Group Economics Emerging Markets
Asia outlook
Arjen van Dijkhuizen, +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
Resilient, despite China-made slowdown
26 May 2015
Regional growth slowed in Q1 driven by China and manufacturing PMIs point to further weakening growth momentum. Still, we expect regional growth to remain resilient this year at 6.3%, outperforming other regions by a wide margin. We assume the Chinese authorities will keep adding stimulus to keep growth close to their 7% target. Expected pick-up in advanced economies and drop in oil prices also support regional growth. Key risks are related to a hard landing in China, disappointing growth in advanced economies, US dollar strength, market turmoil feeding capital outflows, high domestic debt levels, delays in structural reforms and geopolitics issues.
Regional growth slowed in first quarter Although Asia continues to outperform other EM regions and advanced economies by a wide margin, regional growth has slowed a bit in recent months. We expect that regional growth fell to 6.3% yoy in Q1 (Q4-2014: 6.5%). General factors behind the regional slowdown were a weakening of domestic demand in several countries and a drop in global growth affecting exports, although regional imports have also cooled. Asian export volumes dropped significantly in March. This partly reflects a slowdown in external demand and special factors (China), but for some countries also highlights the erosion of competitiveness (see below).
Regional manufacturing PMI index has fallen further % yoy^
index**
12
60
10
55
8
50
6
45 40
4
35
2 08
09
10
Asia real GDP (lhs)
11
12
13
14
15
Asia manufacturing PMI (rhs)
Sources: Bloomberg, HSBC/Markit, ABN AMRO Group Economics ^ 2015-Q1 is still a projection ** China: HSBC/Markit version
Slowdown largely ‘made in China’ The regional slowdown in Q1 was largely ‘maid in China’, where growth fell to 7.0% yoy (2014-Q4: 7.3%) due to weak domestic demand and the slowdown in the industrial sector. Growth also fell in other countries for which China is a key trade partner. In Hong Kong, which has the strongest trade and financial ties with China, growth slowed further to 2.1% yoy in Q1. South Korean growth fell to a two-year low of 2.4% yoy, while growth dropped to below 5% yoy in Indonesia. Compared to Q4-2014, annual growth in Q1 remained (fairly) stable in Taiwan, Malaysia and Vietnam. Growth accelerated
only in Thailand, on the back of a more stable political situation, and Singapore. While Q1 figures have not yet been published for India, activity data have cooled recently, but – as explained in our March outlook – methodological revisions have lifted India’s annual growth rates up by 1.5 – 2 %-points. Manufacturing PMIs edge downwards Manufacturing PMIs also point to a weakening regional growth momentum. Our regional GDP-weighted indices have dropped further over the past few months. Using HSBC/Markit’s figures for China, the regional index even dropped to below 50 (49.4) in April for the first time in a year. Using China’s official PMI, the regional index has fallen to the neutral 50 mark. Currently, the manufacturing PMI is below 50 in most countries for which these indicators are published, with Indonesia, Hong Kong and Korea ranking the lowest. Manufacturing PMIs remain above 50 only in India, Vietnam and China (official version).
Emerging Asia: Economic growth % yoy
2014
2015
China
Q3-14 7.3
Q4-14 7.3
Q1-15 7.0
7.4
7.0
2016 7.0
Hong Kong
2.9
2.4
2.1
2.5
2.5
3.0
India
8.2
7.5
-
7.2
7.5
7.5
Indonesia
4.9
5.0
4.7
5.0
5.0
5.5
Malaysia
5.6
5.7
5.6
6.0
5.0
5.0
Singapore
2.8
2.1
2.6
3.0
3.0
3.5
South Korea
3.2
2.7
2.4
3.3
3.0
3.5
Taiwan
4.3
3.4
3.4
3.7
3.5
3.5
Thailand
0.6
2.3
3.0
0.7
3.5
4.0
Reg. avg.
