22
Global Ou utlook – 25 November 2015 2
Asia – China, world trade and d Fed sha ape 2016 6 outlook k
Arje en van Dijkhuizen Sen nior Economist Tel:: +31 20 628 8052 2 arje en.van.dijkhuizen@ @nl.abnamro.com m
2015 brought h headwinds, but b regional growth hollds up quite e well We expect the v very gradua al regional slowdown s to o extend into o 2016-17 Infla ation low de espite currency weakne ess, leaving room for more m easing. Key y risks: Chin na, Fed lift-o off, high deb bt/credit tigh htening and world trade e.
s related to China, Fed and weak global g trade 2015: a year full off headwinds The year 2015 has bee en turbulent forr emerging Asia, marked by sseveral headwinds. First, the orrection of the Chinese stock k market and th he unexpected change in the exchange rate e sharp co regime in the summer added to China a’s slowdown concerns. c Thesse factors, com mbined with uncertainty regarding tthe timing and pace of Fed rate hikes, triggeered capital outtflows and a ng of financial cconditions. Morre recently, how wever, China hhard landing fears have abate ed tightenin and financial conditionss have become e somewhat less tight again. Another headw wind stems from m lacklustrre global trade, particularly a stagnating s glob bal electronics cycle. Weakerr external dema and - not only from China b but also from ad dvanced econo omies – has lefft its mark on th he export-orien nted conomies. Fina ally, further dow wnward pressure on commoddity prices has impacted i Asian ec commod dity exporters ssuch as Malays sia and Indones sia. Still, for Assia as a whole, the drop in commod dity prices is a n net benefit, as the largest eco onomies are neet commodity importers.
A weak yearr for Asian tra ade
Financial F cond ditions have tightened, so ome reversal seen
Indices, average e 2005 = 100
ndex Asia ex Japa an* In
220
160
200 140
180
Asia, % yoy
3
12
2
10
1 8
0
160
120
140
-1
6
-2
120
100
100 80
80 05
06
07
08
09
10
11
Import vo olumes Asia (lhs) Global traade index (rhs)
12
13
14
15
4
-3 2
-4 -5
0 99
Exporrt volumes Asia (lh hs)
Sources: S CPB, Tho omson Reuters Da atastream
01
03
05
0 07
09
Financial conditions ind dex (lhs)
11
13
15
Real GDP (rhs)
Sou urce: Bloomberg. * Negative valuess point to tightenin ng of financial cond ditions.
Still, re egional grow wth holds up p quite well in 2015 …, Despite these headwin nds, regional grrowth held up quite q well in 20015, at just abo ove 6% (down from f pretty much in line with what we envisaged one year ago. Our base-line 6.3% in 2014). This is p o of an ongoing g gradual slowd down in China (towards 7% inn 2015) has ma aterialised, scenario despite numerous n hicccups surroundin ng China’s tran nsition and weaak external trad de. Our view is based on: 1) the fact th hat a resilient services s sector and solid conssumption comp pensate for ss in industry/cconstruction an nd investment and a 2) the assuumption that the authorities ke eep weaknes adding monetary m and ffiscal stimulus to t prevent an ‘u unorderly’ hardd landing. Meanwhile, India iss doing be etter this year th han originally envisaged. e Afte er a revision in GDP methodo ology pushed up u (estimate ed) growth rate es in early 2015, we raised ou ur 2015 forecasst from 5.5% to o 7.5%. The up plift in India more m or less co ompensates fo or the downward revision in 20015 growth forecasts for seve eral other As sian countries, particularly tho ose highly depe endent on tradee (Taiwan and Singapore).
