India and the Philippines Remain the Bright Spots
As a group, the eight countries under our coverage in the Emerging Asia region turned in a mixed performance during the third quarter and October. Among the outperformers, India clung to its top position on the list of the world’s fastest growing large economies while the Philippines remained on track to be one of Asia’s fastest growing economies in 2015. South Korea made a smart recovery following a phase of tepid growth in the first half of this year, and Thailand defied weak demand both at home and abroad to report a reasonably robust performance on the back of strong tourism activity. However, Chinese growth slowed down, as expected, amid the country’s transition to a growth model focused on domestic demand. Taiwan paid the price for China’s slowdown, sliding into recession largely due to reduced exports to the Middle Kingdom. Growth decelerated in Indonesia and Malaysia.
At a Glance
China: China’s National Bureau of Statistics said that between the second quarter and the third, the world’s second largest economy expanded 6.9 percent on an annualized basis, its slowest pace of growth since the first quarter of 2009.
India: During the third quarter, the Indian economy expanded 7.4 percent from the same period a year ago, holding on to its top position on the list of the fastest growing large economies in the world.
South Korea: Data released by the Bank of Korea (central bank) show that between July and September, the economy expanded 1.3 percent from the second quarter, clocking its fastest pace of quarterly growth since the second quarter of 2010.
Indonesia: Indonesia saw its growth rate decelerate to 3.2 percent in the third quarter from 3.8 percent in the second quarter. However, total government spending increased 6.6 percent from the third quarter of 2014.
Malaysia: The Malaysian economy expanded 4.7 percent from the same period a year ago, its weakest pace of growth since the second quarter of 2013. However, exports continued to be the anchor for the economy, jumping 16.7 percent in October from a year ago.
Thailand: Between July and September, Southeast Asia’s second largest economy expanded 1 percent from the second quarter and 2.9 percent from the same period a year ago, clocking its fastest pace of quarterly expansion this year.
Taiwan: Taiwan slipped into recession after its GDP shrank 0.3 percent between the second quarter and the third. Exports plunged 13.9 percent in USD terms and on an annualized basis.
Philippines: During the third quarter, Southeast Asia’s fifth largest economy expanded 1.1 percent from the second quarter and 6 percent from the same period a year ago.
CHINA: MORE STIMULUS FOR THE ECONOMY AS GROWTH DECELERATES
China’s National Bureau of Statistics said that between the second quarter and the third, the world’s second largest economy expanded 6.9 percent on an annualized basis, its slowest pace of growth since the first quarter of 2009. The growth rate exceeded expectations but fell slightly short of the 7 percent annualized expansion recorded for the second quarter. This is likely a sign that the stimulus measures Beijing has launched in recent months and the Bank of China’s (central bank) interest rate cuts since last November are yet to shore up growth in a meaningful way.
More importantly, though, the majority of the data published recently provide a snapshot of China’s ongoing shift from a growth model that overemphasized exports and government-led investment to one that stresses domestic consumption. For instance, reflecting the currently diminished momentum in the Chinese export sector, industrial output, which makes up a large part of the goods China sells overseas, increased 5.8 percent in September, a level close to the lowest rate of output growth recorded in the last six years. On the other hand, retail spending improved at an annualized rate of 10.9 percent in September, beating forecasts as well as signaling that China’s planned transition to a consumption-driven economy is well underway.
Be that as it may, there are signs that Beijing is focusing on ensuring that China’s growth does not decelerate more than it needs to in this phase of transition. In the nine months between January and September, the government started close to 200 rail, road, energy and sewer projects — worth more than $283 billion — and pressed banks to increase lending for infrastructure development. Not surprisingly, the January-September period saw the quantum of new loans in China surging 30 percent year-on-year. Similarly, China’s fiscal spending climbed 26.9 percent year-on-year in September.
INDIA: ON TRACK TO BE THE FASTEST GROWING LARGE ECONOMY IN 2015
During the third quarter, the Indian economy expanded 7.4 percent from the same period a year ago, holding on to its top position on the list of the fastest growing large economies in the world. In the second quarter, GDP had increased 7 percent year-on-year. Data published by the government show that third-quarter growth was driven by a surge in manufacturing activity. Between July and September, manufacturing output climbed 9.3 percent, significantly higher than the 7.2 percent growth clocked in the second quarter. This is an encouraging development since India is trying hard to make manufacturing its main engine of growth in the coming years.
