Asia's major economies, China and Japan, are poised for a year of slowing growth and central bank transitions. Elsewhere in the region, the outlook is more mixed and in most of ASEAN, tepid private demand will keep rate hikes off the table.

1. Asia Economics Outlook 2018
Tom Orlik, Tamara Mast Henderson,
Bloomberg Intelligence economists

2. Asia’s major economies are poised for a year of
slowing growth and central bank transitions

3. In China, drags from property and deleveraging are expected to
shade growth down to 6.3% from 6.8% in 2017. In Japan, weaker
exports and capex will add headwinds to reflation. Elsewhere
in the region, the outlook is more mixed. India is poised for a
recovery as drags from demonetization and a new tax regime fade
– though RBI policy remains tight. In most of ASEAN, tepid private
demand will keep rate hikes off the table.

4. Central bank transitions add uncertainty. People’s Bank of China
chief Zhou Xiaochuan may step down after 15 years at the helm.
The Bank of Korea will likely have a new governor. The heads of
the Bank of Japan and Bank Indonesia will see their terms end in
2Q - though they may stay on.

5. China’s 2018 GDP a political choice as Xi ponders target

6. China’s growth path remains a political choice. Will President
Xi Jinping stick with the commitment to double the size of the
economy from 2010 to 2020, requiring a continued foot on the
accelerator? Or will China’s leaders recognize that the price in
debt and imbalance required to get there isn’t worth paying, and
accept a lower growth rate as they advance needed reforms? A
strong performance in 2017, with GDP poised for 6.8% growth,
provides a little more wiggle room.
Going forward, China could expand 6.3% a year and still stay on
track to double by 2020. Tolerance for growth below that level is
likely limited.

7. GDP forecast

8. Japan’s slower growth, BOJ uncertainty raise risk for 2018

9. Japan is heading into 2018 with its reflation agenda still a
work-in-progress. The task will get harder, with growth poised
to slow, fiscal policy limited by debt, and structural reforms
stalling. A potential change in leadership at the central bank
adds uncertainly. Even so, a weaker yen is likely to support the
economy, giving Prime Minister Shinzo Abe more time to put
Abenomics back on track.
Bloomberg Economics forecasts GDP growth at 0.8% in 2018,
down from 1.7% in 2017. The main drag – slowing exports and
investment, pressured by a slowdown in China and the risk that
protectionism could cap the passthrough of higher demand from
the U.S.

10. Growth to slow to economy’s potential rate

11. RBI holds the key to India growth pickup in year ahead

12. India’s growth is poised to pick up in the coming fiscal year, as
structural reforms clear bottlenecks and a streamlined GST framework
leads to increased efficiency. Government efforts to lower the budget
deficit will remain a headwind. Slowing inflation though, will allow the
RBI to cut rates - reducing high real borrowing costs that are crimping
investment. Bloomberg Economics sees growth in gross value added
(the RBI’s preferred gauge) rising to 7.3% in the year through March
2019, up from 6.4% this fiscal year.
A wide output gap means inflation will slow to 3.5% in 1Q 2019 from
3.8% in 1Q 2018. Inflation anchored below the RBI’s 4% medium-term
target will clear the way for it to cut rates by 50 bps next year, in BE’s
view.

13. Growth outlook hinges on RBI cutting rates

14. ASEAN’s tepid investment may deter rate hikes in 2018

15. Economies in Southeast Asia picked up steam in 3Q, but in most
cases private demand is not shouldering enough of the burden to
worry about rate hikes into next year. Malaysia may be an exception
though, with tightening possible as soon as 1Q 2018. Fading
momentum in private consumption and investment is likely to keep
the Philippine central bank on hold for now. Singapore’s central bank
will probably maintain a neutral bias on the exchange rate as long as
investment continues to contract.
Growth in ASEAN’s five largest economies accelerated to 5.5% year
on year on average in 3Q, up from 4.7% in 1H and 4.3% in 2016.
Singapore, Thailand and Malaysia - those more sensitive to shifts in
external demand - led the group.

16. Growth in the ASEAN-5 has quickened

17. Bank Indonesia may wait for growth lift-off in 2018

18. Stronger investment and consumption in Indonesia may offset
weaker exports, pushing growth toward the upper end of the central
bank’s forecast range of 5.1-5.5% next year. Higher oil prices may lift
inflation into the upper end of the target band, which will drop to 2.5-
4.5% in 2018 from 3-5% now. For policy, this outlook suggests Bank
Indonesia will keep the reverse repo rate unchanged at 4.25% next
year. It will instead rely on easier reserve requirement rules set to take
effect in 2H 2018 to support growth.
Progress on reducing non-performing loans could further support
bank lending and economic momentum.

19. Further rate cuts may hinge on bank lending

20. Australia’s economy may outshine New Zealand’s in 2018

21. Australia’s economy could outpace growth in New Zealand in 2018,
after several years of underperformance. In recent years, a peak in
Australia’s mining super cycle has weighed heavily on investment. At
the same time, New Zealand benefited from strong inward migration.
These factors are showing signs of unwinding. What’s more,
migration to Australia appears to be picking up. Even so, central
banks in both countries appear a long way from tightening monetary
policy.
New Zealand’s expansion has been stronger than Australia’s since 2H
2014, with average annual GDP growth on an expenditure basis of
3.2% compared with 2.4% for Australia. Household spending is the
primary driver of growth in both countries.

22. Growth differential may start to favor Australia

23. South Korea’s trade, fiscal policy to offset drag as BOK hikes

24. Heading into 2018, South Korea’s economy is being buffeted by
conflicting forces. Strong global demand is a positive for the export-
oriented economy. Reliance on a handful of key conglomerates
though, means its fortunes are tied to the global electronics cycle.
President Moon Jae-in’s expansionary fiscal policy holds promise for
jobs, wages and spending. A potential roadblock: sizable opposition
in the legislature.
Growth above potential will keep the Bank of Korea on a tightening
path. But with inflation relatively benign, the pace of rate hikes will be
gradual - with the next move likely in 2H 2018.

25. South Korean GDP growth and components

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