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Economic Insight: South East Asia

The ICAEW Economic Insight: South East Asia, is a quarterly forecast for the region prepared directly for the finance profession.

Fading global trade tailwinds: Q2 summary

  • After a solid start, evidence momentum is easing with manufacturing PMIs and recent trade data all pointing to milder growth. This is consistent with our view that export growth across the region will ease after a strong acceleration in 2017, reflecting softer Chinese import demand and normalisation in the global electronics cycle.
  • While export growth is set to make a smaller contribution to GDP growth this year, domestic demand is solid. After a modest 25bp rise in rates this year we expect most central banks to remain on the sidelines for the rest of the year. We forecast a moderate easing in South East GDP this year to 4.9% from 5.3% in 2017.
  •  A key downside risk is an escalation in US-China trade frictions. We think it is more likely that tariff imposition will be contained. But broader economic tension and rivalry between the two is on the rise, with serious long-term implications, especially in the area of technology.

Unlike the US and Europe, Asia had a promising start to 2018. China’s growth held steady at 6.8% y/y in Q1, and South East Asia expanded 5.3% y/y, slightly softer than 5.4% in the previous quarter. Singapore, Thailand and the Philippines both recorded an acceleration in GDP growth. Momentum eased in Vietnam, Indonesia and Malaysia, albeit growth remained above the average for 2012/16.

We forecast a mild deceleration in GDP growth over the rest of 2018 with GDP growth expected to grow by 4.9% this year compared to 5.2% in 2017. The slowdown is expected to be broad-based, with only Indonesia growing faster than 2017.

Export momentum is forecast to ease from the sharp acceleration in 2017, albeit we do not look for a slump in global trade notwithstanding the downside risk from US-China trade frictions. Indeed, while frictions have risen recently we think the most likely scenario is the US imposing tariffs of 25% on around US$50bn of Chinese imports with China retaliating in kind. This would equate to around 0.4% of Chinese GDP and 0.2% of US GDP. We estimate this would reduce China’s GDP growth by around 0.1 ppt in 2018-19, with a smaller impact on the US. Given this baseline we believe that greater intra-regional trade and the increase in domestic demand’s contribution to GDP will likely protect Asia’s growth to some extent from these trade frictions.

The region continues to benefit from a supportive external backdrop. However, there is evidence that export momentum is easing. Though regional manufacturing PMIs largely remain in expansionary territory, they were broadly lower in April indicating a loss of momentum in activity. A similar trend has been evident in recent trade data. This reinforces our view that manufacturing and export growth is likely to continue to moderate over 2018 amid cooling Chinese import demand and a normalisation in the global electronics cycle. That said, we still see the slowdown as being gradual and exports will remain healthy, and the region is still likely to expand at a faster pace than the average of 2012/16.

On the domestic front, the outlook remains reasonably positive. Our estimates indicate a solid recovery in private investment (exclude construction) across most of South East Asia in 2017, and we expect this momentum to have partly spilled over into 2018. Malaysia is an exception where we have become more cautious on the outlook for investment following the recent election win by Mahathir’s coalition party and planned review of all major infrastructure projects.

Meanwhile, improving labour market conditions and rising wages bode well for the consumption outlook. Many countries in the region have already announced minimum wage increases (8.7% in Indonesia, 6-7% in Vietnam) and more are likely to follow including Malaysia and Thailand. We expect wages in South East Asia to pick-up by an average 3.2%, from 2.1% in 2017. But, this pace will only bring wage growth back in line with labour productivity gains, and we do not expect it to lead to any cost-push pressures.

Monetary conditions still supportive despite recent tightening

Most South East Asia central banks have started tightening monetary policy. This will lead to higher debt servicing costs. However, interest rates would need to rise at a much faster pace than our current projections for debt to meaningfully damage growth across the region. This is not a baseline. Instead, given contained inflationary pressures we expect most central banks to remain on the side lines for the rest of the year lagging that of the US Federal Reserve. Philippines is an exception were inflationary pressures are building and we look for the Bangko Sentral ng Philippines to follow May’s rate hike with another 25bp hike in H2 2018. There is also a risk that Indonesia may raise interest rates again to support the rupiah.

Singapore: Solid start to 2018; however, growth is set to ease from here as export momentum cools

GDP growth was revised up slightly to 4.4% y/y in Q1, marking an acceleration in annual growth from 3.6% in Q4 2017. growth continued to be supported by the external sector, with exports rising a solid 3.9% on the year. On the domestic front, growth was mixed. Government consumption surged 9.7% on the year. Positively business investment also rose strongly, with evidence that the recovery in non-residential construction is finally underway. However, household spending growth slowed to 2.1% y/y from 5.3% in Q4. Public investment and residential construction also fell sharply, although we do note that public investment is lumpy and volatile from quarter to quarter.

