Fitch: APAC Growth to Hold Up Amid China Slowdown and US Hikes

Economic growth in Asia-Pacific (APAC) is likely to remain strong in 2018, supported by improving global trade volumes, accommodative fiscal and monetary policies, and positive reform momentum in a number of emerging economies, says Fitch Ratings. China’s slowdown is likely to be modest, and create only limited headwinds for the rest of the region, while most central banks will have scope to keep domestic interest rates low in the face of tightening global monetary conditions.

Indications are that 2018 will be another good year for the world economy. Fitch expects global growth of 3.3%, up from 3.2% in 2017. APAC economies positioned at the front end of global supply chains – such as Korea and Taiwan – will continue to be key beneficiaries. In terms of domestic demand, fiscal policy remains supportive across much of the region, with several emerging economies implementing ambitious infrastructure plans.

India and Indonesia are the economies that we expect to pick up most sharply, after a somewhat disappointing performance in 2017. We forecast India as the fastest-growing APAC economy, with an ongoing recovery from the disruptions of demonetisation and GST implementation. The recapitalisation plan for state banks should also reduce uncertainty and bolster the medium-term outlook. In Indonesia, the stabilisation of commodity prices and brighter investment climate are likely to boost growth.

Japan’s economy is also performing well, and looks on track for its longest period of expansion since 2001. The Bank of Japan’s (BoJ) stimulus measures are gaining traction, as evident from tightening labour market conditions, and fiscal policy remains supportive. We project GDP growth of 1.5% in 2017 and 1.3% in 2018.

China’s growth should slow to 6.4% from 6.8%, as tighter credit conditions – part of efforts to contain financial risks amid rapid credit growth – continue to feed through the economy. The rest of APAC is highly dependent on China as a source of export demand, which exposes it to risks in the case of a more abrupt slowdown, but our central scenario is that regional effects are likely to be mild.

Steady US monetary tightening and the gradual ending of monetary easing in the Eurozone could put some pressure on asset prices, capital flows and currencies in APAC. Nevertheless, we believe the region is generally well-placed to cope, with most countries running current account surpluses or small deficits and holding large foreign exchange buffers. Economies with large external financing needs and high foreign-currency-denominated debt ratios – such as Indonesia and Malaysia – are the most likely to experience pressures.

Global tightening may lead to higher debt-servicing costs in APAC, particularly to the extent that it passes through to higher domestic interest rates. This could expose vulnerabilities in several economies where there has been a run-up in corporate and household debt in recent years. However, we expect APAC’s major central banks to keep policy rates low in 2018, given the benign inflation environment. Only the Bank of Korea has so far raised its policy rate since the Fed began to tighten.

Ongoing tensions on the Korean peninsula could potentially have disruptive spillovers on market sentiment and trade relations, but we view the risk of an outright conflict as low. Meanwhile, the US administration’s focus on bilateral trade balances poses protectionism risks to its Asian trading partners. APAC economies accounted for more than three-quarters of the overall US trade deficit in 2016 – and China alone accounted for almost half.
Source: Fitch Ratings