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Economic Research: Asia-Pacific Quarterly: The Cost Of Uncertainty

The threat of a sharp downturn across Asia-Pacific has receded over the past quarter. One reason for that is the readiness of policymakers to respond to sluggish growth and unpredictable geopolitical risks. Since the end of the second quarter, eight central banks have cut policy rates. In Singapore, the monetary authority eased policy by slowing the rate at which the currency appreciates. How effective monetary easing can be varies by economy but, combined with the U.S. Federal Reserve's 75 basis points of cuts, this keeps financial conditions supportive for growth. Our U.S. team expects the Fed to keep rates on hold through 2020.

Fiscal policy is easing in some cases. Draft budgets for 2020 signal an easier stance in Korea, Malaysia, Taiwan, and Thailand. Korea is easing most so far and looks set to unleash a fiscal impulse above 1 percentage point (ppt) of GDP next year. The mix of easing varies across countries with a greater emphasis on spending, which tends to have a larger short-term impact on demand than tax cuts (as India may discover). However, outside of Korea, the net fiscal impulses measured by the change in the primary balance are quite small. This is still mainly a central bank story and this suggests rates will have to stay very low.

At the same time, the U.S. and China are edging toward a partial trade deal, which has buoyed market sentiment. Short-term political considerations may have motivated both sides to talk but S&P Global Ratings believes it is far from clear that the thorniest issues have been addressed. Overall, a mini deal covering agricultural imports, China's new foreign investment law, and a currency side-deal would not change our baseline forecasts. The direct effects of tariffs are not large and we had previously assumed a stalemate in the key structural issues. Still, a reduced risk of escalation should put a floor under confidence and diminish the threat of another investment downturn over the next 12 months.

The final piece of good news for Asia is that the electronics inventory cycle has bottomed. This is a cycle with a relatively high frequency and it is often hard to extricate from the business cycle. After running down inventories to quite low levels earlier in 2019, companies may rebuild them slightly in the coming months, which should lift industrial output and trade.

Uncertainty Still High In Asia-Pacific

We have seen some good news but the bad news is that Asia must live with lingering uncertainty. Two centuries ago, Benjamin Franklin wrote that nothing is certain but death and taxes. Although that's a fact of life, uncertainty about the economic outlook has appeared higher than normal recently. A volatile mix of populism, trade and technology tension, and geopolitical realignments make it harder to envisage what the future global economy will look like.

There is no foolproof way to measure uncertainty but one method, counting the number of times newspaper articles use phrases that allude to a cloudy outlook, has become popular. The so-called indices of economic policy uncertainty resulting from these counts have climbed above their long-run averages in a number of countries. In China, such measures have never been higher as chart 1 shows.

Chart 1


Financial Markets Unfazed By Uncertainty So Far

A puzzle is that while many agree that uncertainty is indeed elevated, financial markets appear sanguine about the future. One might think that higher uncertainty would mean higher volatility and lower valuations for risky assets. Indeed, that has been the historical experience. Chart 2 confirms this and also emphasizes just how unusual is the current combination of high policy uncertainty and low market volatility.

Chart 2


Two answers may explain the puzzle: (i) markets are comforted by monetary easing; and (ii) markets can price risk but have a hard time pricing longer-term uncertainty. Much of the uncertainty plaguing businesses is abstract and difficult to pin down in terms of timing. Unlike the result of an election between two known candidates on a specific date, recent uncertainty relates to issues such as the complexities of technology supply chains over the next decade or the impact of populist policies on reform. Unfortunately, we don't see these sources of chronic uncertainty dissipating anytime soon, which could mean specific events--such as the delay of a phase of the U.S.-China deal--triggering periodic volatility in markets.

Sluggish Investment Is The Cost Of Uncertainty

Notwithstanding giddy markets, uncertainty is likely to have a real impact. We estimate that when the policy uncertainty index rises by about one point (a little bit less than the rise observed in recent months) private investment in the developed market economies of Asia-Pacific tends to fall by about 1%-2% after 12 months. This result is shown by Chart 3. While not an enormous impact, it is enough to drag on overall growth. Easier financial conditions may soften the blow but unless the threat of escalating trade tensions eases, we do not expect a rerun of the robust upturn in capital expenditures we last saw in 2016-2017.

Chart 3


Our forecasts reflect this balance. In most economies, investment growth should stabilize rather than rebound sharply. Consumption growth should remain resilient, helped by still-steady labor markets across the region. However, for some economies, many new jobs are casual or part-time service industry positions with modest wages, few benefits, and little security. This structural change in labor markets seems unlikely to reverse soon and continues to weigh on household confidence, income, and spending.

