- Solid growth is underpinned by trade and solid domestic demand;
- Financing conditions to tighten
Fast (growth) and cautious (optimism)
In 2018, the outlook for Asia-Pacific could be summarized in two words “fast” and “cautious”. First, “fast” stands for the still strong real economic growth the region is expected to record this year. Real GDP growth is set to rise by +4.8%, a pace slightly slower than last year (+5%), but still strong compared to the global average and other regions, supported by improved exports prospects and solid domestic demand.
“Cautious” qualifies our optimism. Economic activity has returned to a healthy growth pace with (i) both domestic demand and exports moving in sync, (ii) the manufacturing sector out of deflation.
Yet, challenges to sustainable expansion remain elevated. One, financing conditions are expected to tighten. We expect monetary authorities in the region to shift gradually from an easing to a tightening cycle as (i) inflation picks up and (ii) the reduction of financial risks (high leverage, housing risk, e.g.) becomes the priority. Two, trade related risks do exist with rising protectionist measures from the US against China. Three, on the micro-side, corporate risk remains an issue with a continued rise of corporate bankruptcies (+6% in 2018 from +14% in 2017) led by China (+10%).
China: slower but firm
In China, real economic growth is set to slow to +6.4% (from +6.9% in 2017). Economic growth continues to rise at a solid pace, yet a certain number of indicators point to slower momentum in 2018. On the demand side, retail sales growth moderated and investment remained weak in Q4 2017. In terms of prices, manufacturing reflation start to lose some speed (producer prices up 4.9% y/y in December, down from +5.8% in November). On financing, outstanding loans growth decelerated (12.7% y/y from +13.3% in November). Looking at advanced indicators, business surveys indicate solid expansion in services, fragile growth in the manufacturing sector due to slower growth in both output and new orders. Our view is that authorities’ moves to improve growth quality (financial and property market tightening, cut in overcapacity e.g.) have started to dent growth and slower momentum could be expected going forward. On the upside, we expect domestic consumption to remain resilient underpinned by a favourable fiscal policy, solid labour market and rising per capital income.
Japan: still above potential
In Japan, real economic growth is set to slow in 2018 due to the unwinding of the 2017 fiscal stimulus. Yet economic growth is likely to stay above potential thanks to solid export growth and a positive investment cycle. Investment is underpinned by high corporate profit margins and still favourable financing conditions. Consumption appears to have regained some strength at the end of 2017. Further improvement could be expected if spring negotiation were to allow a pickup in wages as the government has proposed a new tax credit for companies that raise hourly wages. On the monetary policy front, we expect the BoJ to stick to its target for the 10-year JGB yield (“around zero percent”) for the time being. With a tight labour market and gradually rising inflation, the BoJ might, however, begin to signal a more flexible approach to the 2% price stability target later this year
Emerging ASEAN and India: a higher growth regime
In Emerging ASEAN, economic growth is expected to remain firm with stronger expansion in Vietnam (+6.7% in 2018), Philippines (+6.8%) and Indonesia (+5.3%); above trend growth in Malaysia (+5%) and Thailand (+3.6%). Vietnam, Philippines and Indonesia are expected to benefit from a strong rise in exports thanks to solid competitive advantages (low labour costs). Domestic consumption would remain solid sustained by a strong labour market and rising wages.
Higher demand, rising risk appetite and a gradual rise in foreign direct investment may act as a driver for a positive investment cycle. In Malaysia and Thailand, growth pace would be above trend. Yet we expect a slight deceleration owing to more modest investment cycle: in Thailand due to persisting political uncertainties during a potential election year; in Malaysia as monetary policy tighten and fiscal consolidation continues.
In India, growth is set to accelerate to +7.3% in FY2018-19 (from +6.5% in FY2017-18) as the impacts of demonetization and the GST implementation fade away. Strong car sales point to strong growth in private consumption. Industrial production growth picks up speed as both external demand and domestic demand move in sync. Investment shows signs of strengths supported by rising FDI inflows, strong corporates and investor’s confidence and a gradual rise in bank credit. With bank’s ability to lend set to improve next year on the back of government recapitalization (+USD32bn), credit growth could improve further and support growth.
Table 1 Real GDP growth forecasts