Asian Manufacturing Outlook: Mixed Picture in 2014, Improvement Expected in 2015

Monday, June 30, 2014

Asian Manufacturing Outlook: Mixed Picture in 2014, Improvement Expected in 2015 

Need to Know . . .

  • China's manufacturing production is expected to stabilize following the government's mini-stimulus measures, but the growth pace will likely be limited by overcapacity issues and tightened regulations
  • India's election of a new pro-business government may signal an outlook turning point for the economically troubled and socially stressed nation
  • The outlook for Thailand is subject to high uncertainty given the worsening political turmoil in the first quarter of 2014

Regional Overview
The persistently mixed outlook for the broad Asian economy comes from an odd mix of politics, policy, structural change, and civil strife. India’s sweeping election of a new pro-business government may very well signal a turning point for the economically troubled and socially stressed nation. Prime Minister Narendra Modi’s policies are believed to have contributed to double-digit economic growth in the northwestern state of Gujarat, and this political turn could bring a much-needed positive energy to the world’s second most populated country.

Other positive developments include policy-generated improvements in Japanese economic activity and the investment-led (albeit modest) recovery in South Korea. Altogether, these factors are creating more regional optimism than Asia has seen since 2011.

Forecasters expect Indian GDP growth to accelerate from 4.8% in FY2013 to 5.4% in FY2014 and 6.7% in FY2015 (Table 1). South Korean GDP growth is expected to accelerate from 3% in 2013 to 3.6% in 2014 and 3.7% in 2015. Energized by a much-improved policy environment but constrained by uneven global demand and difficult demographic factors, Japanese GDP growth is expected to increase from 1.5% in 2013 to 1.7% in 2014 and 2015.

Table 1 – GDP and Industrial Production Forecast in Asia (Annual Percent Change)

Source(s): Consensus Forecast, May 2014 and MAPI
*MAPI’s definition: China, India, Indonesia, Malaysia, and Thailand
**Forecast is for fiscal year (starting in April)

Apart from India, the outlook for developing Asia remains murky, mostly because of continued slowing in Chinese economic activity. To the extent that there had been any growth momentum in China at all, it moderated during the second half of 2013 and faded during the first quarter of 2014, when Chinese GDP growth was 7.4%, the slowest in five years. Hindered by weakness in both domestic and foreign demand, manufacturing output growth slowed significantly during the first quarter of 2014.

As China confronts uneven world demand as well as financial, demographic, currency, and policy transitions, forecasters expect continued slowing. GDP growth is forecast to moderate from 7.7% in 2013 to 7.3% in 2014 and 7.1% in 2015. Industrial production growth is expected to slow from 9% in 2013 to 8.8% in 2014 and 8.6% in 2015.

The political crisis in Thailand has had a large economic impact; GDP growth slowed from 6.5% in 2012 to 2.9% in 2013. Forecasters expect further slowing to 2.3% in 2014 before a modest acceleration to 4.2% during 2015. Muted activity in Indonesia and Malaysia is projected to improve as the new government in Indonesia gives some sense of economic policy direction and as strengthening global demand becomes a catalyst for Malaysia.

The overall mix of positive and negative forces in developing Asia (China, India, Indonesia, Malaysia, and Thailand) is well reflected in the developing Asia forecast. As shown in Table 1, GDP growth is expected to slow from 6.8% during 2013 to 6.6% during 2014 before returning to 6.8% during 2015. Industrial production growth in developing Asia is forecast to accelerate from 7.5% during 2013 to 7.8% during 2014 and 7.9% during 2015.


