0.9

2.8

2.7

2.6

2.7

2.5

1.4

0.6

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

5.0

5.7

6.5

4.0

3.6

5.5

5.0

Pakistan

0.8

3.7

5.6

2.5

2.5

3.5

5.1

10.2

11.0

9.0

Sri Lanka

0.2

5.6

3.2

2.8

5.0

4.0

4.3

4.3

4.0

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

3.0

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

4.5

3.8

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

5.9

6.0

6.5

5.2

2.4

2.8

3.5

Thailand

1.0

3.2

4.1

2.5

3.0

3.0

1.1

0.7

1.0

1.0

Vietnam

0.5

6.0

7.1

7.0

7.0

7.5

3.5

2.8

4.5

3.5

Emerging Asia

37.3

6.4

5.5

4.9

4.8

5.1

3.1

3.0

3.3

2.7

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

   

(16th Jan)

   

2020

2021

China

           

Mainland China

7-day Rev. Repo

2.50

Down 5bp (Nov ‘19)

Down 5bp Q1‘20

2.00

2.25

Newly Industrialised

           

South Korea

Base Rate

1.25

Down 25bp (Oct ‘19)

Down 25bp Q1‘20

1.00

1.50

Taiwan

Discount Rate

1.375

Down 12.5bp (Jun ‘16)

None on horizon

1.375

1.375

South Asia

           

Bangladesh

Policy Rate

5.00

Down 100bp (Nov ‘03)

None on horizon

5.00

5.00

India

Repo Rate

5.15

Down 25bp (Oct ‘19)

Up 25bp Q4 ‘20

5.50

6.25

Pakistan

Discount Rate

13.25

Up 100bp (Jul ‘19)

Down 50bp Q1 ‘21

13.25

12.00

Sri Lanka

Deposit Rate

7.00

Down 50bp (Aug ‘19)

Down 25bp Q1 ‘21

7.00

6.50

South East Asia

           

Indonesia

7-day Repo Rate

5.00

Down 25bp (Oct ‘19)

Down 25bp Q1 ‘20

4.50

4.50

Malaysia

Overnight Rate

3.00

Down 25bp (May ‘19)

Down 25bp Q1 ‘20

2.75

3.00

Philippines

Overnight Rate

4.00

Down 25bp (Sep ‘19)

Down 25bp Q1 ‘20

3.50

3.50

Thailand

Repo Rate

1.25

Down 25bp (Nov ‘19)

Down 25bp Q1 ‘20

1.00

1.50

Vietnam

Refinancing Rate

6.00

Down 25bp (Sep ‘19)

None on horizon

6.00

6.00

Sources: Bloomberg, Capital Economics

Table 3: Financial Markets

   

Forecasts

  

Forecasts

 

Currency

Latest

End

End

Stock Market

Latest

End

End

  

(16th Jan.)

2020

2021

 

(16th Jan.)

2020

2021

China

        

Mainland

CNY

6.9

7.20

7.00

Shanghai

3,074

3,200

3,300

Hong Kong

HKD

7.8

7.80

7.80

Hang Seng

28,797

28,300

29,300

Newly Industrialised

        

South Korea

KRW

1,161

1,225

1,200

KOSPI

2,248

2,100

2,100

Singapore

SGD

1.35

1.38

1.35

Straits Times

3,273

3,300

3,500

Taiwan

TWD

29.9

30.5

30.0

TAIEX

12,067

11,600

11,600

South Asia

        

Bangladesh

BDT

84.9

85.0

85.0

BSE

4,125

5,300

5,500

India

INR

70.9

74.0

76.0

Sensex 30

41,917

44,500

47,500

Pakistan

PKR

155

170

175

Karachi 100

43,173

36,100

38,600

Sri Lanka

LKR

181

180

180

Colombo All

5,934

5,250

5,500

South East Asia

        

Indonesia

IDR

13,650

14,500

14,500

Jakarta.

6,273

6,450

6,750

Malaysia

MYR

4.10

4.20

4.20

KLCI

1,52

1,650

1,725

Philippines

PHP

50.8

53.5

54.0

PSEi

7,653

8,275

8,875

Thailand

THB

30.4

30.0

29.5

Thai SET

1,587

1,650

1,725

Vietnam

VND

23,175

23,500

23,750

Ho Chi Minh

973

1,100

1,300

Sources: Bloomberg, Capital Economics


Emerging Asia Overview

Most countries set for faster growth in 2020

  • Most countries should stage a modest recovery over the coming year, but with China set to slow, aggregate growth in Emerging Asia will remain subdued. (See Chart 1.)
  • We expect growth in the region’s two biggest economies to go in opposite directions in 2020. With the boom in property construction coming to an end, GDP growth in China is likely to ease. In contrast, after slowing sharply last year, India’s economy should rebound, helped by policy loosening.
  • Growth in the rest of the region is set to recover gradually. The main drag on economic growth over the past year has been a slump in external demand. While there are encouraging signs that the worst for the region’s exporters is now over, a strong recovery is unlikely.
  • Positive base effects following the collapse in demand for electronics at the end of last year should provide a boost to the y/y export figures over the coming months. (See Chart 2.) But with global demand set to remain weak, the level of exports is likely to up pick only gradually. (See Chart 3.)
  • Increased policy support should provide a boost to growth. On the fiscal side, Thailand, Korea, Hong Kong and Indonesia have announced expansionary budgets or fiscal stimulus packages. The relatively healthy fiscal positions of most countries in the region mean policy could be loosened further if growth fails to pick up. (See Chart 4.) The key exception is Malaysia, where fiscal policy is likely to be a large drag on growth this year.
  • Monetary policy is also likely to remain supportive. In the face of weak growth, low inflation and relatively stable currencies, central banks across the region have cut interest rates aggressively over the past year. Monetary policy operates with a lag, so the effect of these cuts will continue to be felt for most of this year.
  • What’s more, with inflation likely to remain weak, most central banks look set to continue easing monetary policy. (See Chart 5.) Our interest rate forecasts are more dovish than the consensus.
  • The Phase One trade deal between the US and China removes the downside risk of imminent further escalation, but it does not mark an end to tensions, not least because it leaves several sticking points unaddressed, including state aid rules and intellectual property protection. In any case, the Phase One deal leaves most tariffs in place. For that reason, any agreement will not return the US-China relationship to the pre-trade war status quo. And the reconfiguring of manufacturing supply chains across Asia that has boosted exports from Taiwan and South East Asia to the US (see Chart 6) is likely to continue.
  • Putting this all together, while growth in most countries has now bottomed out, the recovery is likely to be weak by past standards. (See Chart 7.) At a country level, we hold below-consensus views for Malaysia and Pakistan, where governments are likely to buck the trend and tighten fiscal policy. We are also more downbeat than most on the prospects for Hong Kong, where the impact of the ongoing protests is continuing to linger. However, some countries will spring an upside surprise. In particular, Vietnam and Taiwan should continue to benefit from the reconfiguration of Asian supply chains. (See Chart 8.)