… stab bilising in th he third quarrter The grad dual slowdown n in emerging Asia A that started d in late 2014 hhas continued this year, although h regional grow wth was stable at 6.1% yoy in Q3-2015. Thee slowdown is driven d by overa all
23
Global Ou utlook – 25 November 2015 2
Emerging Asia: Eco onomic grow wth % yoy
Q Q1-15
Q2-15
Q3 3-15
20115*
2016*
2017 7*
China
7.0
7.0 7
6.9 6
7..0
6.5
6.0 0
Hong Kon ng
2.4
2.8 2
2.3 2
2..5
2.5
2.5 5
India
7.5
7.0 7
-
7..5
7.5
7.5 5
Indonesia a
4.7
4.7 4
4.7 4
4..5
5.0
5.5 5
Malaysia
5.6
4.9 4
4.7 4
5..0
4.5
5.0 0
Singapore e
2.8
1.8
1.4
2..0
2.5
3.0 0
South Korea
2.5
2.2 2
2.6 2
2..5
3.0
3.0 0
Taiwan
3.8
0.5 0
-1 1.0
1..0
2.0
2.5 5
Thailand
3.0
2.8 2
2.9 2
3..0
3.0
3.5 5
Regional average
6.3
6.1 6
6.1**
6..1
6.0
5.8 8
Sources: ABN A AMRO, EIU, Bloomberg.
* Forecasts 2015-2 2017 are rounded
** Q3 figure fo or India estimated.
ss in external d demand, and fa altering domestic demand in sseveral countriies. Compared to weaknes Q2, annual growth slow wed marginally y in China and Malaysia, whilee showing a more marked slowdow wn in Taiwan (fiirst annual con ntraction since global g crisis), H Hong Kong and d Singapore. By B contrast, annual growth h in Q3 recove ered in Korea. Manufacturing M PMIs also poin nt to a stabilisa ation h momentum. T Taking Caixin’s s index for China, the regionaal GDP-weighte ed manufacturing in growth PMI edg ged higher in O October (to 48.9 9, from 48.3 in September), a lthough it rema ained below the e neutral 50 5 mark. This w was the first mo onthly improvement since Maay 2015. Taking g the NBS (official) series for Chin na, the regiona al index stabilised just below tthe neutral 50 mark m in Octobe er. Hong Ko ong, Indonesia and Taiwan cu urrently rank th he lowest, desppite an improve ement in the pa ast months. Currently, man nufacturing PM MIs are above 50 5 only in Indiaa and Vietnam.
Who W is most dependent d on n exports and d China?
Regional gro owth is gradu ually slowing to 6% % yoy
index
% GDP
1 12
65
1 10
60
8
55
6
50
1 100
4
45
50
2
40
0
0
35 08
09
10
11
Econo omic growth (lhs)
12
13
14
15
Manu ufacturing PMI (rhss)
Sources: S Bloomberrg, Thomson Reutters Datastream
% total exxports
2 250
60
2 200
50 40
1 150
30 20 10 0 HK SG (1) (1)
VI (2)
MY TW W TH (2) (1)) (1)
Chinna export share (rhhs)
KR (1)
PH P (3 3)
ID (2)
IN (4)
Exportt ratio (lhs)
urce: EIU. (1) Betw ween brackets is C China’s rank as ex xport destination. Sou
We exp pect the gra adual slowdo own led by China to co ontinue in 20 016 and 2017 Looking forward, we an nticipate that re egional growth will continue itts very graduall slowdown, fallling 6.0% in 2016 and 5.8% in 201 17. This trend iss driven by Ch hina, where we from 6.1% in 2015 to 6 g to slide from 7% in 2015 to 6.5% in 2016 2 and 6% inn 2017. For Ma alaysia, which has h expect growth been hit relatively hard d by falling com mmodity prices and rising fiscaal pressures, we w also foresee e s in 2016 6. By contrast, we forecast growth rising som mewhat in 2016 in Korea, growth slowing Indonesia, Singapore, Taiwan and Th hailand, as exte ernal demand sshould strengthen on the bacck of improving world trad de, although tig ghter credit con nditions are likeely to remain a headwind. hile, we expect growth to remain stable compared to 2015 in India (7.5%) and Hong Ko ong Meanwh (2.5%). Hence, H we fore esee India remaining Asia’s fa astest growing emerging gian nt. Still, if the Modi-government fails to speed up ke ey reforms, the e country’s longger-term growth prospects co ould be hurt.
