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Economic Research: Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown


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Economic Research: Economic Outlook Asia-Pacific Q4 2023: Resilient Growth Amid China Slowdown

The Asia-Pacific remains a multi-speed region. China is nursing its property downturn. The region's developed economies are so far undergoing soft landings, with low but positive growth. Meanwhile, Asia's emerging market economies are poised for robust expansions.

We have cut our China growth forecast for 2023 to 4.8%, from 5.2%, and that for 2024 to 4.4%, from 4.7%. For the rest of the region, domestic resilience has caused us to slightly increase our forecast for 2023 growth to 3.9%, and we maintain it at 4.4% for 2024.

Global Setting: A Soft Landing Possible, But Rates Likely To Remain High

In the U.S. and Europe, the big question is whether policymakers can achieve a soft landing by bringing down inflation without causing a substantial downturn. Recent developments have generally been encouraging. In our baseline forecasts we foresee a soft landing in both economies, but risks remain tilted to the downside.

The U.S. economy grew broadly in line with potential output in the first half of 2023 and seems on track for a strong third quarter. After that, our baseline sees very low albeit positive growth through the first half of 2024, before a gradual pick-up. The eurozone recorded marginally positive growth in the first half and should grow in the third quarter. We then project unchanged output until growth resumes in the second half of 2024.

U.S. headline and core inflation have fallen. Yet, amid low unemployment, the decline in U.S. inflation toward the U.S. Federal Reserve's 2% target will be gradual. We forecast another 25 basis points increase in its 'policy interest rate this year, with the first cut in the second quarter of-2024, implying that the strain on Asia-Pacific markets and currencies will likely persist through early 2024.

China's Post-Pandemic Recovery Has Slowed

Renewed property weakness has weighed on China's growth. Housing sales and starts slid again since April, affecting the economy directly and indirectly, via backward linkages to heavy industry and forward ones to sectors such as white goods. With house prices falling again, the property downturn has also affected already weak consumer and business confidence. The downturn has also squeezed local governments' spending amid weak land revenues and financial strains.

In addition, government spending more generally was much lower than budgeted through July, leading to a fiscal contraction, and exports have slowed, reflecting weak global demand.

China's post-COVID recovery has consequently lost steam. Industrial production growth has remained subdued. While consumer spending on catering, travel, and other services has remained robust, goods consumption has slowed: retail sales grew a modest 4.5% year-on-year in August, in real terms, from an already subdued base (see chart 1).

Chart 1


Chart 2


This cyclical softness occurs amid concerns about the government's stance toward the private sector and geopolitics, especially the trade and investment restrictions imposed by the U.S.

We don't think the outlook is alarming. The solid momentum of service-oriented consumer spending supports the services sector. Growth in real service sector output has declined since the re-opening boom at the start of the year, but it picked up to 6.8% in August (see chart 2). While youth unemployment has risen to more than 20%, overall unemployment was modest at 5.2% in August; and brisk year-on-year growth of migrant employment and wages in the second quarter indicates that the labor market is holding up.

China's import data suggests that demand has endured. Our volume estimates correct for the currently large declines in traded goods prices and distinguish between processing imports--used as inputs, to be re-exported--and normal inputs used in China's own economy.

Processing import volumes were down 17% on a year ago in the three months through July, reflecting weak global demand and supply-chain adjustment. But real normal imports rose about 10% on that metric (see chart 3).

Taking another perspective, whereas total imports of manufactured products (including processing imports) have remained weak, those of commodities have risen robustly despite the property weakness. Energy imports have been especially strong (see chart 4).

Chart 3


Chart 4


Policy Support Should Dampen But Not Offset The Weakness

The Chinese government has taken steps to support growth. It has issued plans to improve the business climate and support the private sector, consumption, and the housing and equity markets. Housing policy easing accelerated at the end of August when policymakers meaningfully reduced minimum down payment requirements and mortgage interest rates.

Fiscal and monetary easing has remained limited, and we don't anticipate major macroeconomic stimulus. Policymakers' emphasis on containing leverage and financial risks has increased the bar for macro stimulus. On the fiscal side, China has traditionally relied on local governments to shoulder most of the burden of stimulus. Currently, many local governments are financially stretched, and Beijing is reluctant to push through more local government-led fiscal stimulus. The central government could shoulder more of the burden but remains reticent.