Emerging Asia Overview Charts

Chart 1: GDP (% y/y)

Chart 2: Asian Export Values (3m ave., % y/y)

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

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

Chart 5: Changes in Policy Rate (now – end 2020, bp)

Chart 6: US Imports by Country ($, Jan-Nov 2019, % y/y)

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

Prospects brighten but property remains a threat

  • Cooling property construction is likely to weigh on economic activity in the coming quarters. But with external demand starting to stabilise, the slowdown should be gradual.
  • GDP growth fell 0.4%-pts during the first three quarters of 2019 on the official figures. They have not always been a good guide to cyclical trends, most notably during the 2015/16 downturn. But the recent slowdown is plausible. Our China Activity Proxy (CAP) suggests that growth was slower in 2019 than the official figures show but more stable. (See Chart 9.) This may reflect a skew towards heavy industry, which outperformed last year. The monthly data suggest growth stabilised in Q4.
  • One of the main headwinds last year was weaker external demand, with cooling global growth more to blame than US tariffs. But growth among China’s trading partners appears to be bottoming out which should put a floor beneath export growth in the coming quarters. (See Chart 10.)
  • Meanwhile, with the disruption to pork supply from African Swine Fever starting to abate, the drag on consumption from higher inflation should ease before long. (See Chart 11.) Car sales may also pick up this year as the hangover from the removal of earlier tax breaks fades.
  • However, a sustained turnaround in domestic demand looks some way off. The IT sector remains a drag, with the recent tech boom still unwinding. And more broadly, cooling credit growth and strained corporate balance sheets mean that investment is likely to stay weak.
  • The biggest threat remains the real estate sector. Property construction accelerated last year, shoring up heavy industry. (See Chart 12.) But unless developers accelerate the launch of new projects, which seems unlikely given tighter access to financing and subdued sales, then construction will soon slow as the flurry of projects that broke ground in 2018 are completed. (See Chart 13.)
  • As a result, we still expect growth to decline in the coming quarters. But, as long as a sharp correction in property is avoided, the slowdown is likely to be shallower than we had anticipated. We now expect growth on the CAP to slow from 5.5% in 2019 to 5.0% this year (up from 4.5% previously) before stabilising in 2021. Growth on the official figures will be higher and edge down by a smaller margin. (See Chart 14.)
  • This continued slowdown will probably keep policymakers in easing mode. The budget deficit looks on course to widen further. (See Chart 15.) Indeed, contrary to consensus, we think the balance of stimulus will shift towards monetary policy. We expect the PBOC to step up cuts to the rates on its lending facilities. (See Chart 16.)
  • Softer growth and lower interest rates are likely to weaken the renminbi. But with the outlook improving, we have adjusted our end-2020 USD/CNY forecast from 7.50 to 7.20. This assumes there is no renewed escalation in trade tensions with the US.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP (CE est.)1

7.1

5.4

5.5

5.0

5.0

GDP (Official)

8.3

6.6

6.1

5.8

5.8

Consumer Prices

2.6

2.1

2.9

2.5

1.5

      

Policy Rate2

2.55

2.50

2.00

2.25

Exchange Rate2,3

6.53

6.88

6.97

7.20

7.00

      

Budget Balance4,5

-2.2

-4.7

-6.3

-7.1

-6.6

Current Account5

3.2

0.4

1.0

0.5

0.5

 

Sources: CEIC, CE. 1 Derived from our China Activity Proxy; 2 end of period; 3 vs. US dollar; 4 incl. funds budget; 5 % of GDP.

China Charts

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

Chart 10: Export Volumes & Trade Partner GDP (% y/y)

Chart 11: Consumer Prices (% y/y)

Chart 12: Floor Space Under Construction (% y/y)

Chart 13: Property Starts & Sales (3m % y/y)

Chart 14: GDP and CE China Activity Proxy (% y/y)

Chart 15: Budget Balance (% of GDP)

Chart 16: Repo Rates (%, 7-day)

 

Sources: Refinitiv, CEIC, WIND, Capital Economics


Hong Kong

Past the worst but recovery to be lacklustre

  • Following a sharp downturn in the second half of last year, Hong Kong’s economy is showing signs of improvement. But while fiscal stimulus, fewer protests and improving export conditions should continue to drive a recovery, GDP is unlikely to rise across 2020 as a whole.
  • Hong Kong entered a recession in the second quarter of last year. While the y/y contraction in GDP will probably have deepened in Q4, we think the contraction in seasonally-adjusted q/q growth will have eased. (See Chart 17.)
  • Retail sales growth has also begun to show signs of bottoming out. (See Chart 18.) This suggests that consumption expenditure – which makes up two-thirds of GDP – began recovering last quarter despite the continuing protests.
  • What’s more, protests have become less disruptive recently. Unless they flare up again, the supply-side drag on GDP – from strikes and blocked transportation infrastructure – should ease this quarter.
  • The demand-side damage from the protests will take longer to reverse, however. Tourist arrivals have slumped since the protests began. (See Chart 19.) While non-mainland tourists will probably return to the city once the protests subside, visitors from the mainland (who make up three-quarters of tourists in the city) are likely to be more wary given how intensely state media have condemned the protests.
  • On the upside, the government recently announced that its budget deficit will be close to 3% of GDP for the fiscal year that ends in March. This is the first time the government has run a deficit since 2003 and a big change from the prior fiscal year, when the government ran a surplus equal to 1% of GDP. The territory’s very strong fiscal position means policy could be loosened further if the economy fails to recover.
  • The headwinds to Hong Kong’s trade logistics sector – which generates almost a fifth of GDP – have lessened recently as shipments to China have picked up. (See Chart 20.) What’s more, export growth now looks unusually weak relative to global GDP growth and should rebound before long. (See Chart 21.)
  • The divergence between housing prices and rents suggest that speculation, rather than supply constraints, have been driving prices higher. (See Chart 22.) But sentiment in the property market appears unshakable – prices only fell slightly last year when broader markets came under pressure. (See Chart 23 & 24.) While we see no immediate catalyst for a property market correction, prices still look excessive.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

2.7

3.0

-1.5

0.0

1.5

Consumer Prices

3.2

2.4

2.9

2.5

1.5

      

Exchange Rate1,2

7.80

7.80

7.80

7.80

7.80

      

Budget Balance3

1.8

2.4

-2.3

0.0

1.0

Current Account3

5.3

4.3

6.0

5.8

6.3

 

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

Hong Kong Charts

Chart 17: GDP Growth

Chart 18: Retail Sales

Chart 19: Non-Mainland Tourist Arrivals (Mn, seas. adj.)

