Narendra Modi won a major victory in the general elections, further bolstering his legitimacy. His party won a strong majority in the lower house of parliament and could go on to clinch a majority in the upper house by late 2020 as well, if it manages to maintain power in the upcoming State legislative elections. The country’s economic situation was not very favourable for the Prime Minister as his first mandate came to an end. Economic growth slowed sharply in the last quarter of fiscal year 2018-19 and prospects have been revised downwards. The government must accelerate the reform process in order to increase the pace of job creations and encourage foreign investment.
Economic growth slowed in Q1 2019, but for the moment the economy seems to be fairly resilient to the decline in world trade. In the short term, dynamic household consumption, stimulated by measures to boost purchasing power, will continue to offset the slowdown in exports. In the longer term, real GDP growth is hardly expected to exceed 5-5.5%. After his recent reelection, it is vital for President Widodo to take advantage of his clear cut victory to push through the necessary reforms to stimulate foreign investment and foster growth, while reducing the country’s dependence on volatile capital flows. Foreign direct investment has declined for the past six quarters and no longer suffices to cover a swelling current account deficit.
Given its dependence on foreign trade and its integration within Asian supply chains, the Vietnamese economy is squeezed by the weakening in global demand and Sino-American trade tensions. Real GDP, exports and industry have all registered a growth slowdown in recent months. Yet Vietnam could also benefit from China’s troubles: in the short term, it could benefit from some carry-over effects if merchandise is shipped directly to US businesses seeking to avoid the new tariff barriers. Vietnam could also benefit from new foreign direct investment projects of international groups seeking to manufacture outside of China. Moreover, Vietnam’s external financial position is also expected to continue to improve.
With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
Industrial enterprises were squeezed by tighter financing conditions in 2017 and early 2018, and then hit by a slowdown in production and revenue growth last year. These troubles have contributed to the deterioration of their payment capacity, resulting in a surge in defaults in the local bond market. The increase in defaults is an indicator of the financial fragility of corporates, and also seems to be going hand-in-hand with greater differentiation of credit risks by lenders and a certain clean-up of the financial sector. These trends are expected to continue in the short term as the authorities conduct a targeted easing of monetary policy. However, the persistence of the debt excess in the corporate sector will maintain high credit risks in the medium term.
After nearly five years in power, Narendra Modi’s track record is generally positive, even though the last year of his mandate was tough, with a slowdown in growth in Q3-2018/19. The main growth engines are household consumption, and more recently, private investment, thanks to a healthier corporate financial situation, with the exception of certain sectors. In full-year 2018, external accounts deteriorated slightly as a swelling current account deficit was not offset by foreign direct investment. A big challenge for the next government will be to create a more conducive environment for domestic and non-resident investment.
Singapore is highly vulnerable to contagion effects of US trade hikes on Chinese imports due to its large dependence on tech exports and integration Asian value chains. Exports have contracted since last November and economic growth has slowed. Monetary policy tightening, which started last year, should pause in the short term while the government is expected to increase public spending to support activity. Its fiscal room for maneuver is significant given the strength of public finances. This will also enable the authorities to continue to implement their strategy aimed at stimulating innovation, enhance productivity and improve Singapore’s medium-term economic growth prospects.
Economic activity in Japan remains in a slump, and the slowdown observed in 2018 seems set to last. Manufacturing activity deteriorated in the first quarter. In the short and medium term, Japan will continue to be hard hit by the slowdown in China, its main trading partner. Demographics are still a major problem in a country where the over-65 age group continues to swell and now accounts for more than a quarter of Japan’s total population. It serves as a constant incentive to boost productivity gains through large-scale structural reforms in the goods and services markets as well as in the labour market.