On the monetary side, in our view the recent cut in the reserve requirement rate for banks signaled the authorities' commitment to ensure ample liquidity and to use quantitative levers to encourage credit growth. But they are keen to keep banks' net interest margins at a level that ensures the banks are sufficiently profitable. That limits the room for further interest rate cuts.

Elevated U.S. interest rates are another constraint, especially given the depreciation of the renminbi this year. In August, the authorities stepped in to dampen currency weakness to contain capital outflows triggered by worries about currency depreciation. While they didn't make outright foreign exchange purchases, they did tweak the setting of the central rate for the currency's band and made shorting the offshore renminbi less attractive.

But the measures are accumulating, especially in real estate, and we predict further steps. Likely measures include more easing of property policy and expanding credit and infrastructure financing. And, following the unbudgeted tightening of fiscal policy in the first seven months, we expect the government to ease the reins on spending in the rest of 2023. That should imply a positive fiscal impulse in the second half of the year, compared with the first half. Indeed, government expenditure growth rose in August.

In all, we have cut our projection for growth in the second half. We now see sequential growth in the second half to be less than half of that in the first half. We forecast 4.8% GDP growth in 2023, 0.4 of a percentage point less than in June, and 4.4% in 2024, also implying a -0.3 ppt revision.

There are risks of a worse outcome. In particular, much weaker-than-expected housing sales and construction would imply substantially lower overall growth in 2023 and especially in 2024. The impact via backward and forward linkages and on confidence would amplify this.

In our view, persistent deflation is not a serious risk in China. The economy tends to be marked by low inflation and production often exceeds demand. However, headline inflation was negative in July because of falling food and fuel prices. These prices won't continue to decline for long. Meanwhile, core inflation has remained positive and, with services prices likely to continue to rise, we don't see persistent consumer price deflation. Indeed, consumer inflation edged up into positive terrain in August.

Asia-Pacific Ex-China Remains Positioned For Solid Growth

Slowing global demand has weighed on the region's exports. According to national accounts data, in Asia-Pacific excluding China and Vietnam (where such data is not available), year-on-year real export growth slowed from 5.9% in the first quarter to -2.5% in the second quarter. The deterioration was especially pronounced in emerging market economies.

On the other hand, our estimates suggest that seasonally adjusted monthly export volumes have bottomed out in Japan, South Korea, and especially in Taiwan (see chart 5). That is in line with tentative signs that the semiconductor sector cycle has bottomed out.

Domestic economies have shown resilience amid interest rate increases. In most emerging market economies demand has gained support from the re-establishment after the pandemic of the buoyant secular consumption trend and from the lower impact of higher interest rates than in developed economies. Meanwhile, in rich economies robust labor markets have bolstered demand (see chart 6).

Chart 5


Chart 6


In this setting, consumption growth has remained robust. In Asia-Pacific excluding China and Vietnam it picked up 0.5 ppt to 4.5% year on year in the second quarter in real terms, due to an acceleration in emerging markets. It was especially strong in Hong Kong, India, Indonesia, Taiwan, and Thailand.

Investment growth also held up, with the real year-on-year expansion easing 1.0 ppt to 4.1% in the second quarter and momentum remaining buoyant in emerging markets. Capital expenditure growth was notably strong in Australia, India, Malaysia and New Zealand. But it was weak in Hong Kong, Singapore, and, in particular, Taiwan.

In all, growth in the region has generally remained resilient. Year-on-year GDP growth picked up in the second quarter in both developed and emerging Asian economies. India led again, with GDP growing 4.2% quarter on quarter to a level 7.8% up on a year ago. Japan's GDP grew 1.5% on the quarter, largely due to strong net trade. South Korea and Taiwan returned to positive sequential growth. In Australia, quarter-on-quarter growth held steady at 0.4%, increasing the probability of a soft landing (see "Australia: A Soft Landing Is Possible, Not Certain," published Aug. 8, 2023).

However, GDP contracted in the second quarter in Hong Kong and the Philippines and was barely positive in Singapore.