Chart 20: Exports (HKDbn, seas. adj., 3m ave)

Chart 21: Exports and World GDP

(% y/y)

Chart 22: Rents and Housing Price Affordability

(Q1 1999 = 100)*

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Chart 23: Property and Stock Prices
(Jan. 2019 = 100)

Chart 24: Option-implied probability of the HKD/USD touching 7.90 within six months*

 

Sources: Refinitiv, Bloomberg, Capital Economics, policyuncertainty.com


Korea

A slow recovery

  • Economic growth in Korea is likely to accelerate this year, helped by a combination of further policy support and a recovery in the technology sector. (See Chart 25.)
  • Korea’s economy looks to have grown by just 1.9% in 2019, which would be the weakest pace of growth since the global financial crisis.
  • In response to the slowdown, the government has announced a major loosening of fiscal policy. The 2020 budget envisages a budget deficit equivalent to 3.6% of GDP, up from an estimated 2.2% last year. (See Chart 26.) While some of this reflects the poor outlook for tax revenues, government spending is set to increase by 9.3%.
  • Meanwhile, Korea’s tech sector is likely to perform better this year. Positive base effects following the collapse in demand for electronics at the end 2018 and early 2019 should see better y/y export figures over the coming months. (See Chart 27). However, we also expect underlying demand to recover as the rollout of 5G leads to an increase in investment in the tech sector.
  • The labour market should also fare better over the coming year after the government scrapped a further planned increase in the minimum wage. Employment growth slowed sharply after the first big hike in the minimum wage in 2018 (which was raised again at the start of 2019), with low-wage sectors such as retail, construction and hospitality being hit the hardest. Although job creation has rebounded a bit recently, this has been driven by government programmes to boost employment for the elderly. Employment among those under 60 years old is still falling. (See Chart 28.)
  • Consumer spending will remain a drag on growth. A period of deleveraging is needed in order to bring high household debt down to more sustainable levels. (See Chart 29.)
  • The Bank of Korea cut its policy rate twice last year, and we expect one further 25bp cut in early 2020. (See Chart 30.)
  • While inflation has nudged higher in recent months, it is unlikely to stand in the way of further easing. The headline rate was still just 0.7% y/y in December and is likely to remain well below the Bank’s 2% target this year. Low core inflation suggests underlying price pressures are also very weak. (See Chart 31.)
  • Looking further ahead, the key challenge for the government is the poor demographic outlook. The UN Population Division estimates that the working age population has peaked in size and is likely to shrink by just over 1% each year on average over the next 30 years. (See Chart 32.)
  • The government has so far had little success in addressing the situation. Efforts to raise fertility rates have failed. Meanwhile the impact of attempts to increase the proportion of women in the workforce looked to be muted. As such, the working age population is likely to shrink at one of the fastest rates anywhere in the world, lowering growth and straining public finances.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

3.1

2.7

1.9

2.5

2.7

Consumer Prices

2.3

1.5

0.4

1.0

1.5

      

Policy Rate1

2.25

1.75

1.25

1.00

1.50

Exchange Rate1,2

1,140

1,125

1,150

1,225

1,200

      

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

Chart 28: Employment (000’s y/y, 3m ave.)

Chart 29: Household Debt (% GDP)

Chart 30: Policy Rate (%)

Chart 31: Consumer Prices (% y/y )

Chart 32: Working Age Population (million)

 

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


Singapore

Gradual recovery ahead

  • Policy loosening should help the economy to recover over the coming quarters, but the rebound in growth is likely to be slow by past standards. (See Chart 33.)
  • In 2019 the economy grew by just 0.7%, which was the weakest pace of growth since the global financial crisis. And while the advanced estimate of Q4 GDP suggests that growth has now bottomed out, the economy remains very weak. (See Chart 34.)
  • Looking ahead, we expect a gradual recovery in global growth, which should provide a boost to exports. (See Chart 35.)
  • The government is also providing more fiscal support to the economy. The FY2019 budget (Apr. – Mar.) is already targeting the largest overall deficit since 2015 at 0.7% of GDP. This compares with a surplus of 0.4% of GDP in the previous financial year. (See Chart 36.)
  • With growth set to remain weak and a general election likely to be held this 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. Domestic borrowing costs track rates in the US closely due to Singapore’s pegged currency and have fallen by around 25bps since the Fed began its easing cycle in July. (See Chart 37.)
  • Meanwhile loosening by the Monetary Authority of Singapore (MAS) is also likely to help. The Authority lowered the target slope of its nominal effective exchange rate (NEER) policy band at its meeting in mid-October (see Chart 38).
  • With inflation set to remain weak (see Chart 39), monetary policy is likely to remain supportive and further loosening cannot be ruled out if the economy takes a turn for the worse.
  • Overall, we expect GDP growth of 1.7% this year and 2.5% next. While stronger than the 0.7% expansion last year, this would be a weak rebound by past standards.
  • 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 around 2.0% over the next decade. The consensus are forecasting growth of 2.5-3.0%.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

5.0

3.2

0.7

1.7

2.5

Consumer Prices

2.4

0.4

0.6

1.0

1.5

      

Exchange Rate1,2

1.35

1.36

1.35

1.38

1.35

      

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

Strong export performance to continue driving economy

  • Taiwan’s economy has rebounded strongly and should continue to perform reasonably well over the year ahead. The decent prospects for the economy mean the central bank (CBC) is unlikely to adjust its policy setting.
  • The economy grew by an impressive 3.0% y/y in the third quarter. Our GDP Tracker nudged down slightly but suggests growth remained robust in the fourth quarter. (See Chart 41.)
  • The main factor behind the strong performance was the rebound in the export sector. This outperformance is largely the result of the trade war. US demand has shifted away from China towards alternative suppliers. Taiwan’s exports to China have slumped, while those to the US have surged. (See Chart 42.) Looking ahead, with most US tariffs on China remaining, exports from Taiwan should continue to perform reasonably well.
  • The outlook for domestic demand is also positive. The government is rolling out an ambitious multi-year plan to improve the country’s infrastructure. 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 if growth takes an unexpected turn for the worse. (See Chart 43.)
  • However, there are a couple of risks to the economy. A key threat is persistently low inflationary pressures. Headline inflation has averaged just 0.6% in 2019, well below the central bank’s target of 2%. (See Chart 44.) Low inflation means the CBC has a lower margin of error. An adverse economic shock could easily tip the economy into deflation. But we doubt fears about deflation will prompt the CBC into cutting. The last two times the CBC lowered interest rates, GDP was contracting in y/y terms, and the economy was in deflation. (See Chart 45 & 46.)
  • Tsai Ing-wen’s re-election on 11th January means relations between China and Taiwan will remain turbulent. China may make it more difficult for Taiwan to negotiate free-trade deals with other countries and may introduce more draconian travel restrictions on Chinese tourists to Taiwan, which would impact Taiwan’s economy.
  • Taiwan faces two key structural headwinds. The first is the rapidly ageing population. The working age population looks set to shrink over the coming years. (See Chart 47.) Weak productivity growth is also a concern. But decoupling between the US and China, which led to a surge in foreign direct investment at the end of last year, is providing Taiwan with a new opportunity. (See Chart 48.) That said, even if productivity growth picks up, it is unlikely to rise by enough to offset the shrinking labour force. Thus, we think that the sustainable rate of GDP growth in Taiwan is likely to slow further during this decade.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

2.8

2.7

2.6

2.7

2.5

Consumer Prices

1.1

1.4

0.6

1.0

1.5

      

Policy Rate1

1.82

1.38

1.38

1.38

1.38

Exchange Rate1,2

30.9

30.2

30.0

30.5

30.0

      

Budget Balance3

-1.5

-1.3

-1.5

-1.7

-1.5

Current Account3

10.5

11.6

11.0

11.0

10.5

 

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

Taiwan Charts

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

Chart 42: Exports By Destination (TW$, 3m %y/y)

Chart 43: Government Debt and Debt Limit (% of GDP)

Chart 44: Consumer Prices
(% y/y, average for Jan. and Feb.)