Acute risks have eased but chronic uncertainty remains. Once again, escalating trade tensions remain the key risk but we believe China's slowdown is becoming a larger threat to the near-term outlook, even if slower growth may help lower the medium-term risks from debt. We do not see a substantially higher probability of a hard landing over the next 12 months but the more the economy slows, the more likely we may see financial stress emerge in some pockets of the economy, especially firms and provinces exposed to overcapacity sectors where deflation may be starting to bite.

The key upside risks include a more powerful growth impulse from easier financial conditions and, where relevant, recent fiscal easing.

China: Tighter Financial Conditions and 'Weak Tail' Risks

Markets often focus on the short-term confidence effects of trade developments and this has indeed proven to be a key driver of market pricing, including the currency. However, we think the domestic policy stance and ongoing supply chain realignments will prove to be more important for developments in the real economy next year and beyond.

The partial deal we assumed is signed would remove the risk of a near-term escalation but does not fundamentally alter the medium-term dynamic of the U.S.-China economic relationship. At its heart, the dispute is about China's state-led economic model and the perception among some of China's G-20 peers that this is incompatible with the global trading system that has developed under U.S. tutelage since 1945. We see little sign that China is willing to change its recent course, which has emphasized targeted opening up, a sprinkling of liberalization, and a firm guiding hand from the state.

The recent Fourth Plenum Decision, an important policy signal, nodded toward a level-playing field for private enterprise but reinforced a strong role for the state. Ominously for the U.S.-China relationship, the decision confirmed the priority of "building a new state-led mechanism to make breakthroughs in key technologies." It repeated previous language about making state-owned capital stronger, better, and bigger. None of this is new but that is the point: China's current development plan appears to have changed little since 2015. Some progress is being made in advancing legislation that addresses intellectual property protection and foreign investment--two key concerns of China's trading partners--but it is far from clear if that is enough to persuade the U.S. to begin normalizing trade and investment relations.

Investment will be a casualty of chronic trade uncertainty. Manufacturing fixed asset investment, which accounts for about a third of total investment, has grown by less than 3% in 2019. This is remarkably low for China and has only been partially offset by robust investment in real estate. While it's hard to identify the role that trade tension is playing, investment in industries with high export exposure, including electrical machinery, has been hit hard. With the property cycle turning, these two big chunks of overall investment are set to remain a drag on growth.

Policymakers look unlikely to step hard on the gas pedal to power an economy that faces building headwinds. Instead, we expect gentle taps on the gas to prevent the economy from reaching stall speed. Based on the official data, this is probably close to 5.5% next year. The messaging has been quite consistent with this approach in recent months, whether it be statements from the Politburo and State Council or speeches by officials. Restraint is also evident in actual policy actions, including the People's Bank of China's mini five-basis-point cut to some of its policy rates. In turn, short-term funding rates, including the seven-day repurchase rate for banks, have remained broadly stable over the past 12 months.

Chart 4


Policy restraint is evident in financial conditions, which stopped easing a few months ago and are now neutral. One reason for the small reversal in financial conditions is a negative credit impulse, which is typically measured as the change in the net flow of new credit as a share of GDP. We estimate this net flow has fallen to just 5% of GDP, from 9%, in just a few months (see chart 5). One of the main reasons for this is a renewed contraction in shadow bank credit.

Chart 5


Tight credit reflects flow from the "tap" (policy) and the efficiency of the "pipes" (transmission). Both are likely contributing to weaker credit flows in recent months. Tighter regulation and oversight of shadow banking have clearly narrowed and even blocked some pipes in the system. To some extent, if it contributes to reduced financial risks, this is welcome. However, it may also inflict undesirable collateral damage to the economy if lingering distortions mean that the pipes to some healthy borrowers have become impaired. In particular, in a world of less credit, private firms that lack an implicit guarantee from the state may find that they are rationed out of bank lending.

Another problem is the distribution rather than the level of growth. China's slowdowns can trigger stress in the so-called "weak tails" of the credit quality distribution, typically provinces or industries exposed to overcapacity. Such stress is sometimes foreshadowed by producer price index (PPI) deflation because this indicates weak revenues in the upstream industries where overcapacity is rife. In turn, this can pressure smaller banks and local governments, whose fortunes tend to rise and fall together. With few alternative sources of growth, job losses can result with little offset from welfare payments due to a still-weak social safety net.

