After some hesitation, the Chinese authorities finally stepped up their stimulus measures over the summer. The recent slight upturn in economic growth is set to continue in Q4 2023. However, action by the central bank and the government remains constrained, cautious and measured, while internal and external obstacles to economic activity are still powerful. In the real estate sector, even if activity stabilises in the short term thanks to support measures, it is likely to remain hampered by the financial fragility of developers and weak buyer sentiment. In the export sector, enterprises are affected by the slowdown in global demand and US-China tensions, while multinationals are starting to rethink their production strategies.
The Hong Kong economy is struggling to recover from the series of shocks experienced between 2019 and 2022. Following political and institutional upheavals in 2019 and 2020, the territory was severely affected by the health crisis up until last year. In 2023, activity is recovering, but Hong Kong is now facing the weakening in external demand and, above all, significant tightening of monetary conditions. The rise in interest rates since March 2022 has impacted domestic demand, particularly through its effects on the property market. Fiscal policy, meanwhile, remains resolutely expansionary.
In Q2 2023, Indian economic growth remained solid. But since the summer, the situation has deteriorated slightly. In addition to the contraction in exports, rural demand is slowing. Inflation has rebounded and downward pressures on the rupee have increased slightly due to the sharp slowdown in capital inflows. External accounts are expected to remain under pressure until the end of the year. The sharp rise in oil prices and a below-normal monsoon are weighing on the trade deficit and fuelling inflationary pressures. In addition, the narrowing yield spread between Indian and US government bonds is limiting portfolio investment. So far, the banking sector has weathered the rise in interest rates well
Despite the global economic slowdown, Indonesia’s economic growth has remained robust. Inflationary pressures remain contained despite rising rice prices. Public finances have strengthened and the fiscal deficit has fallen below the regulatory threshold of 3% of GDP a year earlier than expected. Although government debt is higher than before the crisis, it remains modest and its refinancing is less reliant on portfolio investments. The increase in the payment of interests on debt should be monitored as it reduces the government’s fiscal leeway to support the economy
After some hesitation, the Chinese authorities finally stepped up their stimulus measures over the summer. The recent slight upturn in economic growth is set to continue in Q4 2023. However, action by the central bank and the government remains constrained, cautious and measured, while internal and external obstacles to economic activity are still powerful. In the real estate sector, even if activity stabilises in the short term thanks to support measures, it is likely to remain hampered by the financial fragility of developers and weak buyer sentiment.
After sustained growth in H1 2023, driven by external demand, the Japanese economy is beginning to slow down. Private demand (household consumption, corporate investment) is offering little support for growth. Although inflation has stabilised at around 3%, it is eroding household purchasing power, which is still not benefitting from significant wage increases. Nevertheless, according to the Ministry of Finance data, corporate profits hit a new record in Q2. Fostering a better redistribution of profits to wages remains a priority for Fumio Kishida’s government, which is preparing a new wave of budgetary measures in October
Japanese economic surveys remain positive overall, despite contrasting results for August: the composite PMI was up 0.4 points to 52.6, while the Economy Watchers Survey fell by 0.8 points, returning to its June level of 53.6.
The rebound in economic activity seen at the start of the year after the zero COVID policy was abandoned quickly fizzled out, from as early as spring 2023. Our Pulse below reflects this weak economic performance. Exports have stalled due to weak global demand and tensions with the United States. The crisis in the real estate sector has continued and the number of payment defaults by property developers has increased
The Japanese economy continued its post-pandemic recovery in May and June, although this remains fragile. According to the final estimate for May, industrial production contracted by 2.2% m/m but increased by 4.2% year-on-year. At the same time, activity in the tertiary sector grew by 1.2% m/m and 1.8% y/y. The latest PMI survey also indicates that economic activity expanded in June (composite index in expansion at 52). Nevertheless, a distinction must be made between the manufacturing sector index, which fell back into the contraction zone (49.8), and the services index, which continued to grow (54), although at a slower pace than in May.
The economic indicators for June and the second quarter of 2023 illustrate widespread sluggish economic activity. Chinese households are cautious and limit their spending. They are worried because of the lasting crisis in the real estate sector and the uncertainties surrounding employment opportunities.
