Downward revision of GDP forecast likely for Asean

by NUR HANANI AZMAN / pic by AFP

THE highly contagious Delta variant is challenging policymakers and the expectation that economic recoveries will gather momentum in the second half of 2021.

Moody’s Analytics senior APAC economist Katrina Ell and Moody’s Analytics associate economist Dave Chia said downward revisions to gross domestic product (GDP) forecasts have previously occurred for Indonesia, Philippines and Malaysia.

“Further markdowns are likely for the current quarter given economic recoveries are being paused and a stronger bounce back being pencilled in for the December quarter.

“Indonesia is at the worse end of the spectrum. We already downwardly-revised our forecast for GDP in our July baseline from above 5% to 4.5% and the likelihood of further downward revisions is high, as the national lockdown saps domestic demand,” they said in a report title ‘Macro Roundup: It Gets Worse Before It Gets Better’ yesterday.

Singapore is in lockdown until mid-August, but given the outsize importance of exports to the economy, there is less downside risk to the third quarter.

The Philippines has eased restrictions in the past month, but the likelihood of daily infections rising now that the Delta variant has arrived are high.

Implications of slow vaccination

Asia’s generally slow rate of vaccination is a thorn in the region’s economic recovery.

Experience in the US and UK proves that when there is a high rate of full vaccination, there is a marked improvement in health outcomes from COVID-19 contraction, irrespective of the variant.

“As Asia’s average rate of full vaccination of its population is low, the need for lockdowns and other restrictive social distancing measures is necessary to protect the vulnerable.

“Once herd resilience is reached (around 70% of the population), the need for harsh lockdowns is removed and domestic demand does therefore not become as suppressed,” Ell and Chia said.

Policy implications

Central banks responded aggressively to the pandemic in the first half of 2020, often unleashing unprecedented support to cushion the blow.

But now, even though economies are still struggling, central banks no longer have the same monetary space to support. The onus is on fiscal policy to do the heavy lifting in Southeast Asia.

Ell and Chia said Malaysia, for example, has introduced four significant fiscal stimulus packages this year and may increase its debt ceiling further as severe movement restrictions in Kuala Lumpur bite.

They see Indonesia will have significantly larger budget deficits than initially planned this year, with further government support flowing to mitigate movement restrictions in Bali and Java.

“The Philippines will likely introduce a further US$3.6 billion stimulus package shortly to keep the government’s downwardly-revised GDP target for 2021 in sight of between 6% and 7% this year.

“Even if this latest package is forthcoming in the Philippines, we maintain that our existing GDP forecast for 2021 of 4.9% has downside risk,” they added.