"Weak tail" risk is rising but not yet at the levels that fanned fears of a hard landing in 2015. Producer price deflation has returned but by late 2015, producer prices had been falling for over five years (see chart 6). Worse, for some provinces, deflation had reached double-digits, suggesting collapsing revenues and mounting losses. The supply-side reform of 2016-2017 may mitigate these pressures in this cycle but the recent surge in steel output suggests that this remains a vulnerability during downturns.

Chart 6


Taken together, we feel comfortable with our GDP growth forecasts of 6.2% for 2019 and 5.7% for 2020. This is a call on where the official growth target will land as much as on the fundamentals. We expect consumption growth to cool further as employment growth slows (due to demographics and soft hiring), real wage gains moderate, and wealth gains from the property market wane. Investment growth will also slow, largely due to fewer starts by property developers. Manufacturing investment may stabilize but, if supply chains start shifting, a strong upturn is unlikely. Infrastructure investment growth will only partially offset these drags. Net exports have been a big swing factor in recent quarters, but we do not expect too much action here.

Japan: Pillars Of Domestic Resilience Set To Weaken

The pillars of domestic resilience that have shielded Japan from the worst of the global trade cycle are weakening. Most important is household spending. This is not just due to the effect of the recent hike in the consumption tax to 10%, from 8%, although this will not help. Slowing employment growth and a renewed decline in real wage growth will also crimp disposable incomes and discourage spending.

New jobs in the economy had been growing at 1%-2% in recent years as rising participation helped offset a shrinking working age population. More recently, employment growth has dipped to 1% and below due to a combination of more cautious hiring and difficulties in finding people with the right skills in an increasingly tight market. At the same time, real wages are falling, again suggesting that Japanese workers would rather accept lower wage increases (or even cuts) to ensure job security. This does not bode well for consumption and retail sales have already started to weaken.

After a period of high investment, we expect firms to invest at a slower pace over the next year as uncertainty takes its toll. Japan is an upstream supplier of capital equipment and intermediate goods to the technology industry. Assuming that tech firms across Asia go slow on new capex plans as they rethink their supply chain risks, demand growth for capital equipment is likely to cool (see chart 7). Order books for Japan's industrial sector have shrunk over the last year. Electronics orders have stabilized as the inventory cycle turns but this is unlikely to presage a substantial upturn.

Chart 7


The recent gradual climb in core inflation is unlikely to pick up much pace should growth slow. We expect underlying inflation (excluding fresh food and energy) to remain below 1% and well below the Bank of Japan's 2% target through the next 12 months. Given the diminished policy space, we do not anticipate substantial fiscal or monetary easing through 2020 unless the yen appreciates substantially.

Australia: Moderate Recovery But Interest Rates To Stay Low

Easing by the Reserve Bank of Australia (RBA) has brightened the prospects for a moderate pick-up next year. Policy rate cuts tend to be effective in Australia, largely because they mostly feed through to mortgage rates. The 75 basis points in rate cuts has pushed mortgage rates down by 50-75 basis points, lowering debt servicing costs and improving household disposable income. At the same time, a nascent stabilization in home prices should mean the ongoing hit to household wealth diminishes over time. In turn, this should provide some lift to private consumption, which accounts for over half of the economy.

We do not expect a sharp recovery, however. One key reason is that while employment growth at near 2% and an unemployment rate near cyclical lows at 5.2% suggests a rosy job market, the details are less supportive. The underemployment rate, which accounts for people with a job that would like to work longer hours, has remained stubbornly high, above 8%. Many of the new jobs created appear to be part-time jobs that either lack the security and benefits of full-time roles or pay less. This may partly explain why, despite a falling unemployment rate, wage growth has remained tepid and consumers more cautious.

Investment may also remains subdued. Notwithstanding the mining and housing boom and bust, overall private investment has hardly grown in the last decade. Declining interest rates and bond yields should help support capital expenditure but this persistent weakness in capital expenditure suggests some structural factors are not easily remedied by monetary easing. Indeed, the most powerful driver of growth is likely to remain exports driven by liquid natural gas capacity coming onstream. China's property slowdown could hit other commodities but this may affect prices (i.e., the terms of trade) more than quantities.

We assume the central bank will bear the burden of lifting growth--like it has done in recent years (see chart 8). We forecast the RBA will cut the policy rate by another 25 basis points and then hold at 0.5% through 2020. This reflects two assumptions. First, high underemployment implies the output remains wide, wage growth will be tepid, and inflation will converge only gradually to target. Second, our estimates that the real neutral interest rate (the level consistent with the economy at trend and inflation at target) has declined substantially, perhaps close to zero. Indeed, this is also the level priced by real forward rates. Assuming fiscal policy continues to tighten slightly, as it has for a decade already, to secure even a modest recovery, the real cash rate is likely to remain negative for some time to come.