The economic rebound that has followed the abandonment of the zero-Covid policy is quickly losing momentum. Domestic demand is held back by a significant fall in consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, but this may end up having limited effects on credit activity. Further stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
In India, economic growth is holding up thanks in particular to slowing inflation and early signs of an improvement in the labour market. Public finances, which consolidated slightly during the fiscal year 2022/2023, remain much more fragile than five years ago. The government is favouring growth over fiscal consolidation. Capital expenditure continues to increase, even though room for manoeuvre is shrinking due to the high and rising interest payments on government debt. The sharp rise in public investment has improved the quality of infrastructure, which should attract a little more foreign investment
Taiwanese economic activity has slowed sharply since spring 2022. The island is particularly vulnerable to weakening global demand and the downturn in the electronics cycle due to its dependence on semiconductor exports. At the same time, its position as a quasi-monopoly on the most sophisticated microprocessor market probably protects it against the threat of Chinese aggression, at least in the short term. From a strictly macroeconomic point of view, Taiwan has solid fundamentals – and in particular a very comfortable external financial position – that strengthen its ability to withstand external shocks.
After inflation, would it be the turn of wages to change gear in Japan? The report published by the Ministry of Health, Labour and Welfare on July 7th shows indeed a notable increase in (scheduled) base wages in May, up 1.0% m/m, the largest monthly increase since the start of current statistics in 1990.
China’s economic growth recovered rapidly following the abandonment of the zero-Covid policy, but it is also running out of steam faster than expected. Domestic demand is held back by a significant loss of consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, and additional stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
Inflation in Japan continues to rise, spreading to all the items in the consumer price index. Inflation expectations remain anchored around the 2% target and price increases should remain at this level in the medium term. We expect the Bank of Japan (BoJ) to raise the 10-year sovereign rate ceiling to 1% in July, before ending its yield curve control policy by the end of 2024. Real GDP grew by 0.7% q/q in Q1 (+2.7% in annualised terms), mainly supported by household consumption and non-residential investment. The return of foreign tourists (+71% q/q in Q1) also enabled activity to rebound after two disappointing quarters. Although slowing, growth should continue in Q2 (+0.5% q/q) and throughout the second half of the year, reaching 1.1% in 2023.
Apart from being located in South Asia, Sri Lanka, Pakistan and Bangladesh have the common weakness of being very vulnerable to exogenous shocks, particularly those related to the commodity cycle and climate change. The Covid-19 epidemic and the very sharp rise in commodity prices in 2021 and 2022 have therefore exacerbated the macroeconomic imbalances of these countries, whose public finances and external accounts were already fragile. Consequently, Sri Lanka defaulted on its external debt in 2022. This is not yet the case in Pakistan, although the risk is very high. As for Bangladesh, it has been much more resilient to shocks than its two neighbours and should escape a default.
Real GDP growth rose in the last two quarters in Japan, but is still slightly below 2019 levels. However, a slowdown in activity is expected from Q2 and until the end of 2023.
China’s post-Covid economic rebound is running out of steam with surprising speed. Indicators for May 2023 show a slowdown in all demand components.
According to the United Nations, India’s population surpassed that of China in April. This strong population growth is seen as a considerable asset for the Indian economy. However, the very high level of youth unemployment (despite robust economic growth) is a source of concern, and some fear that India’s demographic advantage may become a social risk.
There were slight signs of recovery in real estate and construction activity following the lifting of health restrictions in December 2022 and thanks to support measures taken by the authorities. However, hopes for sustainable improvement in the property sector soon fell.
Japanese growth picked up again during Q1 2023, posting an increase of +0.4% q/q. However, this upturn needs to be put into perspective, as it follows two disappointing quarters (-0.2% q/q in Q3 2022 and 0.0% q/q in Q4 2022). As a result, Japanese GDP is still at the same level as in Q2 2022.
On May 14th, legislative elections were held in Thailand to renew the 500 members of the House of Representatives. The "democratic" parties have presumably won more than 300 seats. The two main opposition parties, Pheu Thai and Move Forward, have won more than 290 seats. The opposition parties are discussing to recommend one nominee for the position of Prime Minister.
Economic indicators for the month of April 2023 suggest that China’s economic recovery is rapidly running out of steam. Granted, health restrictions were lifted recently (December 2022) and there are still some major post-Covid catching-up effects that are bolstering household demand. However, growth in other demand components has weakened.
The current inflationary momentum could encourage the BoJ to reassess its yield curve control policy, or even start a tightening in monetary policy. However, the timing and size of any such adjustments are difficult to predict and may not occur before next year.