Over the last six months the rupiah has gained more than 7% against the dollar (14,085 rupiah per dollar on 16 April), taking it to just 2% higher than it was a year ago. Over the same period, foreign exchange reserves have increased (by USD 9 bn) taking them back close to their levels of a year ago. They remain sufficient to cover the country’s short-term external financing needs (1.3 times) despite the increase of the latter due to the sharp rise in the current account deficit.Although the figures on international trade suggest a sharp fall in the current account deficit in Q1 2019, the improvement in external accounts reflects mainly the return of portfolio investments. But this consolidation also reflects the country’s dependence on volatile capital
Narendra Modi’s term as India’s prime minister has been broadly positive economically. In the last five years, he has pushed through some important reforms, taking advantage of his majority in the lower house of Parliament. However, to achieve a significant increase in GDP per-capita and reduce India’s vulnerability to external shocks, it is necessary to carry out further reforms in order to create a more conducive environment for domestic and foreign investment. The latest polls suggest that no party could win a majority in the lower house of Parliament in the general election scheduled for April and May. Mr Modi’s party still looks likely to win the most seats, but could be forced to govern alongside the Congress Party
In South Korea, real GDP growth reached 3.1% in Q4 18, driven by the set of supportive measures implemented by the government. Real GDP growth should slow in the first quarter of 2019.
Industrialized Asian countries are hit by a severe slowdown in their external trade. Signs of weakening have been visible since the beginning of 2018 and aggravated since November, following the last series of US tariff hikes on imports of Chinese goods. In fact, Asian exporters have been severely affected by the contagion effects of these US tariff hikes, as well as by the economic slowdown of the main world trade partners and by the down cycle in the global electronic sector. In January-February 2019, total exports of goods in USD collapsed in China (-5.2% year-on-year), in South Korea (-8.7%) and Taiwan (-4.1%). Export growth slowed down significantly in other countries, including Vietnam (+3.9%)
The plethora of data released this week didn’t remove concern about the Chinese growth slowdown. Lunar holiday bias and the recent fiscal stimulus measures imply it is too early to draw firm conclusions. The matter is important for the global economy given China’s weight. It is also important for key exporters to China such as Germany. Against this background, reaching a trade agreement with the US becomes key.
Japanese economic growth was particularly volatile in 2018. All in all, it decreased sharply in full-year 2018 to 0.7%, from 1.9% in 2017. The country was hit by a typhoon in the third quarter of 2018 that weakened most of the components of demand, and thus growth (-0.7% q/q). In the fourth quarter, activity picked up mildly (+0.3% q/q). Investment regained vigour after a particularly morose third quarter, while private consumption began supporting growth again. Inversely, external trade continued to strain growth. At a time of reinvigorated domestic demand, the sharp upturn in imports was only partially offset by higher exports. Japan’s growth dynamics will face several challenges in 2019 and beyond
In China, real GDP growth slowed to 6.4% in Q4 2018 year-on-year from 6.5% in Q3. The slowdown in the industrial sector worsened in Q4 while growth in the services sector remains more dynamic. Regarding demand components, exports have weakened markedly in the two last months of 2018, mostly due to the impact of US tariff hikes on imports of Chinese goods. Growth in household consumption has continued to decelerate (especially in the car market).
Economic growth slowed to 6.6% in 2018 from 6.8% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s BJP party lost its hold on three states during recent legislative elections.
Economic growth slowed to 6.6% in 2018 from 6.9% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
The elections promised by the military regime ever since it took power in 2014 are finally slated to be held in 2019. Yet this does not mean that the political and social crisis has been resolved: the ruling junta intends to remain in power without providing a veritable solution for “national reconciliation”. From an economic perspective, short-term prospects are still upbeat. The Thai economy will be hit by the slowdown in China, but thanks to dynamic domestic demand, growth should approach its long-term potential this year. In the long term, in contrast, the outlook continues to deteriorate as the political environment holds back the economy’s growth potential.
Export and real GDP growth have started to suffer from US-China trade tensions and from the mounting difficulties of China’s external trade sector. Taiwan is highly exposed to this type of external shocks due to its heavy reliance on exports of tech products to the Chinese and US markets. However, Taiwan is also well-armed to absorb shocks. External accounts and public finances are strong, and the authorities have a good margin of leeway to act. They are expected to maintain accommodative monetary and fiscal policies in order to stimulate domestic demand in the short term, and should continue some structural reform measures aimed at improving Taiwan’s longer-term economic prospects.