Chart 8


Risks to the outlook are fairly balanced. The key external downside risk is that China's property market slows more than expected, hitting commodity prices. Domestically, persistently weak wage growth and lower than expected household spending could keep growth well below 2.5%. In either of these scenarios, the probability of unconventional monetary policy--especially quantitative easing--is fairly high. On the upside, the impact of policy easing may be larger than we anticipate, particularly on the property market.

India: Difficult Near-Term Outlook

Growth continues to surprise on the downside and with core inflation falling sharply; this is clearly a substantial weakening in demand. Weakness in the real sector and stress in the financial sector are feeding into each other, pulling growth down. Slowing global growth, falling trade intensity, and uncertainties stemming from trade conflict are hurting, too. Interestingly, this slowdown is atypical, in the sense that it is accompanied by the cleaning-up of the financial sector--something that's happening after almost 20 years. That has the potential to stretch the slowdown, particularly when the policy space to stimulate the economy in the short run is limited.

With revenues way behind targets--both direct and indirect taxes have recorded anemic growth so far--the government may have to cut expenditure to achieve the fiscal deficit target of 3.4% of GDP set for the current fiscal. This will render it unsupportive for GDP growth for fiscal 2020, akin to what was experienced in the last fiscal. The only way to minimize this is to double efforts at raising non-tax revenues via divestment and asset monetization.

Monetary policy, too, has lost its bite. Despite a cumulative repo rate cut of 135 basis points by the Reserve Bank of India (RBI), the lending rates have fallen by only 20-30 basis points. With the slowing economy, the demand for credit has come down, but the risk aversion and weak sentiment mean the willingness to supply credit, too, has reduced. We believe the RBI will ignore the spike in inflation due to idiosyncratic factors (vegetables, etc.) and maintain an accommodative monetary policy as the risks to growth in the near term outweigh the risks to inflation.

The cost of scrubbing the financial system is slower growth. The authorities have to be vigilant to ensure that contagion from stress in some of the non-banking financial companies (NBFCs) does not generalize. Looking beyond the gloom and doom, the big picture that emerges for the medium run remains promising--with about 7% annual growth.

Korea: The Worst May Be Over

We expect growth in Korea to edge slightly higher in 2020 to 2.1%. In large part, this reflects some recovery in business investment. After a strong capital expenditure cycle during the synchronized global recovery 2017, Korean firms became much more cautious this year and private investment fell below the post-2009 trend as external demand waned and trade uncertainty rose. We do not expect a full recovery in private investment back to trend, suggesting that policy uncertainty is having a persistent effect on the capital stock. Still, the recent depreciation in the real exchange rate, lower real policy rates, and stalemate rather than escalation in trade tension should see capital expenditure grow moderately over the next 12-18 months.

Household spending growth may slow but remain fairly resilient as the recent pick-up in hiring is lifting confidence. Employment growth is edging closer back to 2%, driven by the service sector, which now accounts for most jobs. For example, employment growth in the retail, wholesale, hospitality, and transport sectors has risen by 2 ppts back to 2%. Manufacturing and construction employment remain more subdued, reflecting weak investment. Real wage growth remains above 3% across the economy although this is due to falling inflation rather than nominal wages. In addition, high household debt will remain a drag on spending.

Policy easing has helped brighten the outlook for growth. Bank of Korea (BoK) rate cuts of 50 basis points have finally begun to lower the real policy rate. Meanwhile, the government looks set to deliver a fiscal stimulus of about 2.5 ppts of GDP over the two years through 2020. This has eased some of the burden on monetary policy to support growth but we still expect two more BoK rate cuts to 0.75% in this cycle as inflation remains persistently below the 2% target.

The key external risk remains an escalation in trade tension, either between the U.S. and China or in the bilateral relationship with Japan. This is not just a trade story for Korea--more important, trade tensions threaten to disrupt complex technology supply chains that would raise medium-term costs for Korean firms. The main domestic risk is deflation and the potential to drag down wages. This would make it much harder for households to service their large stock of debt.

Indonesia: Struggling To Lift Growth

Growth momentum in Indonesia has softened although headline GDP growth is still steady at around 5%. Private demand looks to be weaker as the corporate credit impulse (the change in new credit as a percentage of GDP) has dropped despite easier global financing conditions, monetary policy easing, and a loosening of macroprudential policies. Consumer confidence has weakened slightly, although it remains higher than during past downturns. External factors have also weighed on growth as the terms of trade worsened and regional trade is still in a slowdown.