Chart 45: GDP Growth, Inflation & Policy Rate Change

Chart 46: Policy Rate (%)

Chart 47: Projected Annual Change in Working Age Population (%, annual average)

Chart 48: Approved FDI into Taiwan (US$m)

 

Sources: Refinitiv, United Nations, Capital Economics


Bangladesh

Robust growth but reforms needed to achieve long-term potential

  • Bangladesh has grown strongly in recent years and should continue to perform well during the forecast period. (See Chart 49.) However, further reforms are needed for the economy to fulfil its long-term potential.
  • There are several reasons why Bangladesh’s economy should continue to grow strongly in the near term. For a start, low wages mean the country is particularly well placed to continue expanding its low-end manufacturing sector. The US-China trade war, which has boosted garment exports to the US (see Chart 50) is providing the sector with a further boost.
  • In addition, macroeconomic risks have eased. Foreign reserves are at close to record highs and form a solid buffer against a balance of payments crisis. Meanwhile, inflation should allow the central bank to keep monetary policy supportive.
  • In the long term, however, Bangladesh will need to diversify away from garment production, and into sectors such as electronics and other consumer durables, where there is more scope to add value.
  • In order to achieve this, major improvements to the country’s infrastructure and business environment are needed. Encouragingly, work has already begun on some major new projects, including most notably the Dhaka Metro Rail.
  • More progress is also needed to reduce red tape. Bangladesh is rated 168th out of 190 countries in the World Bank’s Ease of Doing Business Rankings (See Chart 51.) Finally, reforms to the banking sector are also needed to bring down the high level of non-performing loans, which is needed to ensure financial stability and facilitate private investment.

Chart 49: Bangladesh GDP (% y/y)

Chart 50: Garment Exports to the US (Nov. 2019, % y/y)

Chart 51: World Bank Ease of Doing Business Rankings (2020, out of 190 countries)

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

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

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

85.0

85.0

85.0

      

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. 1end of period 2vs. US Dollar 3% of GDP


India

The road to recovery

  • After a year to forget in 2019, a combination of policy loosening and more decisive measures to deal with problems in the shadow banking sector will push economic growth in India back up to a healthier pace in 2020. And with core inflation set to rise, markets are wrong to assume that interest rates will stay on hold for the next two years. We think the RBI will switch to tightening mode much sooner than generally expected, possibly before the end of this year.
  • India’s economy grew by barely 5% in 2019, its worst performance since the global financial crisis. The slowdown has been due to a pullback in credit from the non-bank financial (NBFC) sector ever since a large-scale default in late 2018. This has caused investment and household consumption growth to slump.
  • But as the severity and longevity of the problems in the shadow banking sector have become clear, policymakers have stepped up their efforts to deal with the strains they have caused. Licences for many of the worst-performing shadow banks have been cancelled, while lending rules for the better-performing NBFCs have been eased. The spread of NBFC bond yields over government bond yields has since dropped sharply. (See Chart 52.)
  • Broader measures to support the economy have also been enacted. The RBI slashed interest rates aggressively last year. Fiscal policy has been loosened too, albeit at the cost of the finance ministry missing its budget deficit target. (See Chart 53.) All of this should help drive a gradual recovery in growth over the coming quarters. (See Chart 54.)
  • The external position looks secure. Relatively lacklustre domestic demand will keep a lid on imports in the near term. Barring a surge in oil prices, this should keep the current account deficit contained. (See Chart 55.) And India’s low level of foreign-currency debt means that the further falls in the rupee we are expecting won’t have severe economic consequences.
  • On inflation, the headline CPI rate has spiked in recent months, driven largely by supply shocks pushing up food prices. Further ahead, stronger growth will also push up core inflation. So while headline inflation will peak in early 2020, the RBI will be faced with both core and headline inflation above its 4% target by Q3. (See Chart 56.)
  • This will put pressure on the central bank to act. We are firmly non-consensus in expecting the RBI to hike interest rates within the next few quarters, possibly before the end of 2020. (See Chart 57.)
  • On the reform front, we are optimistic that aided by the by the strongest electoral mandate since the early 1980s (see Chart 58), the Modi government is likely to continue gradually implementing growth-enhancing measures over the course of its second term. In all, we think the economy will be a star performer in the emerging world over the next decade. (See Chart 59.)

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

7.0

7.4

5.0

5.7

6.5

Consumer Prices

7.8

4.0

3.6

5.5

5.0

      

Policy Rate1

6.25

6.50

5.15

5.50

6.25

Exchange Rate1,2

67.8

69.7

71.5

74.0

76.0

      

Budget Balance3

-6.9

-6.3

-6.6

-6.8

-6.0

Current Account3

-2.3

-2.4

-1.3

-2.1

-2.5

 

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

India Charts

Chart 52: Spread of AAA Rated NBFC Bond Yields Over Government Bond Yields (%-pts)

Chart 53: Central Gov’t Fiscal Deficit (% of GDP)

Chart 54: GDP (% y/y)

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
(2020 – 2029)

 

Sources: Refinitiv, CEIC, Bloomberg, Capital Economics

Pakistan

Inflation worries reappear

  • A sharp fall in the rupee and a series of aggressive interest rate hikes has led to a welcome fall in Pakistan’s external imbalances. However, with growth slowing sharply and inflation close to multi-year highs, the country is not out of the woods yet.
  • Over the past couple of years, policymakers have acted aggressively to reduce the country’s current account deficit, which peaked at over 5% of GDP in 2018. Since late 2017, the rupee has been devalued by 32% against the US dollar. Interest rates have also been raised by 750bps to 13.25% over the same period.
  • The steps taken by policymakers are having their desired effect. The trade and current account deficits have narrowed significantly. (See Chart 60.) On the plus side, the move away from a large current account deficit should make the economy less vulnerable to sudden shifts in global capital flows. However, given that the adjustment has come through a collapse in domestic demand and imports, the improvement has only been achieved at the cost of a sharp slowdown in growth.
  • The other main threat to the economy is high inflation. The headline rate was 12.4% y/y in December and is now double the SBP’s 6.0% target. (See Chart 61.) Rising food prices, a weaker rupee and cuts to electricity subsidies that were agreed to as part of Pakistan’s deal with the IMF have been the main factors pushing inflation up.
  • Higher inflation means that despite the fall in Pakistan’s external imbalances, interest rates are likely to remain high for some time yet (see Chart 62) and will continue to drag on growth prospects.

