Japan's economic growth should benefit from a technical upturn in Q2: we expect growth of 0.5% q/q after the contraction in Q1 (revised downwards to -0.7% q/q). The outlook remains negative – particularly for demand, despite the tax cuts introduced in June – while household consumption spending contracted by -1.8% y/y in May. Furthermore, while wage increases (excluding bonuses) reached their highest level since 1993 in May (+2.5% y/y), a sign of the growing transmission of negotiated wage increases (+5.1% y/y according to the Rengo trade union), real incomes are still not rising (-1.4% y/y).
In China, manufacturing activity remains dynamic, but rising tensions with most of its trading partners and an increase in protectionist measures are now weighing on export prospects. At the same time, domestic demand continues to be held back by the crisis in the property sector, and credit growth is slowing despite monetary easing measures. Therefore, the authorities are expected to continue to ease cautiously their economic policy in the coming months. The financial difficulties of local governments and, more generally, the deterioration in public finances have reduced the fiscal room for manoeuvre. The central government is being pressed to take a more direct role in support measures.
Indian economic growth reached 8.2% for the fiscal year 2023/2024. However, this performance did not enable Narendra Modi's ruling Bharatiya Janata Party (BJP) to retain a majority in parliament. Over the next five years, the BJP will have to deal with the smaller parties that are partners in the coalition it leads to run the country. Adopting new reforms to further liberalise the economy could prove difficult. In addition, the Prime Minister may have to change the structure of budget spending in order to increase once again the share of subsidies and other social transfers, which have been falling for the past five years
President Lai Ching-te took office on 20 May. He is expected to continue the domestic and foreign policy agenda of his predecessor, in a more tense climate. On the one hand, Beijing could increase its military manoeuvres around the island. On the other hand, Parliament is now dominated by opposition parties, which are expected to slow down or block many government projects. The new administration will at least be able to count on a favourable economic situation to start its mandate. Economic growth has been accelerating over the past year, driven by the rebound in the global electronics cycle
In China, manufacturing activity has remained dynamic, driven in particular by strong growth in exports of high value-added goods. However, the global market share gains made by Chinese companies, bolstered by public subsidies, have exacerbated tensions with most of its trading partners. The proliferation of protectionist measures is now negatively affecting export prospects. At the same time, China’s domestic demand is being undermined by the ongoing crisis in the property sector, and monetary easing measures are failing to stimulate credit activity. Therefore, the authorities are expected to continue to ease cautiously their economic policy in the coming months.
While quarterly growth and inflation are expected to rise in the second quarter, the Bank of Japan is proceeding cautiously following its decision in March to end negative interest rates. A new plan for the pace of bond purchases will therefore be presented in July, while we expect just one further rate hike this year, probably in September. In addition, the domestic currency has continued to deteriorate, prompting the authorities to intervene in the foreign exchange market and fuelling fears of imported inflation.
May’s activity data once again highlights the fairly different dynamics of the various components of Chinese economic growth. Overall performance is still somewhat lacklustre and points to a slowdown in activity in Q2 2024 compared with the previous quarter.
For the fiscal year 2023/2024, which ended at the end of March 2024, economic growth in India reached 8.2%, the highest rate among Asian countries. Over the past twenty years, growth reached 6.3% per year on average. Yet, despite this performance, India’s GDP per capita remains low. In addition, income inequalities have increased and unemployment rates are high (especially among young people), despite higher education levels. The low levels of income and employment can be explained by the employment structure, which remains concentrated in agriculture, a sector with low value added. Despite the major reforms adopted by the Modi government to stimulate development of the manufacturing industry, the sector did not create any jobs over the period 2012-2019
In line with our expectations, the Japanese economy experienced a 0.5% q/q contraction in GDP in Q1 2024. This contraction was likely linked to the disruptions caused by the earthquake on 1 January on the Noto peninsula and the temporary closure of car manufacturing plants amid a safety scandal. GDP components pointed to a broad weakness in the economy with, primarily, a fourth consecutive contraction in household consumption, which was the main driver of the fall. In addition, the release was accompanied by growth in Q4 2023 being revised down to +0.0% q/q (from +0.1% previously). However, activity is expected to rebound in Q2, with our forecasts pointing to a growth rate of +0.8% q/q.
China’s economic growth continues to be typified by divergence between sectors and sluggish domestic private demand. As shown in our chart below, the manufacturing sector gained in strength between February and April 2024, compared to the previous three months, whilst the service sector saw no improvement.
Since China's accession to the World Trade Organisation (WTO) in December 2001, the European Union's bilateral deficit with the country has widened from EUR 39 billion to EUR 292 billion in 2023 (Eurostat data). This is by far the largest deterioration recorded by the Old Continent with a trading partner, even though, as a whole, the EU's trade balance with the rest of the world returned to surplus in 2023.
In the first quarter of 2024, China’s economic growth was stronger than expected and was largely driven by the export-oriented manufacturing sector. Against a backdrop of sluggish domestic demand and strategic rivalries, particularly with the United States, Beijing is further developing its industrial policy to support economic growth and strengthen "national security". Priority is given to the high-tech and energy transition sectors. With considerable support from the government, these sectors are moving up the value chain, increasing their production capacity, lowering selling prices and gaining export market shares. The flood of green tech products is expected to lead to further trade confrontations in the coming months.
The reform policies initiated since Narendra Modi came to power in 2014 are expected to continue with his very likely re-election next June. His economic performance has been positive overall, with robust growth, a strengthening banking sector, a surging investment rate and infrastructural deficiencies being reduced. However, the country is still facing many substantial structural challenges. GDP per capita is still much lower than in other Asian countries (China, Vietnam and Indonesia), the manufacturing sector is barely growing and the country fails to create enough jobs for young people, who are still experiencing very high unemployment rates.
