Asia Outlook
Group Economics Emerging Markets Research
28 November 2016
Pretty resilient to ‘Trump risks’ Arjen van Dijkhuizen Senior Economist Tel: +31 20 628 8052 arjen.van.dijkhuizen@nl.abnamro.com
Upward revision of China leaves regional growth forecast at almost 6% in 2017 Regional growth expected to slow further in 2018, driven by China Trump victory (and Fed hike) trigger renewed tightening financial conditions … … while posing risks in the areas of foreign trade and foreign investment This adds to the risks related to a China hard landing, high debts and geopolitics.
Stabilisation in China leaves regional growth close to 6% this year For two years now, regional growth in emerging Asia has been close to 6%, as fiscal and monetary easing supporting domestic demand is offsetting subdued external demand. Our regional manufacturing PMI has even been improving over the past few months, reflecting a pick-up in global manufacturing and trade. Despite a couple of structural drags (high debt, overcapacity, weak private investment etcetera), China’s slowdown remains very gradual in nature, as the authorities have added (mainly fiscal) stimulus. China’s growth has been falling from 7.3% in 2014 to 6.9% in 2015 and to an expected 6.7% this year. Compared to 2015, growth is also expected to fall this year in Malaysia (from 5% to 4%), Singapore (fr om 2% to 1.5%) and Hong Kong (from 2.4% to 1.5%). By contrast, we expect growth to pick up this year in Taiwan (from 0.7% to 1%), as the global tech cycle improves. Meanwhile, growth is more or less at similar levels to last year’s in India (at 7.5%, having surpassed China as fastest growing emerging giant), South Korea (around 2.5%), Indonesia (5%) and Thailand (3%). Compared to our previous Asia outlook published in September, we raised our 2016 estimate for China (from 6.5% to 6.7%) and Hong Kong (from 1% to 1.5%).
Industrial production bottoming out?
Regional growth stable around 6%, PMIs improve further Regional growth, % yoy
Regional Manuf. PMI (China: NBS)
CPB index, production weighted, % yoy
12
65
14
10
60
12
8
55
6
50
4
45
2
40
2
35
0
8 6
10
8
0 08
09
10
11
12
Economic growth (lhs)
13
14
15
4
6 4
2
0 11
16
13
14
Emerging Asia (lhs)
Manufacturing PMI (rhs)
Source: Bloomberg, Thomson Reuters Datastream, ABN AMRO Group Econ.
12
15
16
World (rhs)
Source: CPB
Upward revision of China forecast will leave regional growth almost 6% in 2017 Regarding 2017, compared to our previous Asia outlook published in September we have raised our growth forecast for China from 6% to 6.5% for the following reasons: 1) the very stable growth performance this year, 2) the fact that 2017 is a politically important year
Insights.abnamro.nl/en
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Asia Outlook - Pretty resilient to ‘Trump risks’ – 28 November 2016
implying that Beijing remains committed to prop up growth, if needed and 3) our assumption of a ‘moderate Trump scenario’ in the US (see for more detail our China outlook, Soft landing to continue in 2017-18, published on 24 November). With China’s growth forecast for 2017 now at 6.5%, we expect regional growth to slow very gradual next year, to 5.9%. For most of the other countries, we expect growth in 2017 to remain quite similar to this year’s level. Exports will benefit from an improving global manufacturing cycle and China’s stabilisation, while there is still some room for policy stimulus to support domestic demand. All this should compensate from the rising headwinds related to a tightening of financial conditions and the risk of more restrictive trade policies following Donald Trump’s victory in the US presidential elections (see below). Still, given those headwinds, we have removed our expectation of an acceleration in 2017 for several countries. We forecast India to remain the fastest grower at 7.5%. Modi’s recent demonetisation moves bring short-term downward risks, but thanks to the reduction of external deficits since the taper tantrum in 2013 and its relatively closedness, India is relatively immune to the ‘Trump-related’ risks.
Emerging Asia: Economic growth (forecasts) % yoy
Q1-16
Q2-16
Q3-16
2015
2016*
China
6.7
6.7
6.7
6.9
6.7
6.5 ↑
6.0
Hong Kong
0.8
1.7
1.9
2.4
1.5 ↑
1.5
1.5
India
7.9
7.1
7.2
7.5
7.5
7.5
Indonesia
4.9
5.2
5.0
4.8
5.0
5.0 ↓
5.0
Malaysia
4.2
4.0
4.3
5.0
4.0
4.0
4.0
Singapore
2.0
2.0
1.1
2.0
1.5
1.5 ↓
1.5
South Korea
2.8
3.3
2.7
2.6
2.5
2.5
2.5
Taiwan
-0.3
0.7
2.1
0.6
1.0
1.5
1.5
Thailand
3.2
3.5
3.2
2.8
3.0
3.0
3.0
Regional average
6.1
6.0
6.1
6.2
6.1
5.9
5.7
Source: ABN AMRO Group Economics, EIU, Bloomberg. * Estimates 2016 are rounded, except for China.