Chart 60: Pakistan Trade (US$bn)

Chart 61: Consumer Prices (% y/y)

Chart 62: Policy Rate (%)

Sources: Refinitiv, Capital Economics, World Bank

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

 

Ave.

   

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

3.7

5.6

2.5

2.5

3.5

Consumer Prices

9.2

5.1

10.2

11.0

9.0

           

Policy Rate1

10.2

10.0

13.25

13.25

12.0

Exchange Rate1,2

93.3

139

155

170

175

           

Budget Balance3

-6.2

-6.5

-5.0

-4.5

-4.0

Current Account3

-2.7

-5.9

-2.0

-0.5

-1.0

 

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


Sri Lanka

Rebound this year

  • With the tourism sector rebounding strongly following last year’s terrorist attacks and fiscal policy being loosened, we expect the economy to grow strongly in 2020. (See Chart 63.)
  • Tourist arrivals have recovered strongly since the Easter Sunday terrorist attacks, with y/y growth rates set to rebound strongly over the coming months. (See Chart 64.) Fiscal policy is also being loosened. Late last year, the new government of Gotabaya Rajapaksa (brother of the previous president, Mahinda Rajapaksa) slashed the rate of VAT from 15% to 8%.
  • While the VAT cuts should provide a boost to growth, they will also create a strain on public finances and could spell trouble for its relationship with the IMF. Unless Sri Lanka raises taxes elsewhere or cuts spending, the VAT cuts will lead to around US$2bn in lost revenue (around 2% of GDP), causing the deficit to widen sharply.
  • This is much larger than the 5.3% deficit target agreed with by the IMF (see chart 65), who could decide to withhold future loan payments unless the government reverses course. This would risk undermining the confidence of international investors, which could cause bond yields to spike and the value of the currency to plummet.
  • The uncertain outlook for the currency means further interest rate cuts are unlikely. The central bank may be forced to hike rates if the currency comes under downward pressure.
  • Another concern is Rajapaksa’s plans to “restore relations” with China. During his brother’s presidency, booming Chinese investment provided an important boost to growth, but left the country with debts it was unable to pay off.

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

Chart 64: Tourist Arrivals

Chart 65: Budget Balance (% of GDP)

Sources: Capital Economics, IMF

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

 

Ave.

  

Forecasts

 

07-17

2018

2019e

2020

2021

GDP

5.6

3.2

2.8

5.0

4.0

Consumer Prices

7.7

4.3

4.3

4.0

4.0

      

Policy Rate1

8.00

7.00

7.00

6.50

Exchange Rate1,2

127

183

181

180

180

      

Budget Balance3

-6.8

-5.3

-5.9

-6.5

-6.0

Current Account3

-3.8

-3.1

-2.0

-3.0

-3.0

 

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


Indonesia

Growth to be slower than official figures suggest

  • 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 outlook for the export sector is improving. A gradual pick up in global growth should provide a boost to export volumes over the coming year. And while commodity prices are likely to remain subdued by past standards, they do look set to recovery gradually over the next couple of years. (See Chart 67.)
  • A low level of national debt (which is currently just 30% of GDP) means the government has scope to loosen policy. However, the budget for 2020 suggests fiscal policy will remain broadly neutral.
  • What’s more, given the country’s poor infrastructure, 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 President Jokowi’s first term. (See Chart 68.)
  • Against a backdrop of weak economic growth and subdued inflation (see Chart 69), the central bank cut interest rates by 100bp last year. (See Chart 70.)
  • A high level of foreign currency debt leaves the country vulnerable to sudden sharp falls in the value of the rupiah, and the pace and timing of further cuts will be dependent on the performance of the currency. But provided the rupiah holds up relatively well against the US dollar over the coming months (see Chart 71), then further easing is likely.
  • BI has nothing to worry about on the inflation front. The headline rate fell to just 2.7% y/y in December and is well within BI’s target range. A combination of weak GDP growth and well-anchored inflation expectations should help keep inflation in check.
  • Looking further ahead, the prospects for a sustained improvement in economic performance depend on whether Joko Widodo can forge ahead with his reform agenda, most notably reforms to the country’s rigid labour market. (See Chart 72.)
  • Hopes have recently been raised that now Jokowi is in his final term and will not face re-election, he will be more prepared to take on vested interests and push through controversial reforms. The president was recently quoted as saying “because this is my last term, I have nothing to lose.”
  • But while his comments are certainly encouraging, we think he will struggle to carry out his pledge given the level of opposition he is likely to experience. His recent decision to weaken the powers of the country’s well-respected anti-corruption body (KPK), certainly doesn’t bode well. Indonesia is rated as one of the most corrupt countries in the region. (See Chart 73.)

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

 

Ave.

   

Forecasts

 

08-17

2018

2019e

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

3.0

3.5

           

Policy Rate1

6.7

6.00

5.00

4.50

4.50

Exchange Rate1,2

10,962

14,380

13,900

14,500

14,500

           

Budget Balance3

-1.4

-1.7

-2.2

-2.0

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

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

 

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


Malaysia

Further slowdown to come

  • Fiscal tightening will drag heavily on Malaysia’s economy this year (see Chart 74), and we expect growth to come in well below what the central bank and other private sector analysts are forecasting.
  • Having previously held up much better than elsewhere in the region, GDP growth in Malaysia slowed in Q3. Our GDP Tracker, which is based on activity and export data, suggests that the slowdown worsened in Q4. (See Chart 75.)
  • We expect the economy to slow further over the coming quarters. One drag is likely to come from tighter fiscal policy. The government is aiming to bring the deficit down steadily over the next couple of years. (See Chart 76.) In order to achieve this, the government is planning to cut spending by 10% in 2020, with the brunt of the cuts set to fall on consumers. (See Chart 77.)
  • The drag from tighter fiscal policy will be somewhat offset by a recovery elsewhere in the economy. Although global growth looks set to remain weak, we think it will stage a gradual recovery over the forecast period, providing a modest boost to exports.
  • Investment should also stage a recovery, now that many of the infrastructure projects that were suspended after the 2018 general election have been revived. These include the East Coast Rail Link and more recently the $35bn Bandar Malaysia, a large real estate project. Foreign direct investment has been recovering since early 2019. (See Chart 79.)
  • Meanwhile monetary policy is likely to be loosened further. Bank Negara Malaysia (BNM) cut interest rates at the start of last year and with growth set to disappoint, it is likely to cut again this year. (See Chart 80.) The BNM has little to fear on the inflation front. Both headline and core inflation are low and are set to remain below 2% for the whole of 2020. (See Chart 81.)
  • On the political front, the handover of power from Prime Minister Mahathir to Anwar Ibrahim looks set to take place this 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.
  • Tackling these structural problems would help Malaysia reach its goal of becoming a high-income country (HIC). The country now looks certain to miss its target to become a HIC by 2020. We estimate it will take until 2026 until that happens, two years later than under the World Bank’s forecasts.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