Easier global financial conditions have provided room for Bank Indonesia (BI) to cut rates. Lower long-term yields in the U.S. and EU, and expectations of accommodative monetary policy for a long horizon have eased capital flow pressures and supported the rupiah even as BI has cut rates by a cumulative 100 basis points. There are few signs of large external or internal imbalances with the real effective exchange rate a touch above its long-term trend, the current account deficit stable at around 2.7% of GDP, and inflation within the central bank target range.

Domestic macro policies look unlikely to fuel a cyclical upturn. First, the space to cut rates further seems limited. With the Federal Reserve on hold in our baseline, cutting rates will start to narrow the interest rate differential. Core inflation has also begun to edge higher from its recent lows. The growth outlook will therefore depend on how much of the policy easing to date lifts growth.

We expect transmission to remain weak, as the banking sector is facing thinning margins and an uptick in special mention loans, which are an early indicator of broader credit quality weakening. Second, fiscal policy will be kept on a tight rein with the government set to run a primary balance close to zero next year, implying little if any fiscal impulse. Higher public investment remains a policy priority but it is unlikely to move the needle on the level of growth over the next 12 to 18 months.

The reform agenda during President Jokowi's second term will shape medium-term growth prospects. Plans for reform include liberalizing labor markets and improving the investment climate with initiatives such as centralizing and speeding up approval processes. Successful passage of reforms would be favorable for growth.

Growth for the first nine months of the year was 5.0% (year on year) and we expect economic activity in the fourth quarter to be similar to the third quarter, implying full-year growth of 5%. We expect terms of trade and the domestic demand environment to remain challenging, leaving limited upside for growth in the near term. We expect growth of 5.1% in 2020.

Thailand: External Weakness Lowers Expectations

Weak trade has hit growth in Thailand. This weakness in external demand in turn fed through to the manufacturing sector, which contracted over the first nine months of the year. For now, the impact on private investment growth has been limited, which suggests that the slowdown will not be too sharp. Manufacturing weakness has not bottomed out, however, and we expect weakness in the trade environment to persist for now. There are some signs that the manufacturing and external weakness is spilling over to households, as private consumption growth is gradually slowing. There has also been lower support from the tourism sector, in part due to an appreciating currency.

The policy stance is easing in response. The Bank of Thailand (BoT) cut policy interest rates by 50 basis points this year to 1.25% to counter disinflation and weakness in domestic demand. The strong currency, fueled by large current account surpluses and rising real interest rates, has also been a concern and the BoT relaxed foreign exchange regulations to lessen appreciation pressure. In particular, the central bank allowed exporters to hold foreign exchange proceeds offshore, relaxed rules for retail investors to invest abroad, and eased outward transfer regulations. Fiscal policy may also ease a touch, with some measures targeted at rural communities, but the overall fiscal impulse and impact on growth is likely to be small.

With growth set to remain below trend, we expect inflation to remain subdued, while the large current account surplus will keep balance-of-payments inflow pressures in place. In turn, the central bank will likely have to ease policy again. We expect growth of 2.6% in 2019 and 2.8% in 2020. Our 2019 growth number is revised down from 3% as private consumption growth and fiscal stimulus have been below expectations.

Singapore: More Easing To Come

The downturn in the global electronics cycle that started in late 2018 is still weighing on growth. External demand is weak, and the manufacturing sector output has been hit particularly hard. Some of the manufacturing and external weakness has spilled over into the domestic consumer-facing sector, which has recorded low growth during the year. However, labor market conditions have not deteriorated and this is providing support for the services sector.

Forward-looking surveys of manufacturers suggest that gloomy conditions are set to persist in the sector into 2020. Broad services growth is likely to be steady, with continued weakness in the consumer-facing and trade-related services. Tourism, construction, and information and communications are likely to support growth during 2020.

Inflationary pressures are muted. In response to low inflation and weakness on the external front, the Monetary Authority of Singapore eased monetary policy by lowering the slope of the Singapore dollar nominal effective exchange rate (NEER). This will provide some reassurance to market participants and we expect slight policy easing again in 2020, given benign inflation and the challenging growth environment. Overall, we have marked down growth moderately to 0.7% in 2019 and 1.4% in 2020, compared with our 1.0% and 1.6% estimates last quarter.