6.6
6.5
6.3
6.4
6.3
6.4
Sources: EIU, Bloomberg, ABN AMRO Group Economics
Some forecasts cut, but Asian growth still resilient Taking into account the latest developments, we recently cut our 2015 growth forecasts for South Korea and Singapore (from 3.5% to 3%). Still, despite these adjustments and China’s slowdown, we expect regional growth to remain resilient this year, although dropping a bit, to 6.3%.Assuming the authorities to keep adding stimulus to prevent growth from falling (too far) below their 7% target, we see China’s growth momentum improving in the second half of this year. In most
2
Asia outlook k, Resilient, des spite China-ma ade slowdown – xx May 2015 5
other economies, there is also room r for monettary and/or fisccal stim mulus, if neede ed. Moreover, we w expect expo ort-oriented cou untries such ass, for instance, Korea, Hong Kong K and Sin ngapore, to profit from the pick-up in advanc ced economiess (US S, eurozone, Ja apan) in the co ourse of 2015. The T drop in oil pric ces, despite the e recent correcction, will also remain r sup pportive, as Asia’s major econ nomies are nett oil importers. on has stabilis sed in recent months m Regional inflatio s since early e 2014, drivven Regional inflation has dropped sharply or energy, food and other com mmodities. As tthe by lower prices fo op in commoditty prices has co ome to a halt (w with energy evven dro reb bounding), regio onal inflation has stabilised. Our O regional inflation index flucctuated around d 2.5% yoy in re ecent months. eanwhile, region nal core inflatio on has continue ed to fall, Me rea aching 1.3% yo oy in April, refle ecting second-o order effects off low wer commodity prices and weak domestic de emand. es among Still, regional averages mask strrong difference cou untries. Inflation n has bottomed d out in China (fluctuating at a stilll low 1.5%) and d Malaysia, has fallen in India a, Korea and Hong Kong while remaining neg gative in Singap pore, Taiwan d Thailand. Inflation levels alsso differ, with CPI C still relative ely and high in India and Indonesia. Reg gional inflation will also be pacted by clima ate conditions. Still, even assuming a seriou us imp El Niño N this year, its effects are hard to estima ate yet, will diffe er perr country and sshould not be ta aken out of con ntext. All in all, we expect regiona al inflation to edge e up in the coming c monthss, ven by the fading out of the drop in commod dity prices and driv an improving grow wth momentum m.
We W see scope fo or further easinng in several co ountries. For China, we expec ct additional meeasured monetary easing, R cuts, and including one or two policy ratee cuts and RRR f further rate targeted (fiscal) stimulus. We aalso see room for cu uts in India and d Indonesia, altthough easing will be co onstrained by the Fed exit pacce and by poss sible effects of El Niño on inflation. Should inflatioon remain subdued, the Bankk of orea might opt for another ratte cut as well. Ko ernal competittiveness Prreserving exte Re ecent easing measures m and/oor FX interventtions should alsso be e seen in the co ontext of safegguarding extern nal competitivene ess. Countries with (relativelyy) fixed exchange rates are th he most vulnerable in that respectt. For instance, the resilience of urt China’s com mpetitiveness (c chart). While we w the yuan, has hu o not expect the Chinese authhorities to tolerrate a sharp yu uan do we eakening, some depreciationn may be desira able. We expecct CNH to weaken versus the US SD towards 6.30 at end-2015 and 6. Still, we foreesee the CNH remaining r resilient 6.40 at end-2016 ompared to mo ost other Asian currencies, forr which we exp pect co a stronger depre eciation versuss the USD in 20 015-16.