Taking stock, since the fourth quarter of 2019 (before COVID-19) India and China grew by 19.6% and 16.9%, respectively, by far the most among major economies (see chart 7). Southeast Asia has done relatively well since mid-2022, overtaking Asian developed market economies and the U.S.

S&P Global purchasing managers' indices (PMIs) suggest momentum has broadly held up in the third quarter. Manufacturing PMIs in August were higher than or close to a reading of 50 everywhere except for Malaysia, the Philippines, Taiwan, and Thailand. The services sector PMI remained strong in Japan and India. It declined but remained above 50 in China but fell substantially below that threshold in Australia.

Growth this year will be weaker than in 2022, but our outlook remains broadly favorable (see chart 8). Notwithstanding the strong expansion in India in the June quarter, we maintain our forecast for fiscal 2024 (ending March 2024), given the slowing world economy, the delayed effect of rate hikes, and the rising risk of subnormal monsoons. We have increased our forecasts for 2023 growth for Australia, Indonesia, New Zealand, South Korea, and, especially, Japan. We lowered them for Hong Kong, the Philippines, Singapore, Thailand and, notably, Vietnam.

Overall, we expect the region excluding China to grow by 3.9% in 2023, compared with 3.8% in June. We keep our 2024 forecast at 4.4%, with the pick-up over 2023 due to a gradual improvement in external demand and monetary policy easing.

Chart 7


Chart 8


New Price Pressures Hamper Efforts To Curb Inflation

In recent months, sequential core price increases have eased across the board, which is crucial for reducing headline year-on-year inflation.

However, recent increases in international prices of oil and food (especially rice) showed up in higher headline inflation in August in most Asia-Pacific economies (see charts 9 and 10). A fuller picture of the effect will emerge in coming months, depending on the evolution of global prices and government policies (an export ban on rice in India, the world's largest rice exporter, contributed significantly to the increase in rice prices in Asia). Meteorologists forecast that El Niño effects will likely persist into 2024, which will mean weaker agricultural activity in the region and potentially higher food prices.

In India, the increases in global oil and food prices, combined with jumps in vegetable prices, raised consumer inflation by a large margin; it was 6.8% in August, above the Reserve Bank of India's upper tolerance limit of 6%. While we see the vegetable price inflation as being temporary, we have revised up our full fiscal year consumer inflation forecast for India to 5.5% from 5.0% earlier.

In Australia, particularly favorable consumer price index data in July in part reflected government subsidy initiatives. With little slack in the economy and house prices rising again, consumer inflation is unlikely to come down swiftly in coming months.

Chart 9


Chart 10


High U.S. interest rates will keep the pressure up on regional currencies. So far this year, only the Indonesian rupiah has gained against the U.S. dollar. The other Asia-Pacific exchange rates have weakened by between 0.4% (the Indian rupee) and 10.6% (the Japanese yen) (see chart 11). This strain will only ease once markets consider the Fed has finished raising rates.

The recent rise in oil and food prices hasn't yet led to a renewed worsening of external deficit trends in the Asian economies that ran current account deficits in 2022: India, New Zealand, the Philippines, and Thailand. Earlier declines in oil and commodity prices helped to reduce those deficits (see chart 12). In New Zealand, the Philippines, and Thailand, rising tourism revenues are also making a difference. However, the new rise in oil and food prices will put pressure on the external deficit data in coming months.

In this context, policy rates have been on hold. Among Asian central banks that use interest rates to conduct monetary policy based on domestic conditions (thus excluding Hong Kong and Singapore) the last policy rate increase took place 5.2 months ago on average. That compares with two months ago in the U.S and reflects the more favorable inflation reduction in the region so far. The estimate excludes China and Japan, where central banks have not been raising interest rates.

However, we don't expect policy interest rates to fall meaningfully soon. This is because of the new inflation challenges, and we don't see U.S. interest rates coming down soon. Most Asia-Pacific central banks consider the recent currency weakening as manageable, but given renewed increases in global energy and food prices, they would be reluctant to see large currency depreciation stoke so-called imported inflation. Moreover, the Bank of Korea sees a renewed rise in household debt as a reason not to lower the policy rate too soon.