  • China’s GDP grew 7.7% in 2013, the same pace as in 2012. With stimulus measures winding down and the government focusing more on rebalancing and containing financial risks, however, the growth momentum started to moderate in late 2013 before showing evidence of a broad-based slowdown in early 2014. In the first quarter of this year, GDP grew 7.4%, the lowest level in the past five years.
  • Growth in fixed asset investment eased from 19.6% in 2013 to 17.6% in the first three months of 2014, the weakest level since 2002 (Figure 1). Although the Lunar New Year and the cold weather may have played a role, the growth deceleration was mainly caused by slowing investment in private manufacturing. By March, real estate investment growth also dropped, from 19% in 2013 to less than 17% (Figure 2).
  • The improved growth outlook in industrial countries hasn’t translated into gains for China’s exports, which contracted 18% and 7% year over year in February and March, respectively (Figure 3). The disappointing export figures can be partly attributed to over-invoicing problems in early 2013; investors created fake invoices for exports to Hong Kong in an attempt to circumvent governmental control on capital inflows and take advantage of high interest rates in China. This situation makes a direct year-over-year comparison of exports growth misleading.
  • Affected by weakness in both domestic and foreign demand, manufacturing activities slowed down significantly in the first quarter of 2014. Nominal industrial production growth decelerated from 9.7% in 2013 to 8.6% in the first quarter of 2014, which is consistent with deceleration in electricity production (Figure 4).
  • The official PMI, which focuses mainly on large state-owned manufacturing companies, has been hovering around 50 since January; 50 is the border between expansion and contraction (Figure 5). The private HSBC PMI, which is weighted more toward small and private companies, stayed in the contraction zone during January through April.
  • The Chinese currency reversed its long-term appreciation trend and depreciated 2.5% against the U.S. dollar between February and May (Figure 6). This is mainly a result of government intervention in the foreign exchange market in order to squeeze out speculators, deter hot money inflows, and more effectively curb the growth of shadow banking activities.
  • The widening of the daily trading band of the RMB against the U.S. dollar (from 1% to 2%) is expected to introduce more bilateral volatility in exchange rate movement, an intermediate step toward the declared policy objective of full exchange rate liberalization. With increased pressure stemming from weak economic activity indicators, we expect the appreciation pace for the RMB to moderate from 4-5% since 2005 to 1-2% in 2014, a change most likely to happen in the second half of the year.
  • The outlook for trade is likely to improve in the second quarter, with the consensus forecast projecting that both exports and imports will grow 8% in 2014. Investment and manufacturing production are expected to stabilize soon after the government implementation of mini-stimulus measures, but the growth pace will not likely rebound strongly because of lingering overcapacity issues and tightened regulation on local government borrowing and shadow banking lending.
  • Although the government has signaled stronger tolerance for slower economic growth in order to focus more on structural reforms, social stability is still its top priority; fiscal and monetary policy supports will be provided to avoid a sharp economic slowdown. The GDP growth rate will therefore not differ widely from the government target of 7.5% in 2014, and might decelerate slightly further in 2015.
  • The main downside risk to the growth outlook in the near term comes from the financial sector, particularly concerning whether policymakers can contain debt accumulation and restore the soundness of the financial system without derailing growth momentum.

Figure 1 – China: Fixed Asset Investment, Overall and Manufacturing

Source(s): National Bureau of Statistics of China and MAPI

Figure 2 – China: Fixed Asset Investment, Real Estate and Transportation

Source(s): National Bureau of Statistics of China

Figure 3 – China: Exports and Imports

Source(s): Source(s): China Customs Statistics

Figure 4 – China: Power and Industrial Production

Source(s): National Bureau of Statistics of China

Figure 5 – China: Manufacturing PMI

Source(s): China Federation of Logistics and Purchasing and HSBC

Figure 6 – Chinese Currency Exchange Rate Index

*Nominal effective exchange rates are calculated as geometric weighted averages of bilateral exchange rates
Source(s): Federal Reserve Bank of St. Louis and Bank for International Settlements


  • While the April sales tax increase seems to have caused short-term volatility in consumer spending growth, it generally appears that Japan’s implementation of a broad range of monetary and fiscal policies to improve short-term and long-term economic performance is having an impact.
  • Economic growth has been volatile since the first quarter of 2013 but has nonetheless averaged an above-trend 3.3% (Figure 7).
  • While slowing in March and April of 2014, export growth, partially stimulated by a dramatic fall in the yen, turned consistently positive in March 2013, contributing to a positive turn in manufacturing output growth in September 2013 (Figure 8).
  • The shift from a deflation in consumer prices to inflation strengthened considerably in April, further evidence of a welcome change in what has been one of the Japanese economy’s most difficult challenges.
  • The overall improvement in economic growth and firmer pricing power have contributed to a strong acceleration in general machinery output growth, which turned weakly positive during the first quarter of 2013 and accelerated to nearly 37% growth in the first quarter of 2014 (Figure 9).