5.0

4.7

4.5

3.8

4.5

Consumer Prices

2.6

1.0

0.6

1.5

1.5

      

Policy Rate1

3.00

3.25

3.00

2.75

3.00

Exchange Rate1,2

3.4

4.0

4.1

4.2

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: Malaysia GDP and GDP Tracker (% y/y)

Chart 76: Fiscal Balance (% GDP)

Chart 77: Private Consumption (% y/y)

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

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

Chart 80: Policy Rate (%)

Chart 81: Consumer Prices (% y/y)

 

Sources: Refinitiv, Capital Economics, Ministry of Finance


Philippines

Growth to stay around 6%

  • We expect the Philippines to grow by around 6.0% this year. (See Chart 82.) While this would fall short of the government’s 6.5-7.5% target, the country will remain among the fastest growing economies in the region.
  • GDP growth rebounded strongly in the second half of last year, thanks in large part to a big boost in government spending following the delayed passing of the 2019 budget. (See Chart 83.) However, this boost is set to fade. The government is targeting an unchanged deficit of 3.2% of GDP.
  • Meanwhile, the recent boost to consumer spending from very low inflation is likely to fade. The headline rate rose to 2.5% y/y in December, from a low of 0.8% in October, and should continue to edge higher over the coming months. (See Chart 84.)
  • That said, inflation is still likely to stay comfortably within the central bank’s (BSP) 2-4% target range, which will give the Bank room to continue loosening policy. The BSP cut its policy rate by 75bps last year, partly unwinding 2018’s sharp 175bps tightening cycle. We expect a further 50bps of cuts by the end of this 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 14% this year, and further cuts are likely over the next couple of years. (See Chart 86.)
  • The peso performed well in 2019, helped in large part by a narrowing of the current account deficit. This mainly reflects delays to government infrastructure programmes, which dragged on imports. However, the deficit looks set to widen again as infrastructure spending picks up (see Chart 87) and exports stay weak.
  • A larger current account deficit will make the peso vulnerable to sudden shifts in global risk appetite. We expect it to weaken to 53.5 to the US dollar by end-2020, from 50.5 at present. (See Chart 88.) Subdued inflation and a low level of foreign currency debt means the Philippines is not as vulnerable as other countries in the region to sudden falls in the currency. However, the BSP will still monitor the situation closely, and sharper falls in the peso could delay the rate cuts we have forecast for 2020.
  • 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 willingness to undermine the country’s political institutions and the rule of law. This will continue to weigh on investor sentiment and undermine attempts to attract more foreign investment. (See Chart 89.)

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

5.7

6.2

5.9

6.0

6.5

Consumer Prices

3.5

5.2

2.4

2.8

3.5

      

Policy Rate1

N/A

4.75

4.00

3.50

3.50

Exchange Rate1,2

45.0

52.8

51.0

53.5

54.0

      

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: Inward FDI ($USbn, 12month sum)

 

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


Thailand

Gradual recovery helped by policy loosening

  • Economic growth in Thailand has slowed sharply over the past year (see Chart 90), but we think the worst is now over for the economy.
  • A key drag on growth over the past year has been the poor performance of the export sector. (See Chart 91.) We think exports will remain weak over the coming quarters, with the strong baht likely to drag heavily on the sector in 2020.
  • The strong baht is also weighing on the tourism sector. However, with arrivals from China rebounding strongly following the 2018 ferry disaster, the sector should hold up relatively well. (See Chart 92.) Chinese tourists make up around 30% of total visitors to the country.
  • Looser fiscal and monetary policy should also help. In November the government announced a fiscal stimulus package worth US$3.3bn (around 0.6% of GDP), with the extra funds to be spent on supporting the agricultural sector. The extra US$3.3bn comes in addition to the US$10bn increase in spending that was unveiled in August.
  • The central bank (BoT) cut interest rates by 50bp in 2019 and further loosening is likely in 2020. (See Chart 93.) In addition to boosting economic growth, looser monetary policy should help to curb the rapid appreciation of the baht. (See Chart 94.)
  • Thailand’s real effective exchange rate (REER, the currency’s value, adjusted for inflation relative to its main trading partners) has also appreciated strongly, which implies a loss of competitiveness. (See Chart 95.) The REER is now approaching the levels it reached just before the Asian financial crisis (1997-98).
  • In addition to keeping an eye on growth and the currency, the BoT will also need to monitor the inflation outlook closely. Headline inflation averaged just 0.7% last year, and while we think a period of deflation is unlikely (see Chart 96), low inflation brings challenges of its own.
  • For one thing, it lowers the margin of error for the central bank. An adverse economic shock could easily push the economy into deflation which, as the example of Japan shows, can be hard to get out of.
  • Very low inflation means that nominal incomes grow more slowly than they would otherwise. This makes it harder for borrowers to pay off their debts. This is an especially big concern in Thailand where household debt is equivalent to 78% of GDP. (See Chart 97.)
  • Another concern for policymakers in Thailand is that with the policy rate at just 1.25%, they are rapidly approaching the limits of what can be achieved through conventional easing. If growth continues to disappoint, the BoT may need to start thinking about unconventional policy options sooner rather than later.

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

 

Ave.

  

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

3.2

4.1

2.5

3.0

3.0

Consumer Prices

2.0

1.1

0.7

1.0

1.0

      

Policy Rate1

2.15

1.75

1.25

1.00

1.50

Exchange Rate1,2

32.7

30.6

30.0

30.0

29.5

      

Budget Balance3

-0.2

0.8

-0.5

-1.0

-1.0

Current Account3

4.7

7.5

6.0

7.0

7.0

 

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

Thailand Charts

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

Chart 91: Exports (3m, % y/y)

Chart 92: Tourist Arrivals (% y/y)

Chart 93: Policy Rate (%)

Chart 94: Baht vs US Dollar

Chart 95: Thailand Real Effective Exchange Rate (REER)

Chart 96: Consumer Prices (% y/y)

Chart 97: Household Debt (% of GDP)

 

Sources: Bank of Thailand, Bloomberg, Refinitiv, CE, BIS


Vietnam

Beneficiary of the trade war

  • Vietnam’s economy should continue to perform well over the forecast period helped by strong export demand. (see Chart 98),
  • Despite the weakness of global growth over the past year, exports from Vietnam have continued to grow at a decent rate. Low labour costs, political stability, an improving business environment and its close integration into the supply chains of southern China are just some of the factors behind Vietnam’s export success.
  • Vietnam has also emerged as the main beneficiary of the US-China trade war. US tariffs on Chinese imports have led importers to seek alternative suppliers. There is a risk that the surge in exports to the US and Vietnam’s growing bilateral trade surplus with the US could lead to retaliatory action after President Trump called Vietnam “almost the single worst abuser of everybody”. If tariffs were 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.)
  • Another concern for the authorities is the recent rise in inflation, which reached a six-year high of 5.2% y/y in December. (See Chart 100.) The main factor pushing inflation higher has been an outbreak of African Swine Fever, which has caused pork prices to rise. Until a vaccine is found, inflation is likely to remain high. Although we don’t think the rise in inflation will prompt the central bank (SBV) to tighten monetary policy (the SBV tends not to respond to temporary jumps in prices), higher inflation will weigh on the purchasing power on consumers, which will drag on growth.  
  • A further drag on the economy will come from fiscal policy, which needs to be tightened in order to reduce high government debt.