Hong Kong: Revising Medium-Term Growth Forecasts Lower

The economic hit from unrest is building but there are important distinctions between the short-term and the long-term effects. In the short term, the sectors most affected have been retail trade and hospitality, as fewer tourists arrive and locals spend less. Other sectors, including financial services, have been less affected for now. As a result, the economy has entered a recession and we have revised our growth forecast for 2019 down to -1.2%, compared with our 0.2% growth estimate last quarter. Assuming some normalization, these short-term demand hits should mostly dissipate through 2021.

The medium-term supply-side impact is more important if it affects high-value-added sectors such as finance and professional services--output per worker in finance is more than twice the level of that for the broader economy. We assume that firms in these sectors will respond to higher and persistent uncertainty about the business environment by trimming investment plans and diversifying their operations away from Hong Kong. The city is already facing competition from the surrounding region in the mainland known as the Greater Bay Area as a hub for logistics and finance. Hong Kong's competitive position in these spaces will come under increased pressure.

We have revised down our medium-term growth forecast for Hong Kong to 2%, from about 2.5%, as a result. Specifically, we assume that employment growth, which has run at about 0.8% in recent years, will remain largely unchanged in the medium term as real wages fall. We assume labor productivity growth halves from the recent impressive 2.4% to about 1.2%. Clearly, there is much uncertainty about the political outlook and its economic impact and such forecasts are likely to be revised.

The near-term economic outlook depends on the timing of de-escalation of tensions. There will likely be a period following that where activity continues to be weak as employment and asset prices recover gradually. We forecast growth of 0.2% next year, which assumes tensions ease in the first half of 2020, and then a moderate recovery of 2.1% in 2021 off a very low base.

Malaysia: Supported By Consumption

Third-quarter growth in Malaysia slowed to 4.4% from 4.9% in the previous quarter. Manufacturing was the main driver of the slowdown. Growth in the sector remains weak due to the downturn in the global electronics cycle. Broad investment spending is sluggish partly due to the weaker trade environment. Inflationary pressures are controlled for now, and the central bank remains on hold.

We expect Bank Negara Malaysia (BNM) to cut interest rates once in 2020 as growth momentum slows and as inflation remains low. BNM has so far cut rates by 25 basis points in this cycle, which is among the lowest policy rate reductions across the region.

Our growth forecast for 2019 remains unchanged at 4.6%. We expect steady service sector growth and a stable labor market to support activity for the year. Some of the weakness in the external-facing sectors is spilling over onto domestic demand, and private consumption growth is slowing as a result. The government is in a mildly expansionary fiscal stance for 2020. We expect broadly steady growth of 4.5% next year.

Taiwan: A Winner From Trade Tension For Now

Taiwanese firms have been relocating some of their manufacturing firms back home this year, which has supported strong investment growth. This increased manufacturing presence has been enough to offset the global trade downturn and has kept trade activity steady. There has been some regulatory support for this relocation activity including low-cost loans and easier way-clearance. We expect this reshoring to fade out of the data gradually, resulting in strong growth this year but lower investment growth in the outer forecast years due to base effects.

Domestic demand is a bit soft, and wage growth has been weak. Inflation is low, and we expect this to persist through our forecast horizon due to structural factors such as ageing. Without a recovery in domestic demand, we expect growth to moderate over that time.

We have raised growth forecast for 2019 by 0.5 percentage points to 2.5% due to strong reshoring investment. For 2020 and 2021, we expect growth of 2.4% and 2.2%, respectively.

Philippines: Consumption To Remain Resilient

A long delay in passing the budget for 2019 meant that growth for the first half of the year was lower than potential, owing to a negative fiscal stimulus. We expect this effect to reverse in the second half of the year. Over the year as a whole, fiscal spending is likely to contribute positively to growth.

Monetary policy continues to be accommodative, and the Bangko Sentral ng Pilipinas has cut the policy reverse repo rates by 75 basis points this year to 4%. Inflation is low at 0.8%, and we expect further monetary policy easing in 2020.

We project steady domestic consumption to support growth at about 6.0%. We anticipate a recovery in private investment during 2020 due to greater infrastructure investments and pass through of more accommodative monetary policy.