Figure 7 – Japan: Real GDP Growth, Seasonally Adjusted at Annual Rate

Source(s): Economic and Social Research Institute

Figure 8 – Japan: Export Growth and Manufacturing Growth

Source(s): Bank of Japan

Figure 9 – Japan: Output Growth of Select Industry Sectors, Seasonally Adjusted at Annual Rate

Source(s): Bank of Japan

South Korea

  • Economic growth accelerated in the second half of 2013 thanks mainly to healthy domestic demand, especially in fixed asset investment (Figure 10). For the whole year, GDP expanded 2.9%, faster than the 2.2% growth rate in 2012. The growth momentum continued in the first quarter of 2014 as the exports recovery continued, registering a 3.9% growth rate on a year-over-year basis.
  • Fixed asset investment grew 4.2% in 2013, spurred chiefly by the temporary increase in public investment (Figure 11). As a result, construction investment, which accounts for about half of total investment, expanded 6.7%, more than offsetting the declining investment in facilities, which was dragged down by unexpectedly weak export performance in high-tech manufacturing.
  • With the global outlook gradually improving in the second half of 2013, Korea’s exports showed modest recovery and grew 2% for the year, compared with a 1.3% contraction in 2012 (Figure 12). Notably, exports to the U.S. increased 6% while exports to China, the country’s biggest trading partner, went up 8.6% despite its growth moderation. Lower global commodity prices underlay the softness in imports, which shrank 0.8% in 2013.
  • The Korean won strengthened against the dollar in 2013 as the current account surplus jumped from $51 billion in 2012 to $80 billion in 2013, or 6% of GDP. The stronger won and the weaker Japanese currency might erode the competitiveness of Korean manufacturers, who compete directly with Japanese manufacturers in global markets.
  • Manufacturing production stabilized in the second half of 2013 after declining in the first six months of the year, boosted mainly by stronger production for automobiles and improved overseas demand for vessels, electronics, and telecommunications equipment (Figure 13). For the whole year, manufacturing output growth registered 0.3%. The modest growth pace continued in the first quarter of 2014, with manufacturing output up 0.7% on a year-over-year basis.
  • Economic growth is forecast to accelerate to 3.6% in 2014, fueled by strong exports (especially in durables and information technology exports) and private consumption. FAI will continue to grow, but the major driver will be equipment and plant investment on the back of rising exports, while investment in construction will likely grow at a slower pace. Overall, FAI is expected to increase 3.8% this year. Robust domestic and foreign demand will support manufacturing production this year, and the growth momentum is likely to persist into 2015.

Figure 10 – South Korea: Demand-Side Contribution to Economic Growth

Source(s): Bank of Korea

Figure 11 – South Korea: Fixed Asset Investment, Inflation-Adjusted

Source(s): Bank of Korea and MAPI

Figure 12 – South Korea: Merchandise Trade

Source(s): Bank of Korea and MAPI

Figure 13 – South Korea: Manufacturing Production, Seasonally Adjusted

Source(s): Bank of Korea and MAPI


  • The election of Narendra Modi, whose policies contributed to double-digit economic growth in the northwestern state of Gujarat, is the key event for the short-term Indian economic outlook.
  • While Indian economic growth remained below 5% during the first quarter of 2014, the impressive acceleration of export demand since the first half of 2013 (partially from a weaker currency) and strengthened consumer spending growth during the first quarter of 2014 suggest at least tentative momentum toward stronger overall performance (Figure 14).
  • The growth of gross fixed capital formation, which remains the weak spot in the economic picture, will hopefully respond positively if the new government takes aggressive, pro-growth policy actions that boost business and consumer confidence.
  • Manufacturing performance is still weak and volatile, weighed down by the overall economic malaise (Figure 15). Capital goods and consumer goods output both contracted during the first quarter of 2014 (Figure 16).
  • Our GDP forecast for India reflects a modestly optimistic view in light of the election. Growth is expected to accelerate from 4.8% during FY2013 to 5.4% during FY2014 and 6.7% during FY2015. Industrial production growth is expected to accelerate from 0.2% during FY2013 to 4.2% during FY2014 and 6% during FY2015.

