China’s sluggish start to 2016 could be just the beginning of emerging Asia’s troubles, as analysts warn of tougher times ahead for the region.
Beijing surprised financial markets earlier this month with a larger than expected currency devaluation. The move pushed the yuan to a five-year low, adding to concerns about the health of the world’s second-largest economy following weak factory and service industry data after sharp drops in Chinese stocks.
China’s move added to nervousness on Asian markets following North Korea’s reported nuclear test, with MSCI’s emerging equity index dropping 0.6 percent to a six and a half year low.
The risk of further shocks to Asia’s emerging markets was highlighted Wednesday by the World Bank, with its January 2016 “Global Economic Prospects” report downgrading its global growth forecasts and pointing to simultaneous weakness in “most major emerging markets.”
The Washington-based institution cut its estimate for global economic growth in 2015 to 2.9 percent, down 0.4 percentage point on its June 2015 projection, amid declining commodity prices, subdued global trade, financial market volatility and weakening capital flows.
For developing countries, growth last year was estimated at a post-crisis low of 4.3 percent, down from the 4.9 percent recorded in 2014 and also 0.4 percentage point lower than the bank’s previous projection. The demise of the BRICs was highlighted, with the bank describing “a development unprecedented since the 1980s” of most of the large emerging economies in each region slowing simultaneously for three straight years.
Only a few bright lights stood out in an otherwise gloomy outlook for developing countries, including India and well as “some commodity-importing countries in East Asia,” comprising the Philippines and Vietnam, the bank said.
While global growth should accelerate to reach 2.9 percent this year and 3.1 percent in 2017, developing economies are expected to expand by 4.8 percent in 2016, down 0.6 percentage point on the previous projection, rising to 5.3 percent in 2017.
For East Asia and the Pacific, growth slowed to an estimated 6.4 percent in 2015 from 6.8 percent the previous year, hit by China’s deceleration and its effects on commodity exporters such as Indonesia and Malaysia. China’s slowdown was “especially pronounced in the real estate and manufacturing sectors, while activity in the services sectors held up well,” the bank said.
However, Asia’s biggest economy and the world’s second-largest is expected to slow from an estimated 6.9 percent GDP growth in 2015 to 6.7 percent this year and 6.5 percent in 2017, weighing on the regional outlook and offsetting a pickup in ASEAN nations.
The bank said Beijing’s currency interventions to reduce downward pressure on the renminbi contributed to an estimated $443 billion decline in foreign currency reserves since September 2014, with August’s drop the sharpest on record, although it said China still had sufficient reserves to offset risks associated with capital outflows.
Japan, the world’s third-biggest economy, is estimated to have expanded by only 0.8 percent in 2015, with GDP growth in 2016 forecast at 1.3 percent, down 0.4 percentage point on the June 2015 projection.
“The recovery remains fragile in Japan despite substantial policy stimulus,” the bank warned, pointing to weak private consumption and investment, along with poorer Asian demand for Japanese exports.
Spending pressures on social security and defense “remain significant,” although it noted positives including sustained policy accommodation, the prospect of higher earnings and record low unemployment, along with the potential for a gradual acceleration in wages growth.
Elsewhere, India is estimated to have matched its 2014 GDP growth of 7.3 percent in 2015, down 0.2 percentage point on the bank’s previous forecast. Nevertheless, helped by “reduced macroeconomic vulnerabilities and domestic policy reforms,” Asia’s emerging giant should post 7.8 percent growth in 2016 and 7.9 percent the following year, with both projections only 0.1 percentage point lower than previously.
Indonesia is also expected to pick up speed, with growth rising from an estimated 4.7 percent in 2015 to 5.3 percent this year and 5.5 percent in 2017, “provided reforms are implemented to encourage investment and boost productivity.”
The Philippines is also seen posting an upturn, expanding from 5.8 percent GDP growth last year to 6.4 percent in 2016, aided by public-private partnerships and government spending.
However, Malaysia could see growth slow to 4.5 percent next year from 4.7 percent in 2015 on reduced domestic demand, while Thailand’s economy could ease to a 2 percent expansion in 2016 from 2.5 percent last year as “high household debt holds back consumption and export growth is subdued.”
For the region, the bank noted risks to its outlook included a “faster-than-expected slowdown in China,” greater financial market volatility and restricted credit, and a sharp increase in the value of the dollar along with a slower-than-expected pickup in high-income economies such as the United States and Europe.
“Stronger growth in advanced markets will only partially offset the risks of continued weakness in major emerging markets,” said the bank’s Ayhan Kose. “In addition, the risk of financial turmoil in a new era of higher borrowing costs remains.”
ANZ: Asian Weakness ‘Structural’
The bank’s gloomier prognosis was echoed by ANZ Research, with the Australian bank’s chief economist, Glenn Maguire stating in a research report Wednesday that “2016 and 2017 will be two of Asia’s most challenging years, with the ongoing economic slowdown in non-Japan Asia extending into an unprecedented fourth and fifth year.”
“The current slowdown can no longer be explained in cyclical terms alone. More structural elements are now in play, which are more difficult to address via countercyclical policy. Hence, our confidence that the regional economy will find a trough in [quarter one] 2016 has waned,” he said.
According to ANZ, China’s rebalancing and consequent collapse in commodity prices, lackluster US consumer spending and weak global capital expenditure all contributed toward Asia’s “trade recession.” Added to these factors in 2016 and 2017 are risks including a further slowdown in China, while U.S. interest rate hikes could threaten Asian borrowers with large amounts of dollar-denominated debt.
Structural factors behind Asia’s slowdown include aging populations and high levels of leverage in both the corporate and household sectors, along with deep contractions in export growth, with the exception of Vietnam.
ANZ warns that ASEAN’s commodity exporters will bear the brunt of China’s restructuring, particularly Indonesia and Malaysia, although services-heavy economies such as India and the Philippines could benefit. Meanwhile, subdued consumer spending in the world’s dominant economic bloc of the United States, Japan and Europe (the “G3”) will add to the headwinds for developing Asia.
Excluding China, ANZ expects ASEAN to post 4.4 percent GDP growth for 2015, rising to 4.7 percent this year and to 5 percent in 2017, but with risks “skewed to the downside” including corporate balance sheet adjustments, an intensifying trade recession and a “hard landing” in China along with a protracted slowdown in the G3.
Fortunately, the news is not all bad for the region, with ANZ stating that the “foundations for a medium-term structurally stronger Asia appear to be falling into place.”
“Medium-term anchors, such as the commencement of the ASEAN Economic Community and the introduction of the Asia Infrastructure Investment Bank should see investment and infrastructure begin to flourish. Currency depreciation is proving to be insulating for domestic income and some ASEAN economies are displaying nimbleness by evolving into what appears to be a more services-oriented economy and the new global services supply chain environment that is developing alongside that,” ANZ said.
“Certainly, it is not all doom and gloom,” the bank said, although it warned that the balance of risks “remains skewed to the downside.”
With a backdrop of growing security concerns, the latest projections should give Asia’s policymakers an important wake-up call. Economic management in the Year of the Monkey is not about to start getting easier anytime soon.