Chart 11


Chart 12


In Japan, we have pushed out and scaled back our forecast for a mild policy rate increase. Rising underlying inflation, wage growth, and global interest rates have raised expectations in financial markets of a normalization of monetary policy. Still, the Bank of Japan (BOJ) wants to avoid tightening monetary policy prematurely to prevent unduly hurting economic growth and possibly triggering fiscal pressure. It will only increase rates if it sees a sustained rise in consumer inflation to at least 2% in coming years, and it thinks this is only possible if wage growth picks up significantly and sustainably (see "Japan Will Tread Carefully In Its Likely Tightening," published July 16, 2023).

After tentative signs earlier this year that wage growth and inflation may be picking up sustainably, momentum appears to have softened in recent months. A moderation in sequential core inflation in recent months has made a sustained rise of headline inflation to 2% less likely. The BOJ projects 1.6% CPI inflation in fiscal year 2025, and the consensus among economists is that it will fall to 1.1% in calendar year 2025 (as reported by Focus Economics). Expectations among households for the next five years as reported by the BOJ are about 1.3%. We no longer expect a modest increase in the policy rate this year; we anticipate a small rise to 0% in 2024. However, we think a further adjustment or removal of yield curve control is likely before any policy rate change.

Vigilance Remains The Watch Word

One key risk is that growth in the U.S. and Europe slows more than we anticipate following the tightening of monetary policy. Another is that substantial setbacks to China's recovery weigh on growth in Asia-Pacific.

Sustained increases in global energy and commodity prices would risk stoking inflation and external deficits and amplifying the depreciation strain on currencies amid elevated U.S. interest rates.

Other risks center on domestic monetary policy. In Australia and New Zealand, risks resemble those in the U.S.: a sharper-than-expected downturn amid monetary tightening. In Japan, the BOJ must walk a fine line. Rising inflation poses risks, if unattended. But premature interest rate increases would stifle growth and raise interest burdens unduly.

Overall, while we have lowered our growth forecast for China, the outlook for the rest of the region has changed little. Amid resilient domestic demand, the slowdown in 2023 should remain modest in most economies while easing inflation and external deficits have meant a reprieve for central banks. Still, high U.S. interest rates and risks to growth persist, while oil and food prices have risen again. Ongoing vigilance remains vital.


Table 1

Real GDP Forecast
Change from prior forecast
(% year over year) 2022 2023 2024 2025 2026 2023 2024 2025
Australia 3.7 1.7 1.1 2.3 2.3 0.3 -0.1 -0.2
China 3.0 4.8 4.4 5.0 4.5 -0.4 -0.3 0.3
Hong Kong -3.5 4.0 2.6 2.7 2.3 -1.2 -0.2 0.0
India 7.2 6.0 6.9 6.9 7.0 0.0 0.0 0.0
Indonesia 5.3 5.0 4.9 5.0 5.1 0.2 -0.1 -0.1
Japan 1.0 1.8 1.0 1.0 0.9 0.6 -0.1 0.0
Malaysia 8.7 4.0 4.5 4.5 4.4 0.0 0.0 0.0
New Zealand 2.3 1.4 1.8 2.5 2.6 1.2 0.1 0.0
Philippines 7.6 5.2 6.1 6.2 6.4 -0.7 0.2 -0.4
Singapore 3.6 1.1 2.6 2.7 2.6 -0.7 -0.3 0.0
South Korea 2.6 1.2 2.2 2.4 2.0 0.2 0.2 0.1
Taiwan 2.4 0.5 3.0 2.6 2.6 0.0 0.5 0.0
Thailand 2.6 2.8 3.5 3.2 3.2 -0.4 0.0 -0.1
Vietnam 8.0 4.5 6.5 6.8 6.6 -1.0 -0.4 0.0
Asia Pacific 3.9 4.3 4.4 4.7 4.5 -0.2 -0.1 0.1
Note: For India, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26, 2026 = FY 2026 / 27. Source: S&P Global Ratings Economics.