Real R effective exchange raate CPI-based, % cchange 2010-2015
China Hong Kong S. Korea S Singapore Malaysia Taiwan
Re egional inflation has stabiilised % yoy
India index, Jan/12 = 1100
120
6 5
100
4
Thailand Indonesia 0
10
20
30
40
So ource: EIU (projec ctions for 2015)
8 80 3 6 60
2 1
4 40 12
13 Headline infflation (lhs) Brent oil priice index (rhs)
14
15 Core inflation (lhs) FAO foodd price index (rhs))
Sou urces: Thomson R Reuters Datastream m, ABN AMRO Group Economics
door for more policy easing g … opening the d maining below ta arget in many countries, c Asia an Witth inflation rem cen ntral banks havve continued monetary m easing g. The Chinese e autthorities cut the e main policy ra ates twice by 25 2 bp (Februaryy/ Ma ay), while also ttaking a whole range of otherr stimulus me easures includin ng further bankk RRR cuts and d easing fina ancing conditio ons for housing and local gove ernments. India a, Korrea, Indonesia and Thailand have also cut rates r (further).
he outlook Main risks to th We W forecast dollar strength willl get another le eg up, in the runup p to the Fed liftt-off, which we assume to tak ke place next Se eptember. While currency de preciation can help to restore e co ompetitiveness, it can also addd to risks as re epaying FXde enominated obligations will beecome more expensive. We be elieve those ris sks are relativeely contained fo or Asia. Externa al de ebt levels and external e deficits ts are overall manageable, m wh hile the share of FX-denominated looans is relative ely low and FX X eserves genera ally high. Other key risks stem m from 1) a hard derre than-expected la anding in Chinaa, 2) disappointing growth in dvanced econo omies, 3) markeet turmoil feeding EM capital ad ou utflows, triggere ed for instancee by the Fed liftt-off, 4) high do omestic corporate and houseehold debts (Ch hina, Hong Kon ng, Malaysia, Singapore, South Koorea, Thailand)), 5) delays in ms and 6) a flaree-up of (geo)po olitical risks. structural reform
3
Asia outlook k, Resilient, des spite China-ma ade slowdown – xx May 2015 5
Ma ain economic in ndicators/fore casts GD DP growth (%) Em merging Asia Em merging Europe Lattin America Mid ddle East/North Africa A Em merging marketts total
2013 2 6.4 1.8 2.4 1.6 4.6
2014e 6.4 1.3 0.9 2.8 4.4
2015e 6.3 -0.7 0.5 2.5 4.0
2016e 2 6.4 2.0 2.2 3.5 4.8
-0.4 2.2 3.2
0.9 2.4 3.3
1.8 2.7 3.3
2.3 3.1 3.8
2013 2 -2.5 -1.5 -3.0 0.5
2014e -2.5 -1.5 -4.5 -1.5
2015e -3.0 -3.0 -5.5 -6.5
2016e 2 -3.0 -2.0 -3.5 -4.0
-2.9 -2.4 Eurozone -4.1 -2.8 US S Source: EIU, ABN AMRO Group E Economics
-2.3 -2.5
-2.0 -2.2
Eurozone US S Wo orld Bu udget balance (% ( GDP) Em merging Asia Em merging Europe Lattin America Mid ddle East/North Africa A
Inflattion (%) Emerrging Asia Emerrging Europe Latin America Middle East/North Affrica Eme rging markets total Eurozzone US World d Currrent account (% % GDP) Emerrging Asia Emerrging Europe Latin America Middle East/North Affrica Eurozzone US
2013 4 4.6 5 5.3 9 9.0 13 3.6 6 6.4
2014e 3.6 6.2 12.7 7.3 5.8
2015e 3.1 10.2 13.1 6.9 6.0
2016e 3.4 5.3 1 10.3 6.8 5.1
1.3 1 1 1.5 4 4.3
0.5 1.6 4.0
0.4 0.1 3.7
1.7 2.5 3.8
2013 1 1.0 -1 1.5 -2 2.5 8 8.5
2014e 2.0 0.0 -2.5 6.0
2015e 2.0 0.0 -3.5 -1.5
2016e 1.5 0.5 -3.0 1.5
3.1 3.2 2 2.6 2.9 -2.3 -2 2.4 -2.3 -2.4 * figures Emerrging Markets re egions are round ded
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