Figure 14 – India: Exports, Consumer Spending, and Gross Fixed Capital Formation, Inflation-Adjusted

Source(s): Global Insight

Figure 15 – India: Manufacturing Production Growth

Source(s): Reserve Bank of India Bulletin

Figure 16 – India: Capital Goods and Consumer Goods Manufacturing Output

Source(s): Indian Central Statistical Organisation


  • Economic growth moderated from an average of 6.3% during 2010-2012 to 5.8% in 2013, weighed down mostly by the sharp deceleration in investment. In the first quarter of 2014, the economic expansion decelerated further thanks to the still downbeat trade data.
  • Supported by tax reductions and government cash transfers to poor households, private consumption held up relatively well in 2013, expanding 5.3% and contributing half of the growth in GDP (Figure 17). In 2014, private consumption will continue to show robust growth, assisted by election-related spending and easing inflation.
  • While investment in buildings held up relatively well, investment in transportation tools and machinery and equipment turned from double-digit expansions in 2012 to contractions in 2013. This year, uncertainties over domestic election outcomes and the impact of the U.S. Federal Reserve’s tapering will prevent fixed investment from expanding at the robust pace seen before 2012.
  • Depressed global commodity prices lowered the value of merchandise exports, which declined 3.9% in 2013 while merchandise imports contracted 2.6% (Figure 18). The trade deficit widened from $1.7 billion in 2012 to $6 billion in 2013. A larger trade deficit, coupled with a wider deficit for net income transfers and a smaller surplus in cash transfers, led to a current account deficit equivalent to 3.3% of GDP in 2013. The currency—the rupiah—weakened 11% against the U.S. dollar. In 2014, exports are projected to increase 4.8%, benefiting from currency depreciation and the gradual economic recovery in industrial countries.
  • Propelled partly by the government’s cut in fuel subsidies, weather-related disruptions to food supplies, and import restrictions, inflation accelerated in 2013 and averaged 6.4% growth for the year. After the central bank kicked off a series of policy interest rate hikes, the inflation rate eased off from the peak level of 8.8% in August 2013 to 7.3% in April. In 2014, inflation is expected to drop down further in the second half of the year.
  • Manufacturing production benefited from government stimulus measures and expanded 5.6% in 2013, similar to the performance of the previous year (Figure 19). In the first quarter of 2014, business conditions for manufacturing remained relatively flat, affected by unfavorable weather conditions and raw materials shortages. The PMI hovered around 50 before unexpectedly rising in April, driven mostly by a pickup in domestic demand.
  • Real (inflation-adjusted) GDP is projected to dip slightly to 5.3% in 2014 before recovering to 5.8% in 2015, when the newly elected government clarifies its policies, the inflation level normalizes, and the recovery in exports picks up. Manufacturing production is projected to show growth of 4.9% in 2014 and 5.5% in 2015.