Subianto Prabowo will become the new President of Indonesia on 20 October. He will inherit a strong economy with robust and stable growth (5.1% on average over the last ten years, excluding the COVID-19 period), a low fiscal deficit, moderate public debt and sound external accounts. However, there are major challenges ahead for the new President. In the next decade, the country’s demographic dividend will begin to fade. He will need to adopt reforms more quickly in order to get significantly more young people and women into employment and attract more foreign direct investment. Without this, Indonesia will become an “old” country before it becomes a "high income" country.
On 15 May 2024, Lee Hsien Loong, Singapore’s Prime Minister for the past twenty years, will hand over the reins to his current Deputy Prime Minister, Lawrence Wong. This change in leadership is not expected to alter the highly disciplined management of monetary and fiscal policies, or the government’s economic development strategy, which is aiming, in particular, to adapt the country to climate change and to boost its potential growth. In 2024, economic activity is expected to pick up slightly, notably thanks to the improving global electronics cycle; inflationary pressures should continue to abate, but will nonetheless remain high. Against this backdrop, the authorities are expected to keep monetary policy settings unchanged this year.
Downward pressure on Asian currencies increased slightly last week, with the geopolitical and monetary climate becoming less favourable. This recent pressure has been fuelled by fears of rising international oil prices as a result of the conflict in the Middle East, on the one hand, and the shifting stance of the US Federal Reserve on the other. However, the Indian rupee has held up better than other Asian currencies so far.
China’s economic growth accelerated slightly in Q1 2024. It hit 1.6% quarter-on-quarter (from 1.2% in Q4 2022) and 5.3% year-on-year (from 5.2% in the previous quarter). To support activity in 2024, the authorities have opted to strengthen their industrial policy whilst maintaining a prudent demand policy. The manufacturing export sector has posted the strongest performance in the past few months.
Against a backdrop of sluggish domestic demand and strategic rivalries, particularly with the US, the Chinese government is further developing its industrial policy to support economic growth and strengthen “national security“. Priority is being given to the high-tech and energy transition sectors. With considerable support from the government, these sectors are moving up the value chain, increasing their production capacity, lowering selling prices and winning export market share. The flood of green tech products is expected to lead to further trade conflicts in the coming months.
The Bank of Japan has made an admittedly expected, yet nonetheless historic, decision to end its so-called Negative Interest Rate Policy (NIRP), against the backdrop of an almost unprecedented long-term rise in the general price level. However, monetary normalisation will be an incremental process, with the current weak business activity, illustrated by an expected negative growth rate in the first quarter of 2024 and low expectations for the entire year, leaving no scope for any significant tightening.
March saw an improvement in activity in Japan, according to the Jibun Bank PMI survey. Both the manufacturing index (48.2, +1.0pp), thanks to a widespread rise in the main sub-components, and the non-manufacturing index (54.9, +1.3pp) recovered, allowing the Composite index to reach its highest level since August 2023 (52.3, +1.7pp).
Economic indicators for the first two months of 2024 showed a slight improvement in activity, driven primarily by the export manufacturing sector. Growth in industrial production reached +7% y/y in real terms in January-February 2024 compared to +6% in Q4 2023, and manufacturing investment also strengthened slightly. It increased by +9.4% y/y in nominal terms over the first two months, after +6.5% over 2023 as a whole.
Japan entered a technical recession in H2 2023. The first estimate of Q4 GDP indicates a modest contraction of -0.1% q/q following a more significant downturn of -0.8% q/q in the previous quarter. More symbolically, Japan lost its ranking as the world's third largest economy (in nominal GDP) to Germany. Nevertheless, the strength of economic activity in H1 2023 had given the Japanese economy a significant growth carry-over, allowing the average annual growth rate to reach +1.9% for the year (compared to +0.9% in 2022).
The post-Covid recovery in China’s economic activity was not as strong as expected in 2023. The property sector crisis deepened further at the end of the year, the demand for housing did not pick up again, and weak household confidence continues to weigh on household consumption. Conversely, the export-oriented manufacturing sector performed better than expected in the last quarter, in contrast with the performances of domestically oriented sectors. The authorities are maintaining an accommodative policy. However, the weak financial situation of local governments is constraining public investment, and the People's Bank Of China has little room for manoeuvre to revive credit growth. The banking sector is facing an increase in credit risk, but this is seemingly still under control.
India’s economic activity remained healthy during the first half of the current fiscal year. Over the 2023/2024 full year, it is expected to be close to 7%, boosted mainly by sustained private and public investment. The rise in the investment rate for the second year in a row is particularly beneficial, as it addresses one of the country’s structural fragilities. Up until now, the constraints on production factors (both labour and capital) and the country’s lack of integration into global trade have made it less appealing, as evidenced by the further drop in FDI flows (-0.9% of GDP) over the first three quarters of 2023. However, the moderate current account deficit and large foreign exchange reserves are reducing the downward pressures on the rupee.
In Malaysia, economic growth remained robust in 2023 even if it decelerated due to unfavourable base effects. Domestic demand was the principal driver, whereas exports contracted substantially. The outlook for 2024 remains positive and economic growth is expected to recover slightly. The main areas of concern are the developments on the property market and in the construction sector (which contains a large number of the most fragile companies), the consolidation of public finances (which is still happening very gradually) and the evolution of external accounts