India is a services-driven economy now and a large part of its growth in the past decade and a half has been led by the rapid expansion of the Indian information technology (IT) sector. However, in order for India to achieve more broad-based growth across sectors, Prime Minister Narendra Modi’s administration is focusing on tapping the latent potential of the country’s manufacturing sector. A “Make in India” campaign has been launched to attract foreign direct investment in various areas, including contract manufacturing. In this context, India has achieved mixed results in recent months.
On the positive side, it was reported in October that India was one of the countries that made the most improvement in the latest World Bank ranking of countries based on ‘ease of doing business.’ India moved up 12 spots in the ranking to the 130th position. This is a notable achievement for a country where industrialization has been constrained due to complex rules and a rigid bureaucracy. On a discouraging note, though, India has faltered on the reforms front lately. For instance, largely due to the lack of a political consensus, the government has had to abandon land rule amendments that would have made land acquisition for industrial and infrastructure projects easier.
SOUTH KOREA: STRONG REBOUND AFTER LACKLUSTER FIRST HALF
The third quarter turned out to be one of South Korea’s best growth phases in the last five years. Data released by the Bank of Korea (central bank) show that between July and September, the economy expanded 1.3 percent from the second quarter, clocking its fastest pace of quarterly growth since the second quarter of 2010. The central bank has also announced that on an annual basis, the South Korean economy grew 2.7 percent in the third quarter. This pace of expansion, which exceeded expectations, appears particularly impressive when compared with the relatively paltry quarter-on-quarter growth of 0.3 percent South Korea recorded between April and June.
Indeed, South Korea lost much of its growth momentum in the first half of this year when weak global demand hurt its export sector and an outbreak of the deadly viral respiratory disease MERS (Middle East respiratory syndrome) affected tourism and consumer spending in the country. Fortunately, the latest GDP data indicate that the interest rate cuts the Bank of Korea made and the stimulus measures Seoul launched earlier in the year have succeeded to a certain extent, at least on the domestic front. For instance, the Nikkei/Markit purchasing managers’ index that tracks orders from domestic consumers in South Korea has shown an improvement lately and house prices have remained in an uptrend in recent months. Additionally, the country’s annual consumer price index has been rising. The bad news though is that the prospects for South Korea’s all-important export sector continue to be bleak, given the slowdown in China, South Korea’s biggest trade partner, and several emerging economies.
INDONESIA: INCREASED PUBLIC SPENDING FAILS TO PREVENT GROWTH DECELERATION
Amid weakening demand for its coal and palm oil exports, Indonesia saw its growth rate decelerate to 3.2 percent in the third quarter from 3.8 percent in the second quarter. However, measured on an annualized basis, the growth rate improved slightly between the second quarter and the third. The resources-driven Indonesian economy has been struggling to cope with the slowdown in the global commodities market due to a simultaneous decline in domestic spending, which has been hit hard by high unemployment and inflation. During the third quarter too, the unemployment rate showed no sign of softening, edging up to 6.2 percent in August from 5.9 percent a year ago. Similarly, inflationary pressures continued to stifle economic activity as the domestic currency, the rupiah, remained in a downtrend amid the decline in export revenues and a rise in the strength of the U.S. Dollar ahead of interest rate hikes in the U.S.
Given these conditions, the government has lowered its growth forecast for 2015 from 5.7 percent to 4.8 percent, which is the lowest rate at which Indonesia has ever grown since 2009. On the bright side, though, Jakarta has been trying hard to prop up the economy through public investments and a program that aims to improve the business climate in the country and boost foreign investment. In the third quarter, total government spending increased 6.6 percent from the same period a year ago, with much of the investment directed toward drainage projects, roads in villages, a dam and other infrastructure schemes. Similarly, the government’s latest package of measures to improve the business climate includes tax incentives for companies that are being set up in remote economic zones, customs waivers, as well as permission for foreigners to buy property in special zones.