Chart 98: GDP (% y/y)

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

Chart 100: Consumer Prices (% y/y)

Sources: Refinitiv, Capital Economics, IMF

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

 

Ave.

   

Forecasts

 

08-17

2018

2019e

2020

2021

GDP

6.0

7.1

7.0

7.0

7.5

Consumer Prices

8.4

3.5

2.8

4.5

3.5

           

Policy Rate1

8.5

6.25

6.00

6.00

6.00

Exchange Rate1,2

20,426

22,425

23,200

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

Decent growth ahead

  • Myanmar, Cambodia and Laos are among the poorest and least developed economies in Asia. (See Chart 101.) Low incomes mean they have the potential to rack up rapid rates of productivity growth by copying the technologies and best practices of more developed countries.
  • However, low-income countries are not guaranteed rapid catch-up growth. (See Chart 102.) If an economy is poor today, it is probably due in large part to poor institutions and weak policymaking.
  • If these countries are to make the most of their potential, more needs to be done to improve the business environment. All three perform poorly on a range on measures that aim to measure the quality of a country’s business environment, including corruption and red tape. (See Charts 103, 104.)
  • In the near-term, these countries will receive a boost from the US-China trade war, which has led to a sharp rise in exports to the US. In the first 11 months of last year, Myanmar’s exports to the US increased by over 60% y/y. (See Chart 105.)
  • Other factors that will support growth are booming Chinese investment as part of China’s Belt and Road Initiative (BRI). The BRI has been billed as a “game changer” given the poor quality of infrastructure in these countries. (See Chart 106.) However, big questions remain over how these projects will be funded and we are concerned that the BRI could leave these countries saddled with lots of debt they are unable to pay off.
  • Tourism should also grow strongly, helped in part by improving air links with the rest of Asia.
  • However, there are a couple of factors that will drag on growth. Weak global demand will weigh on exports. Exports would be hit hard if human rights abuses associated with the Rohingya refugees in Myanmar and the crackdown on opposition politicians in Cambodia lead the EU to cancel their preferential trade status.
  • Weak fiscal positions, especially in Laos, limit the scope to loosen fiscal policy in the event growth takes a turn for the worse. (See Chart 107.)
  • Finally, the large current account deficits of Laos and Cambodia make these countries vulnerable to sudden shifts in the global risk appetite.
  • Having contracted in 2019, Brunei’s economy should continue to stage a gradual recovery over the next couple of years. (See Chart 108.) 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.

Table 18: Key Forecasts (% y/y)

 

Ave.

  

Forecasts

 

08-17

2018

2019e

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: Monthly Manufacturing Wages (US$)

Chart 102: Productivity Growth & GDP Per Capita

Chart 103: Corruption Perception Index (ranking, latest)

Chart 104: World Bank Ease of Doing Business Ranking (ranking, latest)

Chart 105: US Imports by Country ($, Jan-Nov, % y/y)

Chart 106: Logistics Performance Index (ranking, latest)

Chart 107: Budget & Current Account Balance (% of GDP, latest)

Chart 108: Brunei GDP (% y/y)

 

Sources: Thomson Reuters, IMF, ADB, CE


Long-run forecasts: China

From growth star to middle-of-the-road EM

  • China’s economy faces structural headwinds from slowing productivity gains 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 more than halve over the decades ahead.
  • China’s public capital stock per capita is above what even the most investment-intensive economies have sustained at similar income levels. (See Chart 109.) Front-loading of infrastructure building has propped up growth in recent years but is generating diminishing returns and cannot be continued indefinitely.
  • Other forms of investment won’t pick up the slack. Slowing urban household formation means that fewer homes will need to be built each year. And with China’s share of global exports unlikely to rise much further, the manufacturing sector will be unable to continue adding factories at the same rate as in the past without creating overcapacity.
  • China’s shrinking pool of labour will become an increasing headwind to growth. (See Chart 110.) Attempts to boost the birth rate in recent years have so far had little effect. And China is too big to lean heavily on immigration to supplement its workforce. We expect the drag from this to peak slightly above 1%-pt in the 2030s.
  • Policymakers could counter these drags through market-based reforms to boost productivity growth. But policy under President Xi has favoured tightening political control and cementing the role of state firms, which means that resource allocation is likely to become less efficient.
  • China’s rising debt burden is also 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 will be increasingly challenging to pull off.
  • Most likely, the financial system will continue to direct a disproportionate amount of credit to favoured firms. This will worsen resource allocation and drag productivity growth down further.
  • Climate change may also become a growing headwind, as rising sea levels threaten China’s heavily populated coastal cities and rising temperatures lead to a higher incidence of disease. The World Bank estimates that a 3˚C temperature rise would drag China’s GDP growth down by a 1%-pt.
  • All told, we think China’s growth rate will slow from around 5% currently (on our estimates) to about 2% from 2030 onwards. (See Chart 111.) In other words, China will fall off the path of rapid development laid down by Japan, Korea and Taiwan. Instead, it will start to resemble most middle-income EMs which have converged with developed economies at a much slower pace, if at all. (See Chart 112.)
  • But the renminbi may not follow the path of the “average” EM currency, which typically depreciates in nominal terms due to high inflation. In China’s case, continued overinvestment should keep inflation low and a small but persistent current account surplus means that the renminbi is more likely to strengthen than weaken.

Long-run Charts: China

Chart 109: Public Capital Stock vs Income Level

(US$ th, 2011 prices, PPP adjusted, latest=2017)

Chart 110: Employment

Chart 111: Labour Productivity & GDP

(% y/y)

Chart 112: GDP per Capita

(% of US level, current US$, log scale)

 

Sources: Refinitiv, CEIC, Penn World Tables, Capital Economics

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

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

10.7

6.3

5.2

3.6

3.2

2.2

Real consumption

9.9

8.1

7.3

4.5

4.0

3.0

Productivity

10.3

5.9

5.3

3.8

3.4

2.7

Employment

0.4

0.4

-0.1

-0.1

-0.2

-0.4

Unemployment rate (%, end of period)

5.1

5.1

5.2

5.0

5.0

5.0

Wages

15.2

11.2

7.5

6.0

5.5

4.7

Inflation (%)

3.0

2.8

2.4

1.9

2.0

2.0

Policy interest rate (%, end of period) (1)

0.0

2.3

1.8

2.5

3.0

3.0

Ten-year government bond yield (%, end of period) (2)

3.9

2.9

2.4

3.5

3.5

3.5

Government budget balance (% of GDP, average over period)

