Asia’s unalarming slowdown

Growth in Asia outside mainland China and India surpassed expectations in the first quarter in some economies. The performance reflected sustained strength in household consumption and an improving contribution from net exports.

Despite this, ANZ Research’s annual gross domestic product forecast for the region of 3 per cent remains broadly unchanged. More moderate growth in most economies is likely for several reasons. But there’s little cause for alarm.

The first reason is greater policy transmission. The transmission from higher policy rates to deposit and lending rates is over 80 per cent in Malaysia and South Korea. Over the last three months, this has also substantially advanced in India, the Philippines and Thailand.

The share of time deposits in overall deposits has risen in tandem, pointing to weak consumption ahead. ANZ Research has previously argued weak policy transmission was at best a temporary reprieve for domestic demand.

The second is an unfavourable outlook for exports. The spillover from mainland China’s reopening has been underwhelming. The region’s exports to mainland China fell 18.3 per cent year on year in the first quarter.

ANZ Research’s downgrade to its mainland China GDP growth forecast to 4.9 per cent from 5.4 per cent does not signal an imminent improvement. The main benefit of the reopening lies in higher tourist inflows into the region.

The global tech cycle has admittedly bottomed but the timing and strength of a recovery is unclear. ANZ Research’s base case is a recovery will take hold only around the fourth quarter of 2023.

Against this backdrop, it is unlikely investment activity will materially improve. To be sure, corporate investment intentions have improved over the last quarter but nonetheless do not validate a sustained capex cycle.

The third reason is limited fiscal support. Not only do 2023 government budgets incorporate a neutral or negative fiscal impulse, the build-up in public debt during the pandemic limits the use of discretionary fiscal policy. Furthermore, unlike 2022, a slower pace of nominal GDP growth will make it more challenging for governments to lower public debt ratios.

On the positive side, ANZ Research continues to think the oncoming slowdown will be one of a garden variety.

Positives

Unlike in previous downturns, growth is slowing amid low or falling unemployment rates. Household leverage has not materially increased over the last few years. It remains high in both South Korea and Thailand, but the incremental rise has been small.

The progress on inflation is also encouraging. Though base effects have played a role, headline inflation is gravitating towards official targets.

In Thailand, inflation has fallen to below the lower end of the official target range of 1 per cent to 3 per cent. It is also within official target ranges in India and Indonesia. In the former, the previously stubborn core component has finally started to soften. The progress on inflation has also been impressive in the Philippines, dropping by 260 basis points between January and May.

Based on these developments, real policy rates have risen in all economies and turned positive in India, Indonesia, the Philippines, South Korea and Thailand.

By implication, a further correction in inflation and higher real rates are on the cards. This should be quicker than in developed economies. Unlike the latter, the bulk of the rise in inflation is attributable to higher energy and food prices, both of which have eased.

ANZ Research now forecasts 2023 headline inflation for Asia (ex-mainland China and India) at 3.3 per cent. The key risk to this forecast is the possible dry weather conditions which could impact food prices.

Mend

Current account positions are on the mend in most economies, owing to lower trade deficits and a revival in tourism. The latter is particularly prominent in Thailand, where the current account has now been in surplus for two consecutive quarters.

Given tourist flows from mainland China are still recovering, the potential has not yet been reached. On the trade side, the fall in imports has been more marked than in exports, due to both declining commodity prices and weaker volumes.

First-quarter 2023 current account data for India is not yet available, but ANZ Research expects the deficit to have shrunk to a negligible level. Apart from a lower trade deficit, India’s services exports are surging. In ANZ Research’s view, this gain is structural and is one of the many reasons behind its above-consensus GDP forecast of 6 per cent for the fiscal year ending March 2024.

The Philippines’ current account also appears to have improved, although it is still not comforting. Similarly, in Malaysia, the first-quarter current surplus shrank to less than 1 per cent of GDP, the lowest since the third quarter of 2018. This implies domestic demand and imports need to moderate further to deliver a more sustainable external position.

No pivot

Any developments in inflation and external positions are unlikely to clear the runway for a policy pivot. Further tightening by the US Federal Reserve and the negligible probability of a cut until 2024 remain the key hurdles.

Nominal rate differentials with the US remain unfavourable relative to pre-pandemic levels. Indeed, the continuous recalibration of monetary policy in the US alongside negative economic data surprises from mainland China have led to volatility in portfolio flows and currency performance in the region.

Furthermore, the region’s growth slowdown is unlikely to be unduly severe. ANZ Research’s growth forecasts, corresponding to neutral to marginally positive output gaps for most economies, diminish the need for policy easing.

Overall, central banks in the region are unlikely to pivot until 2024. ANZ Research expects India, Malaysia and Thailand will remain on hold. Amongst those likely to cut, ANZ Research expects the Bank of Korea (BoK) and Bank Indonesia (BI) to be the first to initiate the easing cycle from the first quarter of 2024.

There are headwinds to the region’s growth, the most important being limited traction from mainland China’s reopening. Even so, a significant collapse in growth that would warrant a rapid aggressive fiscal or monetary policy response seems unlikely. Imbalances in the shape of excessive leverage or high levels of unemployment are limited.

Sanjay Mathur is Chief Economist, Southeast Asia & India at ANZ