2017**
2018**
** Forecasts 2017-2018 are rounded.
Regional growth expected to slow further in 2018, driven by China We expect regional growth to gradually slow further in 2018, to 5.7%, driven by China. We forecast Chinese growth to fall to around 6% in 2018, as Beijing will be forced to a stronger extent to address debt, overcapacity and other structural issues and has also more political leeway to do so by then. For the other economies, we expect growth in 2018 to be similar to 2017 levels, as the slowdown in external demand from China will be compensated by higher growth in advanced economies. Moreover, while there are obviously risks from anti globalisation movements in advanced economies (see below), many emerging Asian countries still have room for policy easing to support domestic demand. Inflation is edging up though still relatively low, but central banks more cautious … After having fallen earlier this year, our regional inflation index has risen again in the past months, to 2.5% yoy in October. This is partly driven by higher commodity prices. Still, core inflation is rising as well (mainly thanks to a turnaround in India), although staying quite low at 1.4% yoy. Meanwhile, Chinese producer prices are back in positive territory (+1.2% yoy in October), after having been negative between March 2012 and August 2016. Intra-regional differences between levels and direction of inflation remain high. Over the past months, we have seen further policy rate cuts in India and Indonesia, where the reverse repurchase rate became the benchmark in August. Looking at real policy rates, we still see some room for easing in countries like China, India, Indonesia and possibly South Korea. However, as rising US bond yields, higher Fed funds rates and a possibly more protectionist global stance affect risk aversion and put pressure on Asian FX (also see our Asia FX Outlook), we
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Asia Outlook - Pretty resilient to ‘Trump risks’ – 28 November 2016
think that central banks have become more cautious. Given relatively healthy public finance indicators for most Asian countries, this implies a further shift from monetary to fiscal stimulus.
Inflation in Asia is picking up, but remains relatively low
Still some room for easing; central banks cautious
%
Index, Jan. 2012 = 100
6
120
6
100
4
80
2
60
0
40
-2
20
-4
4
2
0 12
13
14
15
Real policy rate (benchmark rate* minus CPI inflation), %
16
-6 Headline inflation (lhs) Brent oil price index (rhs)
Core inflation (lhs) FAO food price index (rhs)
11
12
13
14
China
India
S. Korea
15
16 Indonesia
Source: Thomson Reuters Datastream, ABN AMRO Group Economics *Indonesia shifted to another benchmark interest rate earlier this year
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
Trump victory and Fed rate hike trigger renewed tightening of financial conditions Financial conditions in emerging Asia have eased during the first part of 2016, reflecting a general improvement of market sentiment vis-à-vis EMs and a pick-up of capital flows. Supporting factors were an easing of Chinaphobia, the Fed remaining on hold, the UK Brexit vote being absorbed smoothly by markets and ongoing policy easing in emerging Asia. However, more recently, a reversion is taking place, as financial conditions are tightening again. In our view, this is due to: 1) a stronger pricing in of a December Fed rate hike and 2) Donald Trump’s victory in the US presidential elections. Trump’s victory is interpreted as being bullish for the US economy and US inflation and triggered a further rise of USD bond yields, US dollar strengthening and a reversal of capital flows towards emerging economies. This tightening of financial conditions will also prove a headwind for emerging Asia (particularly for countries like Hong Kong, Singapore and Malaysia), but looking at economic fundamentals the region is more resilient than other EM regions in our view.
