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Economic Snapshot for ASEAN

Wednesday, September 19, 2018

Economy likely still growing robustly in the third quarter

According to FocusEconomics forecasts, ASEAN is set to expand a healthy 4.9% in Q3 2018, buttressed by strong domestic demand. However, this will still mark a loss of momentum from the second quarter’s 5.2% expansion, largely on sizeable slowdowns in Singapore and Thailand.

Available indicators for the third quarter point to solid economic momentum. The ASEAN manufacturing PMI—which covers all of the region’s economies with the exception of Brunei, Cambodia and Laos—increased in August on faster growth in output, new orders and employment. However, the uptick wasn’t particularly broad-based: exports declined and confidence remained subdued, casting doubts over whether the improvement will be sustained going forward. Moreover, industrial production figures for July were robust across the region, while export growth has stayed solid in most countries so far in the quarter, despite rising fears of protectionism.

Looking at ASEAN’s key economies, economic activity in Malaysia continues to be buoyed by fuel subsidies and the zero-rating of the goods and services tax on 1 June, which have boosted consumers’ purchasing power. However, public infrastructure spending is becoming more constrained as the government looks to rein in the fiscal deficit. In early September for instance, the government agreed to postpone the planned high-speed rail link to Singapore by two years.

The Lion City continues to perform solidly thanks to the services and manufacturing sectors, although construction remains depressed, particularly given measures to cool the property market introduced in July. Tough prior-year comparatives will see annual GDP growth slow in the third quarter. In Thailand, the overall economic picture is healthy thanks to strong manufacturing output and rising farm and non-farm incomes. However, the tourism sector has taken a short-term hit following the recent death of dozens of Chinese tourists in a boat accident. This appears to have temporarily dampened visitor numbers from the Asian giant—by far the top source of visitors to Thailand.

In Indonesia, although economic indicators point to the right direction, the economic panorama is being overshadowed by currency weakness which has seen the rupiah shed around 9% of its value against the dollar so far this year. This has led the Central Bank to intervene in the market to support the beleaguered currency and caused the government to adopt a series of measures designed to reduce demand for foreign currency, including hiking import duties on over 1,000 products.

Several other ASEAN countries, including Malaysia, the Philippines and Myanmar, have also seen their currencies depreciate over the last month as part of a broader selloff of emerging-market assets. In Myanmar, the persistent currency weakening led the Central Bank to abandon its currency trading band of plus or minus 0.8% in mid-August.

Economic fundamentals are healthy, but trade war fears loom large

Looking ahead, growth should be robust across ASEAN. Private consumption will be supported by wage gains and strong labor markets, while global demand for the region’s exports should remain strong, despite a moderation in the pace of growth compared to the last 18 months. In addition, the economic performance of the Philippines will be supported by the government’s infrastructure push. However, public investment in Indonesia and Malaysia could be dampened by these governments’ attempts to limit imports and the fiscal deficit respectively. An escalation of the trade war between the U.S. and China is the key downside risk to growth, given the importance of both countries as export markets to the region. In addition, the likely fallout, coupled with the ongoing tightening cycle in the United States, could put pressure on the currencies of countries with weaker external positions, such as Indonesia and the Philippines. GDP growth for the region is expected to come in at 5.1% this year and 5.0% in 2019, which is unchanged from last month’s forecast.

The 2019 GDP reading reflects lower growth forecasts for Malaysia and the Philippines, an upward revision to Cambodia’s growth projection and unchanged forecasts for the rest of the region’s economies.

Our panel projects that Myanmar will be the fastest-growing economy in the region next year, with a 7.4% expansion, as it continues to benefit from structural reforms and greater economic liberalization. Among the major economies in the region, Vietnam and the Philippines should record the fastest growth. Conversely, high-income Singapore is expected to record the weakest expansion, at 2.7%, reflecting a moderation of growth towards potential.

Inflation ticks up to an over one-year high in August

A preliminary estimate by FocusEconomics shows regional inflation inched up from 2.8% in July to 2.9% in August, which represented the highest reading since May 2017. The uptick came on the back of markedly higher inflation in the Philippines and increased price pressures in Thailand and Laos. In contrast, inflation was unchanged in Indonesia and fell in Vietnam compared to the prior month. August inflation readings for the rest of the region are still outstanding.

Going forward, inflation will be supported by higher global oil prices and solid domestic activity. Our panelists expect regional inflation to average 2.8% this year and 3.1% in 2019, which is unchanged from last month’s forecast.

Source: Focus Economics

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