We cut our GDP growth forecast for FY18-19 from 7.2% to 6.7%. Yet elevated inflation supports our forecast for two more central bank policy rate hikes this year
The message from the latest activity from India was that the economy slowed coming into the beginning of the financial year 2018-19 (runs from April to March). This prompts a downgrade of our GDP forecast for this year. But the balance of economic risks remains tilted toward inflation rather than growth, keeping the Reserve Bank of India (RBI) on track for a second rate hike of the year at the August meeting. There may be one more hike in October.
China's export growth beats consensus but slower import growth signals that future exports will be tough.
Imports only grew 14.1%YoY in June, lower than the consensus of 21.3%. Almost all import items shrunk from the previous month except copper sands and coal, which means that projected manufacturing is slowing.
However, exports grew at 11.3%YoY outperforming the consensus forecast of 9.3%. Export items under tariff threats seem to front-run tariff charges. That may explain why integrated circuits grew 9% MoM.
We believe that future exports are unlikely to extend sustained growth.
It is just a matter of time before trade volumes shrink, directly impacting manufacturers that rely on the global supply chain.
While a softer yuan may cushion Chinese exports, the best it can do is to reduce the tariff effect by around 7% based on our USD/CNY forecast of 7.0 by end-2018.
The Chinese government will also use fiscal and monetary policies to stimulate the economy, and the coming activity data on Monday will provide us insight into the extent of policy support needed.
Asian activity data doesn’t yet speak about the trade war, which has just started. But it won't be too long
Next week in Asia kicks off with China’s GDP data for the second quarter. This and a slew of trade releases elsewhere in the region will be examined in light of the ensuing global trade war. Indonesia’s central bank has seen no fruits from the 100bp policy rate hikes in supporting the local currency and we don't think it will hike again next week.
US President Donald Trump's categorization of the EU as a "foe" on trade is well wide of the mark. And with China and the EU meeting at a summit in Beijing today, we will see what happens when your foe's foe becomes your friend