Economic growth across South-east Asia is expected to cool in the second half of 2018 into 2019, according to the latest Economic Insight: South-East Asia report commissioned by The Institute of Chartered Accountants in England and Wales (ICAEW) and produced by Oxford Economics.
Full-year growth in the region is expected to ease marginally from 5.2 per cent in 2017 to 5.1 per cent in 2018, slowing further in 2019 to 4.8 per cent as moderating Chinese import demand and escalating US-China trade tensions dampen exports and business investment, said the report.
It noted that most of the South-east Asian economies saw growth edge lower in the second quarter, with average GDP growth for the region easing to 5.2 per cent year-on-year, down from Q1's 5.4 per cent.
"In addition, while recent regional trade data suggests some resilience in external demand, forward indicators point to softer export momentum in the coming months," said the report. The aggregate measure of South-East Asia PMIs moderated to 50.9 in July, from 51.1 in June. A reading of 50 and above indicates expansion, while a lower reading indicates contraction.
Challenging export environment
As US-China trade tensions escalate, higher US tariffs on Chinese imports will indirectly impact the region. Said ICAEW regional director for South-east Asia Mark Billington: “Many of the region’s economies are small, open and heavily dependent on exports, with a high level of exports to China. Added to this is the high import content of many Chinese exports, which means that some economies such as Malaysia and Singapore indirectly export a large volume of their exports to the US via China.”
FX resilience amid emerging market currency weakness
The US-China trade tensions, a slide in the yuan, and more recently the Turkish lira crisis have all led to most emerging market currencies weakening against the US dollar this year. So far, solid macroeconomic fundamentals have helped Asian currencies to stay robust and weaken only moderately. The report suggests that while emerging market currencies will see more volatility to come, most Asian currencies are likely to remain relatively robust: "There are unlikely to be any major moves in Asian currencies, and economies with strong fundamentals are expected to see their currencies appreciate modestly against the US dollar by end-2018."
The report's country-specific findings include:
Indonesia's growth to ease amid tighter monetary conditions
Investment is expected to regain momentum over the second half of the year, while August’s Asia Games and increased fiscal spending ahead of the April 2019 general elections could provide short-term tailwinds to domestic demand, said the report. However, tighter financial conditions – from a weaker rupiah and higher interest rates – will likely more than offset any boost over the next few quarters. Export growth is also likely to slow down. The forecast is for Indonesia’s year-on-year growth to slow slightly during the second half of 2018, with full-year growth staying at 5.1 per cent in both 2018 and 2019.
Malaysia's growth faces risks from uncertain fiscal decisions
Malaysia's GDP growth came in weaker in the second quarter, even as a pick-up in domestic demand underpinned strong import growth. "Uncertain fiscal decisions by the government could translate to more risks to Malaysia’s growth forecast," said the report. Although the government is committed to improving the fiscal deficit, the reinstatement of a goods and services tax from September will only apply to selected services at 6 per cent, and will cover a smaller range of goods and services than before. "If the government remains committed to lowering the fiscal deficit beyond 2018, further expenditure cuts and/or a new source of revenue generation will be needed," said the report. The expectation is for Malaysia’s growth to moderate to 4.9 per cent in 2018 and 4.7 per cent in 2019, "despite a strong acceleration in household spending following the new government’s decision to abolish the GST and reintroduce fuel subsidies".