Fed and Trump trigger another wave of EM outflows …
… and a tightening of financial conditions in EM Asia
%
Index Asia ex Japan*
USD bn
6
80 Fed and Trump 2016
5
40 4
3
0
2 -40
Global crisis 2008-09
1
Fed taper tantrum 2013
China and Fed 2015
0
-80 05
06
07
08
09
Portfolio flows to EM (rhs)
10
11
12
13
Fed rate (lhs)
14
15
16
UST 10Y rate (lhs)
Source: IIF, Thomson Reuters Datastream, ABN AMRO (2016-nov: estimate)
% yoy
3 2 1 0 -1 -2 -3 -4 -5
12 10 8 6 4 2 0
07
08
09
10
11
12
13
Financial conditions index (lhs)
14
15
16
Real GDP (rhs)
Source: Bloomberg. * Negative values point to tightening of financial conditions
… and poses risks in the areas of foreign trade and foreign investment Another headwind facing Asian economies for a while has been coming from weak global trade, which has been lagging behind global growth for almost five years now due to both
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Asia Outlook - Pretty resilient to ‘Trump risks’ – 28 November 2016
structural and cyclical factors. Subdued import demand from China and Japan have played a role in this as well. More recently, however, there have been signs of a turnaround in global manufacturing. We also see an improving momentum in Asian imports, including a bottoming out of China’s imports, and more dynamic external demand in Taiwan, one of the global economy’s bellwethers. All in all, we expect global trade to pick up in 2017, but not spectacular given the structural factors at play. We doubt whether the improvement in global trade will extend into 2018, given recent anti globalisation trends in the US (Trump victory) and Europe (Brexit, rising populism). These trends are a constraint for further trade liberalisation and lead to higher risks of protectionism, keeping a lid on global trade (also see our Global Trade Watch, Will the nascent trade recovery be Trump-resistant?, published on 11 November. Looking at the ratio between exports to the US and GDP, Vietnam, Hong Kong and Singapore are most exposed to this type of risks. Still, shifts in US trade policy (Trump does not support TPP) also create opportunities for China and other Asian economies, as they could lead to other ways of strengthening regional trade cooperation.
EM Asian imports are bottoming out, exports still weak
Importance US as an export destination
Volume indices, 2010 = 100
Exports to US, in % GDP (2015)
130
20
15
120
10
110 5 100
0
90
10
11 World trade
Source: CPB
12
13
14
EM Asian exports
15
16
EM Asian imports Source: Thomson Reuters Datastream, ABN AMRO Group Economics
Other risks to our outlook remain In our view, the risks stemming from Trump’s victory in the US elections (tightening of financial conditions, uncertainties regarding trade and investment) add to the risks already in place. We think the main risk for emerging Asia still stems from a China hard landing, as that strongly impact trade, financial sectors and financial (including commodity) markets. Another key risk stems from high debt levels, particularly in China but also in Korea, Hong Kong and Singapore and, to a lesser extent, Malaysia and Thailand. Mitigating factor is that foreign currency debt levels are generally quite low in Asia, making an externally driven liquidity crisis less likely. However, if it is not managed adequately, this debt overhang certainly forms a threat for the banking system and future economic growth prospects. Next to these macro-financial risks, (geo)political tensions could of course impact the outlook as well. Turmoil around the US-China relationship would affect China but also other Asian markets. Geopolitical risks related to the Korean peninsula remain in place, as well as uncertainties surrounding the various claims in the South China Sea. Complex relations between China and neighbouring countries will be there to stay, although the shift towards a more ‘isolationist’ US policy could also lead to a strengthening of regional cooperation. To conclude, we should not forget that given emerging Asia’s relatively strong external position – many countries have current account surpluses and high FX reserves’ coverage of imports and (short-term) external debt – and fiscal fundamentals, the region is more resilient to (external) shocks than other EM regions.
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Asia Outlook - Pretty resilient to ‘Trump risks’ – 28 November 2016
Main economic indicators/forecasts GDP growth (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total
2015 6.2 -0.3 -0.4 2.7 4.0
2016e 6.1 0.9 -1.4 2.9 4.0
2017e 5.9 1.9 1.3 3.0 4.4
2018e 5.7 2.1 2.3 3.6 4.5
1.9 2.6 3.2
1.6 1.6 3.0
1.4 2.4 3.4
1.8 2.7 3.5
2015 -3.0 -2.0 -6.5 -8.5
2016e -3.5 -3.0 -6.0 -7.5
2017e -3.5 -2.5 -5.5 -5.5
2018e -3.5 -1.5 -4.0 -4.0
Eurozone -2.1 -1.9 US -2.6 -3.4 Source: EIU, ABN AMRO Group Economics
-1.7 -3.6
-1.8 -3.9
Eurozone US World Budget balance (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa
Inflation (%) Emerging Asia Emerging Europe Latin America** Middle East/North Africa Emerging markets total Eurozone US World Current account (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Eurozone US
2015 2.5 10.5 8.5 6.0 4.7
2016e 2.7 5.4 10.5 6.2 4.5
2017e 2.9 5.1 6.7 7.2 4.2
2018e 2.7 4.5 5.0 7.6 3.8
0.0 0.1 2.9
0.2 1.2 3.0
1.2 2.7 3.3
1.6 2.8 3.1
2015 2.5 1.5 -3.5 -3.0
2016e 2.5 0.5 -2.0 -4.0
2017e 2.0 0.5 -2.0 -1.0
2018e 1.5 0.0 -2.0 1.0
2.9 2.9 2.8 3.2 -2.6 -2.7 -2.7 -2.9 * figures Emerging Markets regions are rounded
**Inflation Latin America and World without Venezuela
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