We believe that Q1 marks the peak and growth will moderate over the rest of the year. Indeed, on a sequential basis, growth moderated to 1.3% (saar) from 2.1% in Q4 2017. We look for export growth to ease over the remainder of the year from 2017’s strong acceleration. We look for a slowing in export-led manufacturing activity to be partly offset by a recovery in more domestic-orientated service sectors. Residential investment is forecast to becomes less of a drag on headline GDP and labour market conditions are expected to improve, supporting household spending. We forecast GDP to grow by 3.0% in 2018, after 3.6% in 2017.

Growth in goods export volumes slowed to 1.9% y/y in Q1 – the weakest annual rate in more than a year. While base effects have exaggerated the slowdown in recent trade data, we do forecast a deceleration in growth this year. This reflects a normalisation in the global electronics cycle and softer import demand from China. That said, overall growth in world trade, as measured by the import demand of Singapore’s trade partners, is still expected to rise by 6% in 2018. This is much higher than the average for the period 2012-16, albeit down a little from 7.9% in 2017. Consequently, exports should still be supportive of GDP growth, in the absence of any escalation in US-China trade frictions.

Growth to become more broad-based over 2018

An improvement in company profits (up 6.9% in 2017) and a broadening domestic recovery is expected to see business investment growth gather momentum over 2018. Government measures to support businesses and encourage investment, as well as increases in its own infrastructure spending, including the recently announced SGD5bn rail fund, should boost investment. This will be partly offset by ongoing weakness in residential investment. Although demand has improved following an easing in some of the housing restrictions put in place during 2009-13 and the vacancy rate is edging lower, there still exists a large oversupply which will take some time to unwind.

Households have shown surprising resilience in the face of sluggish labour market conditions and negative wealth effects from nearly four years of falling house prices. Over 2018, we expect a more broad-based recovery in services (which accounts for around 70% of total employment) to lead to better employment conditions. This should support some modest wage growth and, coupled with additional fiscal support, bolster consumer spending.

MAS shifts to slight tightening

The MAS decided to ‘slightly’ increase the slope of the SG$NEER policy band at its April bi-annual monetary policy meeting from zero per cent previously. In our view this will not have any material effect on the SGD. We expect that, in the absence of any sharp slowdown in trade, it will firm up April’s decision with the slope to be increased to 0.5% at its October meeting. This would represent a modest appreciation bias in the SG$NEER in October.


Economic growth eased back in Q1, to 7.4% y/y, following a stellar end to 2017. However, the quarterly result was still the strongest Q1 outcome in a decade driven by ongoing strength in the manufacturing sector, solid service sector activity and improving agriculture output. Although external demand is expected to moderate, albeit remain healthy, domestic demand is forecast to strengthen in 2018, driven by solid FDI inflows, buoyant consumer spending and expansionary monetary policy conditions. We look for GDP to grow 6.6% in 2018, down slightly from 6.8% last year. In 2019-20, we expect growth to ease back slightly to around 6.3% amid less expansionary monetary policy and a maturing of the global trade cycle. 

Export growth outpacing that of the region amid sustained FDI flows

A synchronised improvement in global trade last year, particularly in electronics, led to merchandise exports in USD terms rising by 21.2%, in 2017. Another boost to aggregate demand came from the 9.8% growth in domestic investment lifted by high foreign direct investment (FDI) and rapid credit growth. FDI inflows rose 47% last year, with the manufacturing and construction/real estate sectors key beneficiaries but utilities also receiving a large inflow of investment. Moreover, a 40% surge in newly registered capital suggests that 2018 will be another solid year for investment, which will partly offset the forecast easing in export growth. We also expect inflows to remain strong over the medium term given the country’s large, and relatively low wage, workforce, its openness to trade through a greater number of trade agreements and its improved business climate.

Accommodative monetary policy but rapid credit growth risk to inflation and financial stability

Monetary conditions will also remain supportive of domestic demand. in July 2017 the central bank lowered its rediscount and refinancing rate by 25bp, to 4.25% and 6.25% respectively. The increase in private credit will also encourage household spending. The SBV aims to achieve 2018 credit growth of 17% after bank lending increased 18.2% in 2017. However, this rapid expansion of lending does raises the risks to financial stability and inflation.

Indeed, while headline inflation has been below the government’s 4% target thus far this year we do expect inflation to rise to an average of 3.9% in 2018 as food prices exert less of a drag. But there is a risk that price pressures pick up more significantly. In this event policy makers will either need to accept lower growth rates or take a chance on inflation. The authorities have a relatively poor track record in managing inflation and higher inflation could undermine confidence in the dong, and encourage the transfer of VND-denominated savings into gold or dollars.

Increased protectionism a key downside risk

Rising US-China trade frictions have increased the risks of a ‘bad case’ trade war scenario. As a small open economy heavily dependent on external trade, an increase in protectionism and slower global trade would have significant knock-on effects for Vietnam, even if it is not the direct target of increased tariffs. Its dependence on foreign investor flows also makes it vulnerable to changing global sentiment.

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends. 

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