Domestic Demand Remains the Primary Driver of Asia’s Growth

Domestic demand remains the primary driver of Asia’s growth, despite sharp acceleration in exports growth at the start of the year, according to ICAEW’s latest "Economic Insight: South-East Asia" report.

Exports continue to be an important factor, as healthy foreign trade underpins domestic consumption and investment, particularly in East Asia.

The region enjoyed robust GDP growth for the first half of 2017, driven mainly by domestic demand. In many countries, the contribution of net external trade to headline GDP growth was negative and was outpaced by import growth.

Asia’s supply chain mechanisms and resilient domestic demand are likely to lead to import growth as exports and overall growth improve.

Domestic demand has been the main driver of Asian growth for the past five years, though exports continue to play a significant role. In part, the rise in importance of internal factors in supporting the region’s growth is thanks to an extended period of subdued global demand and limited opportunities for improving exports.

Domestic policies have become more expansionary, bolstering consumption and investment. This strategy has been broadly successful, meaning Asia has continued to outperform other regions despite a sluggish external environment.

“In the foreseeable future, we expect policymakers to remain accommodative, both in terms of fiscal and monetary policy,” said Priyanka Kishore, ICAEW Economic Advisor & Oxford Economics Lead Economist. “Gross exports continue to have crucial spill-over effects on the domestic economy that should not be ignored, especially as the fortunes of Asian economies are not decoupled from the global trade cycle,” she continued.

Pick-up in private domestic demand momentum is stronger in economies where export growth has accelerated notably, such as Singapore and Malaysia. This is primarily thanks to the largely export-oriented manufacturing sector in these economies. Hence, improved external demand facilitates production, leading to higher investment, rising incomes and consumers spending more. These factors can also lead to job creation, improved productivity and overall economic prosperity.

On the other hand, growing domestic economy concerns in some parts of South-East Asia point to a growth slowdown. After King Bhumibol’s death in 2016, the political situation might have become more strained in Thailand and underlying political tensions may resurface at some point, affecting the economy.

Mark Billington, Regional Director, ICAEW South-East Asia, said: “With growing domestic concerns in countries such as Thailand and the anticipated weakness in export growth, we remain relatively cautious in our forecast. Most Asian economies, if not all, will observe a slowdown in growth. Overall, while we expect domestic demand to continue playing a vital role in determining Asia’s growth trajectory, we maintain that growth momentum will ease, especially under the influence of cooling Chinese demand weighing on global trade.”

Indonesia growth outlook remains lacklustre despite unexpected monetary easing

Indonesia’s forecasted GDP growth is 5.1% in 2017. A better political backdrop and a stronger pick-up in domestic demand are required for growth to push back towards 6%. The ambitious fiscal deficit target of 2.2% of GDP next year also poses some downside risks to the 2018 growth forecast.

Despite the surprising back-to-back rate cuts from Bank Indonesia (BI) - lowering the 7-day reverse repo rate from 4.75% in July to 4.25% in September - growth outlook remains lacklustre as real GDP grew 5% year-on-year in Q2 2017 (at the same pace as the previous quarter).

Private consumption, the primary driver of growth, grew steadily at 5% year-on-year, contributing 2.75 percentage points to headline growth. Consumer spending showed few signs of gathering momentum, with government consumption contracting 1.9% year-on-year.

Despite a deceleration in export performance, net exports contributed 0.6 percentage points to overall growth, which will see private spending growth ticking up marginally to 5.1% in 2017.

An additional silver lining is the positive outlook for FDI. In recent months, Indonesia has had its credit outlook ratings upgraded by both Moody’s (from ‘positive’ to ‘stable’) and S&P (from BB+ to BBB-). These developments should spur investment inflows, with investment growth already jumping up to 5.4% year-on-year from 4.8% in Q1 (rising back above 5% for the first time in six quarters).

The outlook for direct investment should also be supported by the various policy packages announced last year, which should help to restore investor confidence in Indonesia and lift FDI further.

However, a closer look at trade data reveals slower momentum, in line with cooling global trade and imports resetting to a more sustainable pace post-Ramadan festivities. The outlook for 2018 is also dampened by the recently released budget plans.

Thailand’s growth to stay close to 3.5% as investment remains a drag

Thailand’s 2017 GDP growth forecast edges up to 3.5%, marginally higher than the previous forecast and the expansion achieved in 2016. This is the result of a GDP growth outturn for Q2 2017, driven by stronger consumption and a slower run-down of inventories, with seasonally adjusted GDP increasing by 1.33% quarter-on-quarter.

Monthly data suggests that the domestic economy is maintaining respectable growth. The consumer spending indicator increased for a third month in a row in July, while the stronger performance of merchandise exports this year may now be starting to lift business investment and manufacturing output. Increasing public investment will also remain a key focus.

At the same time, monetary policy is likely to be framed to help drive the domestic economy. The Bank of Thailand is unlikely to cut rates any further, though it has maintained near record-low interest rates of 1.50% since April 2015. However, the first interest rate hike is not expected until late-2018.

A more pronounced economic acceleration is still unlikely as credit conditions remain relatively tight. Net exports and investment have weighed on growth, with imports outpacing solid export growth at 1.2% quarter-on-quarter and public investment falling significantly by around 1% of GDP in Q2.

There are also downside risks to the forecasted growth from bureaucratic delays hampering public spending and the anticipated weakening of external demand in H2.



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