Table 1

Real GDP
Forecast Change from previous forecast
(%) 2018* 2019 2020 2021 2022 2019 2020
Australia 2.7 1.8 2.2 2.3 2.5 -0.2 -0.2
China 6.6 6.2 5.7 5.6 5.4 0.0 -0.1
India 6.8 5.1 6.5 7.0 7.4 -1.2 -0.5
Japan 0.8 0.8 0.1 0.8 1.1 -0.1 -0.1
South Korea 2.7 1.9 2.1 2.3 2.4 0.1 0.0
Hong Kong 3.0 -1.4 0.2 2.1 2.0 -1.6 -1.4
Indonesia 5.2 5.0 5.1 5.1 5.1 -0.1 -0.1
Malaysia 4.7 4.6 4.5 4.6 4.6 0.0 0.0
New Zealand 2.8 2.5 2.4 2.5 2.5 0.0 -0.1
Philippines 6.2 6.0 6.2 6.4 6.7 0.0 0.0
Singapore 3.1 0.7 1.4 2.0 2.1 -0.3 -0.2
Taiwan 2.6 2.5 2.4 2.2 2.2 0.5 0.4
Thailand 4.1 2.6 2.8 3.2 3.4 -0.4 -0.5
Asia Pac* 5.3 4.7 4.7 4.8 4.8 -0.2 -0.1
EM Asia* 6.0 5.3 5.4 5.4 5.4 -0.2 -0.1
NIE* 2.8 1.6 1.9 2.1 2.1 0.0 0.0
ASEAN* 5.1 4.6 4.7 4.8 4.8 -0.1 -0.2
*For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22. §Asia Pac: Australia, Japan, and emerging markets Asia. †EM Asia: emerging markets Asia = China, India, NIEs, and ASEAN. ‡NIE: newly industrialized economies = Hong Kong, Singapore, South Korea, Taiwan; ‡‡ASEAN: Indonesia, Malaysia, Philippines, Thailand. 2018 numbers are actual.

Table 2

Consumer Price Index Inflation
Forecast Change from previous forecast
(%) 2018* 2019 2020 2021 2022 2019 2020
Australia 1.9 1.6 1.9 2 2.2 0 -0.1
China 2.1 2.5 2.3 2.2 2.1 0.4 0.3
India* 3.4 3.6 4.1 4.2 4.4 0 0
Japan 1 0.6 1.3 0.9 0.9 -0.4 -0.7
South Korea 1.5 0.3 0.9 1.4 1.6 -0.4 -0.3
Hong Kong 2.4 2.9 1.9 1.8 2 0.3 -0.4
Indonesia 3.2 3.1 3.6 3.8 3.9 -0.1 0.3
Malaysia 1 0.7 1.4 1.5 1.8 -0.2 -0.5
New Zealand 1.6 1.6 1.8 1.8 1.9 -0.1 0
Philippines 5.2 2.6 2.7 2.9 3.3 -0.2 0
Singapore 0.4 0.6 1.2 1.7 1.9 0 0.1
Taiwan 1.3 0.6 1 0.9 1 0.1 0.2
Thailand 1.1 0.8 0.9 1.1 1.3 -0.2 -0.4
*2018 numbers are actual. For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22, 2022 = FY 2022-23.

Table 3

Policy Rates, End-Of-Year
Forecast Change from previous forecast
(%) 2018* 2019 2020 2021 2022 2019 2020
Australia 1.5 0.75 0.5 0.5 0.5 0.00 -0.25
India* 6.25 5 5 5.25 5.25 0.00 0.00
Japan -0.07 -0.06 -0.06 -0.06 -0.06 0.03 0.07
South Korea 1.58 1.25 0.75 0.75 0.75 0.00 -0.50
Indonesia 5.88 5 4.75 4.75 4.75 0.00 0.00
Malaysia 3.25 3 2.75 2.75 2.75 0.25 0.00
New Zealand 1.75 1 0.75 0.75 0.75 0.25 0.00
Philippines 4.62 3.75 3.5 3.75 4 0.00 0.50
Taiwan 1.38 1.38 1.38 1.38 1.38 0.00 0.00
Thailand 1.53 1.25 1 1 1 -0.25 -0.25
*2018 numbers are actual. CPI--Consumer price index. *For India, 2018=FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22, 2022 = FY 2022-23.

Table 4

Policy Rates, Average-Over-Year
Forecast Change from previous forecast
(%) 2018* 2019 2020 2021 2022 2019 2020
Australia 1.5 1.17 0.5 0.5 0.5 0.00 -0.25
India* 6.34 5.37 5 5.19 5.25 0.03 0.00
Japan -0.06 -0.06 -0.06 -0.06 -0.06 0.01 0.06
South Korea 1.52 1.57 0.88 0.75 0.75 0.01 -0.37
Indonesia 5 5.66 4.75 4.75 4.75 0.03 -0.13
Malaysia 3.23 3.09 2.75 2.75 2.75 0.13 0.00
New Zealand 1.75 1.39 0.75 0.75 0.75 0.11 0.00
Philippines 3.64 4.37 3.56 3.63 3.88 0.09 0.37
Taiwan 1.38 1.38 1.38 1.38 1.38 0.00 0.00
Thailand 1.51 1.59 1 1 1 -0.04 -0.25
*2018 numbers are actual. CPI--consumer price index. *For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22, 2022 = FY 2022-23.

