Slowdown in China Adversely Impacts Many Asian Economies
During the first quarter, news from emerging Asia was dominated by the deep slowdown in China and its adverse impact on a host of other Asian economies, such as South Korea, Malaysia, Thailand, and Taiwan. In other developments, India grew faster than China, Korea saw a large decline in its exports, and Indonesia struggled to jumpstart its economy.
At a Glance
China: During the first quarter of 2015, the economy grew at its slowest pace in six years, expanding 7 percent from the first quarter of 2014. Power output, which is often considered a proxy for economic activity in the manufacturing-driven country, diminished 3.7 percent in March on an annual basis, its biggest decline since the crisis in 2008.
South Korea: The economy expanded 0.8 percent in the first quarter compared to the previous quarter. In April, South Korea’s exports plunged 8.1 percent from the year-ago period, recording their biggest decline since February 2013.
India: According to a new method of calculating GDP adopted by India’s Central Statistics Office (CSO), the Indian economy expanded 7.5 percent year-on-year in the first quarter, exceeding expectations.
Indonesia: Falling short of expectations, Indonesia’s GDP contracted 0.18 percent in the first quarter compared. The economy’s annual growth of 4.7 percent at the end of March also missed forecasts. Government spending plunged 49 percent while exports declined 6 percent during the period.
Malaysia: The economy expanded 5.6 percent in the first quarter, beating expectations. Exports, industrial activity, and private consumption surged in March.
Thailand: In the first quarter, the Thai economy managed to expand its GDP 0.3 percent and 3.0 percent from the year-ago period.
Taiwan: The export-driven economy expanded its GDP 3.4 percent, year-on-year, during the first quarter. In April, the country’s exports dropped 11.7 percent from the year-ago period and export orders slipped 4 percent, year-on-year.
Philippines: GDP in the country grew 5.2 percent, year-on-year, while it was expected to expand at least 6.6 percent.
CHINA: SUBDUED SERVICES ACTIVITY ADDS TO SLOWDOWN CONCERNS
Various data suggest China remains in a slowdown, believed to be its worst in six years, as it struggles to cope with a real estate downturn, overcapacity in its factories, and high levels of local debt. During the first quarter of 2015, the economy grew at its slowest pace in six years, expanding 7 percent from the first quarter of 2014. The comparable data for the previous quarter was 7.3 percent. Similarly, power output, which is often considered a proxy for economic activity in the manufacturing-driven country, diminished 3.7 percent in March on an annual basis, its biggest decline since the crisis in 2008.
The first quarter also saw rather subdued real estate activity as investment in the sector rose only 8.5 percent during the period, the weakest pace of increase since 2009. News from China’s all-important manufacturing sector has not been encouraging either. In April, the HSBC Purchasing Managers’ Index, which tracks manufacturing activity in the country, declined to 48.9 from 49.6 in March. A level below 50 indicates contraction. Similarly, export orders, the mainstay of the manufacturing sector, have remained in a downtrend and led to factory layoffs.
China is rebalancing its economy, moving away from an industry and investment-led model to one in which domestic consumption and the services sector would be the engines of growth. So, in the context of this transition, the decline in exports appears to be a welcome sign, indicating that rebalancing has been achieved to a certain degree. However, given the intensity of the slowdown China is experiencing now, many in the global financial community are worried that the country is indeed struggling to overcome its structural problems. On its part, the Chinese central bank has cut interest rates thrice since November to encourage growth and minimize borrowing costs.
SOUTH KOREA: Q1 GROWTH EXCEEDS EXPECTATIONS BUT SLOWING EXPORTS A CONCERN
Beating forecasts, the South Korean economy expanded 0.8 percent in the first quarter from the previous quarter. The growth was largely driven by domestic factors. For instance, private consumption grew 0.8 percent in the first quarter, thanks to higher spending on services and durables. Construction activity, especially in the area of residential building, also gained momentum, underpinning the current recovery in the real estate sector. These positive reports from South Korea’s domestic economy are significant because the country’s dominant export sector has been bogged down by sluggish global demand.
The South Korean trade ministry has said that in April, the country’s exports plunged 8.1 percent compared to the year-ago period, recording their biggest decline since February 2013. The ministry’s data show that shipments to all three key export markets of South Korea — China, the U.S., and the European Union, which together account for nearly 50 percent of South Korea’s overseas sales — declined. This underpins the fact that Korea’s exports have been hurt by not just the slowdown in China, its biggest trading partner, but also the current general weakness in global trade.
Understandably, the downtrend in the export sector has had a knock-on effect on the country’s manufacturing sector. In April, manufacturing activity declined for the second month in a row. The HSBC/Markit purchasing managers’ index of South Korea’s manufacturing activity fell from 49.2 in March to 48.8 in April, its lowest level since October 2014. It is noteworthy that despite this state of the economy, the Bank of Korea has expressed its reluctance to cut interest rates from the current record-low level of 1.75 percent due to the high level of household debt in the country.