-0.6

-1.0

-4.3

-3.8

-3.1

-3.0

Gross government debt (% of GDP, average over period)

30

37

49

53

57

62

Current account (% of GDP, average over period)

7.2

2.2

1.2

1.5

1.9

2.0

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

6.6

6.5

7.5

7.2

7.0

6.5

Nominal GDP ($bn, end of period)

6,087

11,016

12,926

19,531

26,198

64,546

Population (millions, end of period)

1,338

1,371

1,439

1,458

1,464

1,402

*based on CE China Activity Proxy; (1) Urban surveyed rate; (2) PBOC 7-day reverse repo rate; (3) Local currency


India

Global outperformance backed by demographics and reform

  • We expect India to sustain growth of between 5-7% per year over the next three decades, making it the fastest-growing major economy in the world. As a result, its share of world GDP should more than triple by 2050.
  • Employment growth will hold up relatively well for two reasons. First, the expansion in the working-age population is set to continue, with India replacing China as home to the world’s largest labour force by 2025. (See Chart 113.)
  • Second, female employment is likely to increase from its current very low levels. (See Chart 114.) India’s low female participation rate is often attributed to entrenched cultural norms. But we think it instead 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 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.
  • Other productivity-boosting measures are also likely. Prime Minister Modi’s BJP secured the largest single-party majority in the Lok Sabha (lower house of parliament) since the early 1980s in the 2019 general election (see Chart 115), which should lay the platform for continued gradual reform. Further ahead, growing pressure from businesses and investors should ensure that politicians continue to make reform progress regardless of who holds power.
  • Our optimism about long-run productivity prospects is also 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.
  • But the outlook is not universally upbeat. The recent pursuit of populist policies – such as the controversial citizenship amendment bill – is a concern and, further ahead, India will be among the worst-affected major nations from climate change. Extreme heat will weigh on worker productivity, while rising sea levels will reduce land use in coastal areas.
  • The combined central and state budget deficits will remain fairly high, but public debt is unlikely to jump sharply 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. We suspect that the RBI will 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 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.)

India Charts

Chart 113: Working-age Population (Millions)

Chart 114: Female Labour Force Participation (%, 2018)

Chart 115: Lok Sabha Election Results
(% of Seats Won by Leading Party)

Chart 116: Rupee vs US$

 

Sources: Refinitiv, UN, Electoral Commission, Capital Economics

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

 

2006-2010

2011-2015

2016-2020

2021-2025

2026-2030

2031-2050

Real GDP

8.3

6.5

6.7

6.9

6.0

5.2

Real consumption

8.1

7.3

7.3

7.3

7.8

6.7

Productivity

8.2

5.2

5.1

5.1

4.5

3.9

Employment

0.1

1.3

1.6

1.5

1.4

1.2

Inflation (%)

8.7

8.2

4.3

4.1

4.0

3.7

Policy interest rate (%, end of period) (1)

6.3

6.8

5.3

6.0

6.0

5.0

Ten-year government bond yield (%, end of period) (2)

8.0

8.1

7.5

6.5

6.5

5.5

Government budget balance (% of GDP, average over period)

-7.6

-7.4

-6.6

-6.2

-5.3

-4.7

Gross government debt (% of GDP, average over period)

72

68

68

68

62

58

Current account (% of GDP, average over period)

-2.0

-2.9

-1.6

-1.8

-1.7

-1.5

Exchange rate (Indian rupee per US dollar, end of period)

46

64

74

79

83

101

Nominal GDP ($bn, end of period)

1,708

2,087

2,645

4,861

7,516

34,973

Population (millions, end of period)

1,234

1,310

1,383

1,445

1,504

1,639

Sources: UN, CEIC, Refinitiv, Bloomberg, Capital Economics

Other Emerging Asia

Suffering more than most from deglobalisation

  • A combination of weaker workforce growth, deglobalisation and reduced scope for catch-up means that growth in Emerging Asia (excluding India and China) is likely to slow in the coming decades.
  • Whereas 10 years ago working-age populations were growing by between 1-3% a year, they are now stagnant or falling in around half of the countries we cover. The UN forecasts that working-age population growth will continue to slow. (See Charts 117 & 118.) Policymakers have taken measures to boost fertility and encourage more women into the labour force. But these steps are proving ineffective and international experience suggests it will be difficult to engineer a big turnaround.
  • In the Newly Industrialised Economies (NIEs – Hong Kong, Singapore, Taiwan and Korea) a further drag has come from slower productivity growth. (See Chart 119.) The slowdown partly reflects less scope for catch-up now that these economies are amongst the most developed in the world. Although innovations in robotics and developments in AI may boost productivity growth over the coming years, falling working-age populations mean that the sustainable rate of growth in the NIEs is set to fall.
  • Countries in South and South East Asia have the potential to rack up rapid rates of productivity growth. We are especially optimistic about Vietnam, which has come closer to replicating the success of China than any other country. Several factors account for Vietnam’s strong performance, including political stability, steady progress on reform, low wages, an expanding workforce and its close proximity to the supply chains of southern China.
  • However, low-income countries are not guaranteed rapid catch-up growth. (See Chart 120.) If an economy is poor today, it is probably due in large part to institutional failure. If institutions remain weak and policymaking fails to improve, then potential development may continue to be squandered. Meanwhile, deglobalisation could cut off a key route to development in the Asian economies, which are particularly open and have relied on their role in global supply chains.
  • Growth is likely to remain relatively strong in Indonesia and the Philippines. But further reforms to free-up inflexible labour markets (Indonesia) and improve dreadful infrastructure (both) are needed if either countries are to fulfil their potential. (See Charts 121 & 122.)
  • Meanwhile, in Thailand, years of political uncertainty and upheaval have taken a toll on the country’s institutions and led to a slump in investment. Accordingly, growth there is likely to disappoint. Political uncertainty is also a big concern in Pakistan and Sri Lanka.
  • South East Asia and parts of 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 123.) Some countries, most notably Singapore (which is planning a massive investment in its sea wall defences), have plans to deal with rising sea levels. Most other countries lack the fiscal resources to build effective defences and are likely to be hit hard by rising global temperatures.
  • Overall, we think regional growth will slow from around 4.0% today to around 3.5% in a decade’s time. While growth of this rate would still make Emerging Asia one of the fastest growing parts of the world economy, it would also mean that incomes will converge more slowly than previously. What’s more, compared to what others are forecasting, we are painting a downbeat picture.

Other Emerging Asia Charts

Chart 117: Working-age Populations (% y/y)

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

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

Chart 120: Productivity Growth & GDP per capita

Chart 121: Average Severance Pay for Making Worker Redundant (no. of weeks)

Chart 122: World Bank Logistics Performance Index (higher number = better infrastructure)

Chart 123: Investment’s Share of GDP (%-point change, 2006-18)

Chart 124: Numbers Living Below High Tide by 2050 in High Emissions Scenario (% of population)

 

Sources: Refinitiv, UNDP, OECD, World Bank, IMF, Climate Central