Asia Pacific Economic Outlook Q2 2015

This article gives a near-term economic outlook for three countries: Australia faces slowing growth, the Philippines entered 2015 on a high, while Thailand’s recovery depends on its internal stability.

Australia: Growth to limp through 2015


Australia’s economic growth slowed further in Q4 2014 to 2.3% year-over-year, in contrast to the 2.7% in the previous quarter. Annually, the country’s GDP grew at a below-trend pace of 2.5% in 2014. The momentum of national income growth slowed in the second half due to lower export prices for iron ore and coal. However, the strong investment in new capacity made in recent years is now coming onstream, meaning that export volumes remain the main contributor to economic growth. On the other hand, domestic demand remained weak throughout the year due to poor consumer and business spending. While a weak labour market, record-low wage gains, and high household debt weighed on consumption expenditure, sliding commodity prices and poor domestic demand resulted in weakening business investment.


On the positive side, weaker domestic demand, poor wage growth, the abolition of a carbon tax, and low international oil prices resulted in low inflation: 1.7% in 2014 through Q4 compared with 2.3% in Q3 2014. At the same time, the average value of the Australian dollar depreciated 6.5% in 2014. On a trade-weighted basis, the Australian dollar was around 4% below its early 2014 levels, a relatively modest decline given the significant fall in commodity prices during the latter half of the year.


The combination of weak growth, modestly rising unemployment, and a lack of inflation threats led the Reserve Bank of Australia (RBA) to cut official cash rates for the first time in 18 months, reducing the official cost of borrowing to a record low of 2.25%. This unexpected move by the RBA in its first monetary policy meeting of the year (held in February) was intended to support domestic demand, which has remained below the average long-term growth trend. Lower interest rates are likely to boost domestic demand and offset some of the decline in the investment cycle.


Future outlook


Growth is expected to remain modest this year before gradually picking up to an above trend pace in 2016. A weak labour market will likely weigh on consumption expenditure, although low lending rates, rising housing wealth due to increasing house prices and a lift in equity markets, and falling fuel prices are expected to partially offset the impact. If global commodity prices remain low, that may, in turn, impact wages, profits and government revenues. In addition, investment will likely remain patchy this year due to an expected fall in commodity prices, falling mining-related investment, and a slowdown in investment in Australia’s largest trading partner, China. While lower interest rates, a depreciating currency, and stronger growth in the United States might cushion the impact on investment and trade, growth will likely remain in the range of 2.2–2.9% in 2015. Net export volumes will continue to be the key driver of growth, and a depreciated currency will further boost export growth in services in 2015.


The below-trend GDP growth and patchy investment outlook suggest that the unemployment rate may continue to remain high. In addition, the pace of wage increases and growth in unit labour costs will likely remain low. A weak labour market, poor domestic demand, and low international oil prices may result in a further fall in full year inflation rates this year. Of course, a strengthening housing market and continued depreciation of the Australian dollar may offset this fall. Headline consumer price inflation is expected to be in the range of 1.4–2% this year, lower than the 2–3% target range of the RBA.


The RBA communicated in its February monetary policy meeting that it may reduce interest rates further to support growth because it expects inflation to remain within the target range. The timing of the rate cut is yet to be decided, and will be communicated in future monetary policy meetings. However, given large increases in house prices and the strong ongoing housing asset lending to investors, reducing interest rates might increase risks to the housing market. Thus the RBA has to weigh its options closely before considering whether to make monetary policy more accommodative.


The Philippines: Entering 2015 on a high


The Philippines’ positive momentum is likely to continue in the medium term as policymakers try to set the foundation for sustainable manufacturing and services activity.


For a long time, the Philippines was in the shadow of some of its more illustrious neighbours in Southeast Asia. Poverty, poor infrastructure, and workers migrating to greener pastures had left the economy stranded. But things started changing in the past decade, especially between 2010 and 2014: real GDP expanded on average 6.3% every year. The positive momentum is likely to continue in the medium term as policymakers try to set the foundation for sustainable manufacturing and services activity. Aiding the economy will be continued large remittances from overseas Filipino workers (OFWs). At last count, there were about 10 million of them.


Economy picked up pace in Q4 2014


Real GDP grew 6.9% year-over-year in Q4 2014, up from 5.3% in Q3. This took annual GDP growth in 2014 to 6.1%, yet another year of strong economic growth in a challenging global environment. Growth in Q4 2014 was primarily driven by exports, government expenditure, and private consumption. Total exports grew 15.5% in Q4, up from 9.9% in Q3. External demand will remain healthy in 2015 as well, with a strong US economy likely to offset the impact of a slowing China and a weak Eurozone.


Support from personal consumption continues


Private consumption growth also edged up in Q4 2014 to 5.1% from 5% in Q3; the overall rise in private consumption in 2014 was 5.4%. Consumers benefited from strong economic growth, increased access to credit, rising remittances, and low inflation. A tighter labour market also helped. For example, the unemployment rate fell to 6% in Q4 2014 from 6.7% in Q3. This has kept income growth high, with the pace not likely to slow down in the near term. According to Oxford Economics, nominal personal disposable income will rise 9% in 2015.


