ICAEW: Growth in South East Asia to see mild slowdown in 2018

South East Asia will see a resilient economy backed by global trade growth in 2018, despite a mild slowdown compared with 2017, said ICAEW (The Institute of Chartered Accountants in England and Wales) recently.

According to the organization’s latest report Economic Insight: South-East Asia, a growth rate of 4.7% is expected in the region in 2018—versus 5% in 2017—with the exception of Indonesia, as trade growth cools in tandem with gradual slowdown in China, and as domestic monetary policies begin to tighten.

Overall, 2017 has been a great year for South-East Asia’s economic performance. The region is on track to clock 5% growth for the first time in four years, with almost all countries expected to grow at a much faster pace compared to 2016, according to the report.

ICAEW attributes 2017’s robust performers to several factors, namely the boosted outlook for world growth resulting from fewer concerns about rising trade protectionism and continued resilience in domestic demand, in part supported by accommodative macro policies.

Looking ahead into 2018, exports data from large Asian manufacturing countries and robust PMI readings across the world (particularly in Europe) point to a highly supportive external backdrop. ICAEW said.

World trade is expected to grow steadily over its average pace in recent years in 2018. However, the strength witnessed in 2017 is unlikely to sustain, as China’s economy continues to cool down on the back of tightening monetary conditions. World trade growth is forecasted to slow to 4.2% from 6% in 2017, ICAEW noted.

Less accommodating monetary policy and inflationary pressures

On the domestic front, monetary policy is expected to turn less accommodating. Low inflation has pushed up real wages and given consumers added purchasing power in recent years, and has also given many Asian central banks the opportunity to pursue monetary policy independently of the Fed. However, this is unlikely to remain the case going forward.

Inflationary pressures in some South-East Asian countries, particularly Malaysia and Philippines, have risen in line with the benign global reflation that is taking place as a result of improving growth, recovering world trade and higher commodity prices. In other countries, high leverage and financial stability risks have raised the need for policy normalization, as growth has picked up.

“We expect the process of monetary policy normalization, both by domestic central banks and the US Fed, to proceed in a gradual and well-communicated manner, said Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist. “A very gradual macro policy normalization cycle, along with still relatively solid trends in global trade growth, is expected to ensure that growth remains reasonably resilient across the region.”

The policy backdrop is unlikely to turn highly restrictive for growth, with fiscal policy partly picking up the slack. Most South-East Asian central banks are expected to tighten at the mild pace of 25bp each year. She added.

Indonesia to see GDP growth of 5.3%

Looking ahead, GDP growth forecast for 2017 is maintained at 5.1% and slightly higher at 5.3% in 2018, ICAEW predicated. A better political backdrop and a stronger pick-up in domestic demand are required for growth to push back towards 6%, the organization added.

Supportive factors in the country include a partial recover in commodity prices and a positive outlook for FDI—these developments should contribute to small pick-up in private spending growth (by 5% in 2017) and a spur in investment inflows.

Conversely, there are early signs of slowdown in exports growth momentum, in line with the easing in global trade growth. While a pick-up in infrastructure spending may lead to growth in the second half of 2017, the outlook for 2018 is dampened by the recently released budget plans. The ambitious fiscal deficit target set by the Government poses some downside risks to the 2018 growth forecast.

Growth in Malaysia backed by increased exports and total investment

Malaysia marked its strongest rise in annual growth since 2014, defying expectations in Q3, and accelerating to 6.2% year-on-year, up from 5.8% in Q2.

Looking ahead, domestic demand and the external sector are expected to moderate albeit growth will remain firm. Domestic demand is expected to remain the key driver of growth supported by solid labor market conditions and investment, notably in infrastructure spending funded both domestically and through foreign direct investment flows.

On the external front, the synchronized recovery in global growth will continue to be supportive of exports, but momentum is likely to slow down over 2018 as global trade recovery eases and Chinese import growth cools as a reflection of some modest tightening in monetary policy.

Given less favorable base effects, a moderation in export growth, and slightly tighter credit conditions, Malaysia’s 2018 GDP growth is forecasted to ease back to 5.1%, from an estimated 6% in 2017.


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