Figure 17 – Indonesia: Demand-Side Contribution to Economic Growth

Source(s): Global Insight and Statistics Indonesia and MAPI calculations

Figure 18 – Indonesia: Merchandise Exports and Imports

Source(s): Global Insight and MAPI calculations

Figure 19 – Indonesia: Manufacturing Production

*Where people involved is >20
Source(s): Statistics Indonesia and HSBC


  • Real GDP growth decelerated from 5.9% in 2012 to 4.7% in 2013, constrained by weaker external demand and subdued fixed asset investment (Figure 20). Private consumption grew 7.6% and contributed most of the growth in 2013, supported by a robust labor market and widespread cash transfers from the government ahead of the elections. The pace of economic growth picked up in the fourth quarter of 2013, thanks mainly to the rebound in overseas shipments; the growth momentum continued in the first quarter of 2014.
  • Fixed capital investment growth decelerated significantly from the 20% recorded in 2012 to 8.2% in 2013. This largely reflects government reductions in public investment in order to rein in the persistent fiscal deficit, which exceeded 4% of GDP during 2008-2012. The growth momentum is expected to moderate to 7.3% in 2014 and 6.9% in 2015 as the government plans to further narrow the fiscal deficit; monetary policy may become less accommodating because of inflationary pressure.
  • Malaysia’s economy is highly export-oriented, with exports equivalent to more than 80% of GDP. In 2013, exports fell 2% after adjusting for inflation, reflecting a soft global market for the country’s manufactures (such as electronics) and lower prices for the country’s major commodities (such as palm oil and rubber)(Figure 21). Since imports showed relatively robust growth, the trade surplus fell to $32 billion last year, the smallest in nine years. In the first quarter of 2014, exports experienced decent growth and went up 5.5%, with the main contribution coming from the double-digit expansions in electrical and electronic shipments. Exports are projected to rise by 7% in 2014 and 8% in 2015, spurred by currency depreciation and the improved economic outlook in industrial countries.
  • Affected by weak external demand, manufacturing production grew 4.2% in 2013, the slowest pace since 2009 (Figure 22). The expansion pace picked up in the first quarter of 2014 and went up 7% on a year-over-year basis as the growth momentum in exports continued.
  • The inflation rate started to edge up in September 2013 and reached 3.5% in March, caused by reductions in subsidies for fuel and sugar as well as the depreciation of the currency against the U.S. dollar. The inflation rate is forecast to rise to 3.3% in 2014 and 3.6% in 2015, when the 6% goods and services tax takes effect.
  • The economy is projected to show modest recovery in the next two years and register 5% growth. While higher inflation and fiscal tightening might slow the growth of private consumption and public investment, strong external demand will become the major driver, contributing to faster growth in manufacturing production.

Figure 20 – Malaysia: Demand-Side Contribution to Economic Growth

Source(s): Global Insight and Department of Statistics Malaysia and MAPI

Figure 21 – Malaysia: Exports and Fixed Asset Investment, Inflation-Adjusted

Source(s): Department of Statistics Malaysia and MAPI

Figure 22 – Malaysia: Manufacturing Production

Source(s): Department of Statistics Malaysia and MAPI


  • The political crisis weighed heavily on the country’s economic growth in the second half of 2013, and for the whole year, the economy expanded only 2.9%, compared with a 6.5% growth rate in 2012 (Figure 23).
  • Private consumption barely grew in 2013, hurt by both a high base effect from 2012 (when post-flood replacement needs stimulated household spending) and by falling crop prices that hurt farm incomes (Figure 24). In 2014, private consumption will continue to face headwinds from weakened consumer confidence, delays in government payments to farmers, and debt repayment pressures—the household debt level has risen to 80% of GDP.
  • Fixed asset investment, especially private investment, fell sharply in the second half of 2013 and contracted 2% for the whole year. Total investment made a small contribution to GDP growth because of an increase in inventories. Subdued investment will likely persist into 2014 if public investment in major infrastructure programs suffers from delayed approval while private investors remain cautious, waiting for clear directions from the new government.
  • Merchandise export value declined slightly in 2013 as a result of the price drop for some agricultural products and tepid external demand. Merchandise import value contracted slightly as well, thanks mainly to the 4.6% drop in domestic demand for imported capital goods. In the next two years, external demand is expected to improve when industrial countries show stronger economic performance, and export value is projected to increase by 4% in 2014 and 8% in 2015.
  • Manufacturing production contracted 3.2% in 2013 in response to subdued domestic and foreign demand (Figure 25). While production of electrical machinery and motor vehicles went up 11% and 7%, respectively, production of computers and electronics dropped 3% and production of machinery and equipment declined 5%. External demand will likely become the major driver for manufacturing in 2014.
  • Partly because of lackluster domestic demand and softer global commodity prices, the inflation rate abated from 3% in 2012 to 2.2% in 2013, the lowest level in four years. Low inflation and weak growth momentum prompted the central bank to lower the benchmark interest rate. Accommodating monetary policy is expected to remain in place for 2014, aiding in an investment revival.
  • Even if a stable government can be formed, economic growth is projected to decelerate to 2.3% in 2014. The outlook is subject to high uncertainty given that the political turmoil worsened in the first quarter, and the resulting effects on the economy could last longer than expected. The economy may show a robust recovery in 2015 when public investment in infrastructure steps up, and both consumer confidence and business sentiment recover.

Figure 23 – Thailand: Demand-Side Contribution to Economic Growth

Source(s): Office of the National Economic and Social Development Board and MAPI

Figure 24 – Thailand: Private Consumption and Private Investment

Source(s): Bank of Thailand

Figure 25 – Thailand: Manufacturing Production

Source(s): Office of the National Economic and Social Development Board and MAPI


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