Table 5

Exchange Rate
Forecast yearly average (USD per local currency unit) Change from previous forecast
2018* 2019 2020 2021 2022 2019 2020
Australia* 0.75 0.69 0.68 0.67 0.67 -0.01 0.00
China 6.61 6.91 7.08 7.14 7.19 -0.02 -0.13
India* 69.92 70.49 71.88 72.9 74.13 -0.03 0.63
Japan 110.38 108.85 106.75 105.13 103.88 0.08 1.67
South Korea 1100.16 1163.16 1162.75 1151.75 1137 -2.01 -36.50
Hong Kong 7.84 7.83 7.8 7.8 7.8 0.00 0.00
Indonesia 14230.65 14139.87 14227.5 14440 14675 -28.92 (35)
Malaysia 4.04 4.14 4.18 4.2 4.15 -0.02 -0.07
New Zealand* 0.69 0.66 0.64 0.63 0.63 0.00 -0.01
Philippines 52.66 51.7 51.31 51.03 50.11 -0.53 -1.58
Singapore 1.35 1.36 1.36 1.35 1.33 -0.01 -0.05
Taiwan 30.16 30.92 30.38 30.18 29.98 -0.15 -0.85
Thailand 32.31 31.1 30.31 30.16 30.01 0.00 -0.07
*2018 numbers are actual. For Australia and New Zealand currencies are shown in US dollars per local currency unit. *For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22, 2022 = FY 2022-23.

Table 6

Exchange Rate
Year end (USD per local currency unit) Change from previous forecast
2018* 2019 2020 2021 2022 2019 2020
Australia* 0.72 0.68 0.68 0.67 0.67 0.00 0.00
China 6.91 7.05 7.11 7.15 7.23 -0.10 -0.14
India* 70.5 71 72 73.5 75 0.00 0.00
Japan 112.92 108 106 104.75 103 0.00 0.85
South Korea 1127.43 1167 1160 1145 1133 (18) (52)
Hong Kong 7.83 7.82 7.8 7.8 7.8 0.00 0.00
Indonesia 14779.62 14065 14350 14530 14750 (135) 50.00
Malaysia 4.17 4.15 4.2 4.2 4.13 -0.05 -0.05
New Zealand* 0.67 0.64 0.64 0.63 0.63 -0.01 0.00
Philippines 53.2 50.6 51.56 50.54 49.94 -1.90 -1.44
Singapore 1.37 1.36 1.36 1.34 1.32 -0.04 -0.06
Taiwan 30.86 30.5 30.3 30.1 29.9 -0.70 -0.80
Thailand 32.81 30.5 30.2 30.1 30 0.00 -0.10
*2018 numbers are actual. For Australia and New Zealand currencies are shown in US dollars per local currency unit. *For India, 2018 = FY2018-19, 2019 = FY 2019-20, 2020 = FY 2020-21, 2021 = FY 2021-22, 2022 = FY 2022-23.

Table 7

Forecast Change from previous forecast
(%) 2018* 2019 2020 2021 2022 2019 2020
Australia 5.3 5.3 5.4 5.3 5.3 0.1 0.1
China 3.8 3.6 3.8 3.9 3.9 -0.1 0
Japan 2.4 2.3 2.2 2.2 2.2 -0.1 -0.1
South Korea 3.8 3.8 3.9 3.9 3.8 -0.2 -0.1
Hong Kong 2.8 3 3.7 3.6 3.5 0 0.4
Indonesia 5.2 5.1 5.4 5.5 5.4 -0.1 0.1
Malaysia 3.4 3.3 3.4 3.3 3.3 -0.1 0
New Zealand 4.3 4.1 4.2 4.2 4.2 0.1 0.1
Philippines 5.3 5.3 5.3 5.1 5 0.2 0.3
Singapore 2.1 2.2 2.4 2.3 2.2 0 0
Taiwan 3.7 3.8 3.7 3.7 3.7 0.3 0.5
Thailand 1.1 1 1 1 0.9 0 -0.1
*2018 numbers are actual.

This report does not constitute a rating action.

Asia-Pacific chief economist:Shaun Roache, Asia-Pacific chief economist, Singapore (65) 6597-6137;
Asia-Pacific economist:Vishrut Rana, Asia-Pacific economist, Singapore (65) 6216-1008;

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