Table 2

Inflation (year average)
(%) 2022 2023 2024 2025 2026
Australia 6.6 5.7 3.7 3.1 2.4
China 2.0 0.6 2.3 2.3 2.2
Hong Kong 1.9 2.0 2.2 2.2 2.1
India 6.7 5.5 4.4 4.6 4.7
Indonesia 4.2 3.8 3.3 3.3 3.3
Japan 2.5 3.2 2.0 1.6 1.3
Malaysia 3.4 2.8 2.4 2.4 2.2
New Zealand 7.1 5.7 3.4 2.6 2.5
Philippines 5.8 5.8 3.2 3.2 3.0
Singapore 6.1 4.7 2.9 2.2 2.1
South Korea 5.1 3.6 2.5 2.1 2.0
Taiwan 2.9 2.3 1.0 0.9 0.8
Thailand 6.1 1.9 1.4 1.0 1.0
Vietnam 3.2 3.0 3.1 3.3 3.2
Note: For India, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26, 2026 = FY 20206 / 27. Source: S&P Global Ratings Economics.

Table 3

Policy Rate (year end)
% 2022 2023 2024 2025 2026
Australia 3.10 4.35 3.85 3.35 3.10
China 2.75 2.40 2.40 2.40 2.40
India 6.50 6.50 5.50 5.25 5.00
Indonesia 5.50 5.75 4.75 4.50 4.50
Japan -0.07 -0.10 0.00 0.10 0.10
Malaysia 2.75 3.00 2.75 2.75 2.75
New Zealand 4.25 5.50 5.00 4.00 3.50
Philippines 5.50 6.50 5.75 4.00 4.00
South Korea 3.25 3.50 2.75 2.50 2.50
Taiwan 1.75 1.88 1.63 1.38 1.13
Thailand 1.25 2.50 2.00 1.75 1.75
Note: China's one year Medium-term Lending Facility (MLF) rate is shown. For India, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26, 2026 = FY 2026 / 27. Source: S&P Global Ratings Economics.

Table 4

Exchange Rate (year end)
2022 2023 2024 2025 2026
Australia 0.66 0.65 0.68 0.70 0.73
China 7.12 7.30 7.09 6.99 6.88
Hong Kong 7.82 7.82 7.78 7.75 7.75 `
India 82.3 83.00 83.50 85.00 86.50
Indonesia 15569 15400 15400 15450 15500
Japan 143.3 140.0 130.0 123.0 117.0
Malaysia 4.41 4.70 4.40 4.30 4.21
New Zealand 0.63 0.60 0.61 0.62 0.63
Philippines 57.4 57.00 54.40 52.80 51.70
Singapore 1.34 1.35 1.33 1.32 1.31
South Korea 1,365 1,327 1,247 1,206 1,167
Taiwan 31.4 31.8 31.5 31.1 30.7
Thailand 36.4 35.9 35.6 35.4 35.1
Note: According to FX market convention, for Australia and New Zealand exchange eates are shown as U.S. Dollars per local currency unit. For all other currencies, exchange rates shown as local currency units per U.S. Dollar. For India, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25, 2025 = FY 2025 / 26, 2026 = FY 2026 / 27. Source: S&P Global Ratings Economics.

Table 5

Unemployment (year average)
(%) 2022 2023 2024 2025 2026
Australia 3.7 3.7 4.4 4.5 4.5
China 5.6 5.4 5.3 5.2 5.2
Hong Kong 4.3 2.9 2.8 2.8 2.8
Indonesia 5.8 5.4 5.3 5.3 5.2
Japan 2.6 2.6 2.7 2.7 2.7
Malaysia 3.8 3.3 3.2 3.2 3.2
New Zealand 3.3 3.8 4.7 4.5 4.5
Philippines 5.4 4.6 4.7 4.2 4.2
Singapore 2.1 2.1 2.1 2.0 2.0
South Korea 2.9 2.7 3.2 3.3 3.1
Taiwan 3.7 3.5 3.5 3.5 3.5
Thailand 1.2 1.0 0.8 0.8 0.8
Source: S&P Global Ratings Economics.

Editor: Lex Hall

Related Research

This report does not constitute a rating action.

Asia-Pacific Chief Economist:Louis Kuijs, Hong Kong +852 9319 7500;
Asia-Pacific Economist:Vishrut Rana, Asia-Pacific Economist, Singapore + 65 6216 1008;

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