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Global Ou utlook – 25 November 2015 2
Despite currency w weakness, inflation i rem mains low … In the co ourse of 2015, most Asian currencies have lost ground verrsus the US do ollar. This not only o reflects US U dollar stren ngth, but also concerns c aboutt China’s slowddown and the yuan y devaluatio on. The Malaysia ringgit, In ndonesian rupiiah and Thai ba aht have weake kened relatively y sharply versus the US dollar, d albeit wi th some recovery in recent months. m Meanw while, the Chine ese yuan and th he Indian ru upee have provven relatively stable. s With the e Fed lift-off exppected in Dece ember 2015 an nd 75 bps of o additional Fe ed rate hikes in n 2016, we fore esee some furthher depreciatio on versus USD for Asian FX X in 2016. We anticipate that the Chinese yuan and the Inndian rupee will remain the mo ost resilient of the Asian cu urrencies. Despite currency weakness, w regioonal inflation re emains driven down by y low commoditty prices and s ubdued domes stic demand, while w remarkably subdued, d regional core inflation h has even dropp ped below 1%. CPI inflation rremains negative in Singaporre e producer price e inflation has been in negativve territory sinc ce early 2012. and Thailand. Chinese
Asian FX un nder pressure e in 2015
Regional R infla ation has stab bilised at low levels
Exchange rates vversus USD, indicces, 1 Jan. 2007 = 100
% yoy
180
6
Ind dex, Jan. 2012 = 100
1 120
160
1 100 4
140 120
8 80 6 60
2
100
4 40
80
0
2 20 12
60 07
08 CN NY
09
10
11
INR
12
KRW
13 3 IDR
14
15
16
THB
13
14 4
Headline inflation (lhs) Brent oil prrice index (rhs)
15
16
Core infflation (lhs) FAO foood price index (rhss)
Sou urce: Thomson Re euters Datastream m
Source: S Thomson R Reuters Datastrea am
… leav ving some ro oom for more monetary y and fiscal easing Against the backdrop o of low inflation, we have seen n monetary eassing in the courrse of 2015 in ndia, Korea, In donesia, Singa apore, Taiwan and Thailand. Although the window w for China, In monetarry easing is gra adually closing and central ba anks are becom ming more cauttious in anticipattion of Fed rate e hikes, we see e some room fo or further moneetary stimulus in China, and possibly also in India a and Indonesia. We also see ro oom for fiscal sstimulus in man ny Asian countries damentals are generally soun s, as fiscal fund nd. Budget defficits exceed 3% % of GDP in 20 015 only in In ndia, Malaysia and Vietnam. Public debt rattios are still quiite manageable e and generallyy around 50% 5 of GDP (in n Vietnam, Malaysia, Thailand and India) orr lower.
Main riisks to the o outlook Although h not our base case, a China hard landing still s forms the m main risk to ourr outlook for emerging Asia, as thatt would hurt reg gional trade and trigger markeet turmoil. Another risk relates to ected Fed lift-offf in Decemberr 2015 and sub bsequent rate hhikes in 2016/2 2017, certainly in the expe conjuncttion with high d debt levels in co ountries like China, Korea, Hoong Kong, Singapore, Thailand and Mala aysia. This cou uld trigger rene ewed capital ou utflows and – toogether with otther forces whicch put a bra ake on credit g rowth – contrib bute to a furthe er tightening of financial condiitions in Asia. Although h (renewed) cu urrency weakne ess can help re estore competittiveness, it also o increases risks as repay ying FX-denom minated debt will become more expensive. Inndonesia and Malaysia M look particula arly vulnerable to China and Fed F risks, given n their dependeence on comm modities, their trrade links with h China and exxternal fragilitie es. We have inc cluded these ccountries in ourr “top six of emerging markets mosst at risk”. Ongo oing global trad de weakness aalso forms a ke ey risk to Asia’ss mies. And finally, (geo)politica al tensions – cooncerning territorial claims in the export-oriented econom Asian wa aters, among o others – could also a impact the e economic outtlook.