Consumers also benefited from real income gains late last year due to declining inflation. With energy prices staying low, this trend is likely to continue in 2015. The other key contributor to personal consumption growth in 2014 was remittances, which went up 5.8% to $24.3 billion last year. With remittances set to stay high amid improving economic prospects, it is no surprise that consumer confidence in the Philippines is high. In Nielsen’s Q4 2014 survey, the Philippines’ consumers rank second, along with Indonesia, on the confidence list; India leads the tally.


Hoping for better fiscal management and policy continuity


Public finances continue to be affected by a weak tax regime and failure to achieve spending targets. Corruption has also been an issue, with legal challenges in recent times threatening to derail the government’s focus on much-needed infrastructure spending. Fortunately, national accounts data for Q4 2014 reveal that government spending is back on track. The announcement of a number of public private partnership projects in Feb 2015 also suggests that the government has likely left behind some of its troubles.


On the tax side, however, there are concerns about the increasing demand for a reduction in tax rates and extension of tax breaks to more sectors. Such moves, without improvements in revenue collection, are fraught with medium-term risks to fiscal sustainability. The Philippines needs revenue to augment infrastructure and human capital, and to fight poverty. The other big medium-term challenge is policy continuity, as President Benigno Aquino leaves office in 2016. With presidents limited to one term, economy watchers will be anxious that the new administration does not lose the strong gains made in the last decade.


Thailand: Internal Stability Crucial for Long-Term Growth


2014 was a difficult year for Thailand’s economy. Tourist numbers fell due to political tension, manufacturing declined, and private consumption remained subdued. Economic growth for the year on the whole was down to 0.7% from 2.9% in 2013.


However, a recent rebound in tourism, along with the low price of oil, is expected to initiate an economic recovery. The strength and sustainability of recovery will depend on how Thailand addresses its problems: high household debt, imminent drought in certain provinces, weakness in Thailand’s key export markets (China, Japan, and the European Union), and military rule, which could hurt the prospect of political stability.


Strong Q4 ends year of weak growth


Real GDP grew 2.3% year-over-year in Q4 2014. Government consumption expenditure grew 5.5%, picking up from 0.4% in Q3. This is in line with the military administration’s plan to increase fiscal spending.


Q4 2014 was the strongest quarter of the fiscal year, but one must keep in perspective the low base of comparison: Q4 2013, when the political unrest began. Additionally, the low growth rate of 0.7% in 2014 made Thailand the slowest-growing Southeast Asian economy. Furthermore, the problems that plague Thailand’s economy are not likely to vanish in the coming quarter.


Slump in consumption


Household debt in Thailand has risen from 60% of GDP in 2009 to 85% of GDP in 2014. Low interest rates, easy access to credit, and populist schemes such as tax rebates for first-time car buyers have encouraged this trend. The debt-service ratio among farmers is critically high at 52%. This means that more than half the disposable income of an indebted Thai farmer is spent on servicing debt payments. Furthermore, the prices of two widely grown crops, rice and rubber, continue to remain low, keeping down incomes in the agriculture sector. Complicating matters further is the looming drought, which is expected to be the worst in a decade. These factors are likely to keep consumption expenditure subdued, particularly among Thailand’s rural majority.


Exports unlikely to come to the rescue


The outlook for Thai exports in 2015 is not too bright: The Bank of Thailand forecasts that exports will grow just 0.8%. Several factors contribute to this forecast.


Thailand’s main export destinations are not doing particularly well. China’s growth rate has slowed as the economy is going through restructuring. Japan remains fragile, and growth in the Eurozone is still weak. The only bright spot is the strengthening US economy, but this is unlikely to outweigh weaknesses in other major export destinations.


The strength of the Thai baht relative to competitor nations’ currency is another cause for concern. The baht has appreciated 14% against Indonesia’s rupiah and 12% against the Malaysian ringgit from a year ago (mid-March).


Some bright spots


Low crude oil prices, however, have come as a welcome relief, helping slash Thailand’s import bill and keeping net exports positive. Lower energy prices should work to the advantage of the domestic economy by encouraging private consumption. Consumer prices in Thailand declined from a year ago by 0.41% in January and by 0.52% in February. These figures are well below the lower limit of the Bank of Thailand’s (BOT) target range of 1–4% for headline inflation in 2015.


Declining prices and weak economic growth resulted in the BOT cutting its policy interest rate in March by 25 basis points to 1.75%. This was the first reduction in the policy rate in a year. The accommodative monetary policy should provide respite to highly leveraged households as well as encourage private consumption to pick up.


The recent improvement in the tourism industry is another positive. Tourist arrivals were up 15.9% from a year ago in January and 18% from a year ago in the first half of February. A surge in the number of tourists from China, Thailand’s largest group of foreign tourists, has helped to boost the sector.


Factors that drive progress


While Thailand has posted a mild recovery from its poor showing in 2014, the near-term performance of the economy will depend to a large extent upon internal stability and the strength of the global economic recovery. In the short run, Thailand is expected to reap the benefits of low oil prices, easy money, and a rise in the number of foreign tourists.


However, long-term growth will depend upon how Thailand addresses its internal problems. A resurgence of political instability will put the brakes on economic growth and cause investors to turn their attention to other destinations in Southeast Asia.


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