INDIA: ROBUST MANUFACTURING GROWTH ADDS TO OPTIMISM AROUND THE ECONOMY
According to a new method of calculating GDP adopted by India’s Central Statistics Office (CSO), the Indian economy expanded 7.5 percent year-on-year in the first quarter, exceeding expectations. For the fiscal year ended March 2015, GDP grew 7.3 percent. Given China’s growth rate of 7.0 percent for the same period, there has been talk about India emerging as the world’s fastest growing large economy. Be that as it may, some commentators such as professor R Nagaraj of the Indira Gandhi Institute of Development Research, have expressed skepticism about this new method of calculating GDP.
While Indian authorities have claimed that the new formula is more in tune with international norms, analysts such as Paranjoy Guha Thakurta have said that the new GDP figures present an excessively optimistic picture of the Indian economy and several other indicators of the economy do not correlate with the GDP data. Agricultural growth is one such indicator. Hit by drought conditions last year and heavy unseasonal rainfall early this year, agricultural growth plunged to 0.2 percent in the fiscal year ended March 2015 from 3.7 percent a year ago.
The debate over the new GDP figures notwithstanding, a significant spurt in India’s manufacturing activity has cheered the country’s policymakers as well as commentators. During the first quarter of 2015manufacturing expanded 8.4 percent on an annual basis. The comparable figure for the previous quarter was 3.6 percent. It is noteworthy that unlike China, India has a largely subdued manufacturing sector and one of the economic agendas of the current government is to make India a manufacturing hotspot similar to China.
INDONESIA: FIRST-QUARTER GDP DECLINES ON WEAK EXPORTS, GOVERNMENT SPENDING
The first half of this year has turned out to be rather difficult for South East Asia’s largest economy. Falling short of expectations, Indonesia’s GDP contracted 0.18 percent in the first quarter. The economy’s annual growth of 4.7 percent at the end of March also missed forecasts. Slowing demand for Indonesia’s commodity exports as well as a decline in government spending are believed to be taking a toll on the economy. According to the country’s statistics office, government spending plunged 49 percent between January and March while exports declined 6 percent due to depressed growth in Indonesia’s key export markets, China and Singapore.
Worse, consumer spending, which has propped up the economy in the past, is showing signs of slowing down due to rising inflation. In fact, high consumer prices have deterred the Indonesian government from stimulating the economy through interest rate cuts and other monetary measures. Mindful of its constraints, the government of President Joko Widodo resolved to increase infrastructure spending to the tune of 290 trillion rupiah ($22 billion) in order to jumpstart the economy. But the government’s current spending (7 trillion rupiah as of April)is woefully short of this target.
MALAYSIA: ECONOMY OVERCOMES HEADWINDS TO RECORD STRONG GROWTH
Malaysia, a major exporter of liquefied natural gas, oil, and other manufactured goods and commodities, has been facing headwinds for several months now amid the slide in oil prices and a slowdown at its biggest trading partner, China. But showing remarkable resilience, the economy expanded 5.6 percent in the first quarter, beating expectations. Growth would have been slower but for two factors. Exports, which had remained depressed at the start of the year, picked up unexpectedly in March on the back of increased demand for Malaysian electronics goods in the global market. March also saw a surge in industrial activity and private consumption just as the country prepared to introduce a 6 percent goods and services tax (GST).
THAILAND: MEAGER Q1 GROWTH DESPITE HURDLES
In the first quarter, the Thai economy managed to expand its GDP 0.3 percent and 3.0 percent from the year-ago period. But given the number of headwinds faced, the Thai economy was widely expected to contract during the first quarter. For one, export-dependent Thailand has been hurt by the slowdown in China, its top trading partner. Secondly, with the high levels of debt in Thai households, consumer spending at home has been severely hobbled. So, only the government is in a position to boost growth through a large dose of public spending. Unfortunately, the Thai military generals that seized power last year with the promise of ending corruption and political unrest have introduced tough regulations. Consequently, Thai civil servants are fearful of making spending decisions and exposing themselves to corruption charges.
TAIWAN: SLOWDOWN IN CHINA WEIGHING ON EXPORT SECTOR
Taiwan, which is described as Asia’s smartphone economy due to its large volume of semiconductor and other exports to technology companies like Apple, expanded its GDP 3.4 percent, year-on-year, during the first quarter. Not surprisingly, the growth was driven by exports from the country’s high-end manufacturing sector. But more recent data from the country, especially from the Taiwanese export sector, are not very encouraging. In April, the country’s exports dropped 11.7 percent from the year-ago period due to a decline in shipments to China and Europe as well as due to the diminished international demand for Taiwanese technology goods. The same month, Taiwan’s export orders, often considered a leading indicator of the demand for Asia’s exports and high-tech gadgets, fell 4 percent, year-on-year, as orders from China dropped 10.3 percent and orders from the U.S increased 14 percent.
PHILIPPINES: GROWTH SLOWS DOWN DUE TO WEAK EXPORTS
Southeast Asia’s fifth-largest economy, which is now among the fastest growing major Asian economies, surprisingly slowed down in the first quarter. GDP in the country grew 5.2 percent, year-on-year, while it was expected to expand at least 6.6 percent. The fourth quarter of 2014 had also recorded 6.6 percent growth, year-on-year. The pace of growth in the first quarter, the slowest in three years, was adversely affected by a large drop in exports, which merely edged up 1 percent between January and March. To put this data into perspective, exports had climbed 12.8 percent in the fourth quarter. Despite these setbacks, the outlook for the Philippines appears strong, thanks to its healthy domestic demand.
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