MALAYSIA: GROWTH SLOWS DOWN DESPITE ROBUST EXPORTS
In the third quarter, the Malaysian economy expanded 4.7 percent from the same period a year ago, its weakest pace of growth since the second quarter of 2013. This pace of expansion was also slower than the 4.9 percent annualized growth recorded for the second quarter this year. Data released by the Central Bank of Malaysia show that private sector activity drove the economy during the third quarter as public sector investments remained lackluster. This is not surprising because Malaysia’s sovereign debt, which has grown significantly in recent years, is now at a level close to the government’s own self-imposed ceiling. What’s worse, 29 percent of this debt is held by foreigners. Therefore, given its vulnerability, the Malaysian government has not been able to increase stimulus-related spending as much as governments in neighboring Thailand and Indonesia have.
Encouragingly, though, exports continued to be the anchor for the Malaysian economy, jumping 16.7 percent in October from the same period a year ago. This October surge was significantly higher than both expectations and the 8.8 percent increase achieved in September. Shipments to China, Malaysia’s biggest trading partner, climbed 26 percent year-on-year while overseas sales to the U.S. and the European Union soared 31 percent and 27 percent, respectively. Notably, October marked the fifth consecutive month Malaysian exports rose on the back of a weakening ringgit. This is an important trend as exports appear to be the only major growth driver for Malaysia now, given that high levels of household and sovereign debt have kept both domestic consumption and public spending depressed in the country.
THAILAND: GOVERNMENT STIMULUS, STRONG TOURISM ACTIVITY SPUR ECONOMY
Thailand’s National Economic and Social Development Board has said that between July and September, Southeast Asia’s second largest economy expanded 1 percent from the second quarter and 2.9 percent from the same period a year ago, clocking its fastest pace of quarterly expansion this year. Bloomberg reported that both exports and domestic demand remained subdued all through the third quarter and growth was largely driven by the government’s stimulus measures and strong momentum in the tourism sector, which saw a 24 percent surge in tourist arrivals from a year earlier.
The good news is that Thailand will likely be able to sustain its newfound vigor in the coming quarters too given that its latest budget, which has been effective since October, contains provisions for a 20 percent year-on-year rise in public investment. The government aims to increase spending on railways, roads and checkpoints in an effort to boost border trade with neighbors at a time when demand from the country’s traditional export markets has diminished. Besides, the government is already on track to implement stimulus measures to the tune of $10 billion during the current quarter.
TAIWAN: ECONOMY IN RECESSION AMID SLIDE IN EXPORTS
Between July and September, Taiwan’s GDP shrank 0.3 percent from the second quarter. Having also contracted between the first quarter and the second, the export-reliant Taiwanese economy is now technically in recession (two consecutive quarters of negative growth). Not surprisingly, the third quarter saw exports, which account for nearly 70 percent of Taiwan’s GDP, plunge 13.9 percent in USD terms and on an annualized basis. Taiwan is a key supply-chain hub for high-tech and electronics products, and its economy is dominated by contract manufacturers that supply parts to or assemble products for global giants like Apple, Inc.
But Taiwan’s overseas sales have plummeted in recent quarters amid the slowdown in China, which buys a third of Taiwan’s exports, and depressed global demand for electronics goods like smartphones. Nonetheless, the coming quarters could turn out to be slightly better for Taiwan as its government has implemented stimulus measures to the tune of $134.8 million to boost spending in the economy. Further, the launch of new smartphone products could trigger a seasonal upturn in the global electronics market, which should help Taiwan.
PHILIPPINES: REMAINS ONE OF THE FEW BRIGHT SPOTS IN ASIA
During the third quarter, Southeast Asia’s fifth largest economy expanded 1.1 percent from the second quarter and 6 percent from the same period a year ago. According to a senior government official quoted on BBC.com, the country’s services sector along with robust public spending drove the economy between July and September. Exports also expanded 6.4 percent from the same period a year ago. Although the third-quarter growth rate fell short of expectations, the Philippines remains on track to become one of Asia’s fastest growing economies in 2015.
Indeed, the Philippine economy has fared better than most other emerging markets in recent years due to its structural advantages. For instance, the country has been able to consistently maintain a current account surplus thanks to the remittances from Filipinos abroad, which generates as much as 8.5 percent of the national GDP now. Secondly, with efficient management of its finances, the government has been able to reduce its debt as a share of GDP while simultaneously increasing spending on infrastructure. Poor infrastructure is one of the biggest disadvantages of the Philippine economy and the current government has reportedly tripled infrastructure spending since coming to power five years ago.
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