12 January 2018
India: Inflation hits RBI’s forecast but growth remains slow

The return of the Indian rupee to an appreciation trend after a selloff from September through November reduces pressure on the RBI to raise interest rates

Inflation hits RBI's forecast

India’s consumer price inflation data for December and industrial production data for November are due today. CPI inflation is creeping higher and with a low base effect in the food CPI component, it is poised to exceed the Reserve Bank of India’s (RBI) 4.3-4.7% forecast for the second half of the fiscal year 2017-18 (ends in March 2018). Our forecast for December is 5.1% year-on-year, in line with consensus.  

China: Imports even stronger

We expect strong trade growth, especially imports, although the year-on-year growth rates will be slower than the prior month. In 2018, we expect 12% import growth and 8% export growth due to rising domestic demand.

Exports should be strong but imports should be even stronger

While our forecasts on December trade growth (8.7%YoY exports and 10.4%YoY imports respectively) are lower than consensus (10.8% and 15.1%) and the prior month's data (12.3% and 17.7%), they do not change the picture that China's export and import growth is robust. For the whole of 2017, we expect 8% export growth and 16.5% import growth.

China's trade will be helped by a better global economy in 2018. We expect that imports will grow 12%, faster than export growth at 8%. The slower pace is a result of a high base in 2017. We see domestic demand as the main factor behind strong import growth, as spending from the middle classes keeps growing.

Though merchandise imports will grow at a slower speed, services imports could rise faster. We expect tourism, which is part of services imports, to grow considerably among the middle classes.

As such, the current account surplus as a percentage of GDP will fall to around 0.8% in 2018, against 3Q17's 1.0%. That would imply the CNY could be around its equilibrium level in 2018. Our projection of USDCNY is 6.30, appreciating 3% in 2018.

Technology is another trade growth driver

We believe that technological-related products are driving part of this trade growth. According to China Customs, exports and imports of mechanical, electrical goods and parts amounted to $1185 bn and $769 bn, respectively YTD in Nov 2017, which was 58% of total exports and 46% of total imports during the first eleven months of 2017. Exports of these items (+9%YoY Ytd) outgrew total exports (+8%YoY Ytd) in the first eleven months of last year. These data highlight the importance of technology in production of consumer goods and business tools.

We expect this trend to continue in China in 2018. And there could be a gradual increase in the value-add of technological products produced by Chinese companies, as growing high-tech sectors is part of the government's agenda.

Malaysia - Manufacturing slowed toward end-2017

We reiterate our forecast of normalization of BNM policy with two 25bp rate hikes in 2018 and our view of the MYR remaining among Asian top performers this year

Above-expected November manufacturing

Malaysia’s industrial production surprised on the upside in November with 5% year-on-year growth against the consensus expectation for growth of 4.6%. Acceleration from 3.4% October growth happened despite a slowdown in export growth over the same months (14.4% from 18.7%).

What does this mean for 4Q17 GDP growth?

After a strong run in the first three quarters of 2017 the export-led manufacturing recovery appears to have taken a breather in the final quarter of the year. Average October-November IP growth of 4.2% YoY was a slowdown from 5.9% growth in the third quarter. The corresponding figures for export growth are 16.5% and 22.1%. The activity data supports our forecast of a slower 4Q17 GDP growth rate of 5.5% YoY compared to 6.2% in the previous quarter. That was the fastest pace of growth in three years. Our full-year 2017 growth forecast is 5.8%. 

Policy implications

Strong GDP growth has put upwards pressure on inflation and this has prepared markets for Bank Negara Malaysia monetary policy normalization earlier than most other Asian central banks. We forecast two 25bp BNM rate hikes in the first and third quarters of 2018, taking the overnight policy rate to 3.50%. The Malaysian ringgit’s 11% appreciation in 2017 was the second-best among Asian currencies. The tighter BNM policy bias will likely sustain the MYR outperformance in 2018. Our end-2018 USD/MYR forecast is 3.80 (consensus 3.95).

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Good MornING Asia: 12 January 2018

A combination of factors should see higher US inflation over the coming months, though much of this will be USD and energy-related – the direct impact on US yields may be muted. Weaker USD will help Asian central banks keep policy accommodative.

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