Fitch: India, China Growth to Diverge Further Through 2017

Emerging Asia will continue to experience relatively high rates of growth over the medium term as economic prospects remain starkly divergent across emerging markets, according to Fitch Ratings' latest Global Economic Outlook report. Growth should improve steadily through to 2017 for emerging Asia excluding China on aggregate. This should occur even as China continues to experience a gradual structural slowdown.

Differing exposures to key global macro trends - including the fall in commodity prices and likely rise in US interest rates, as well as country-specific factors will continue to contribute to substantial differentiation in growth rates in emerging markets over the next few years. Fitch forecasts aggregate growth in emerging Asia excluding China to accelerate to 6.7% in 2016 from 6.4% in 2015, although robust Indian growth masks a weaker performance relative to the recent trends in other large regional economies such as Indonesia and Malaysia. Fitch forecasts China's growth to slow to 6.8% in 2015 and 6.5% in 2016 as rebalancing continues. 

The region's performance is projected to be markedly stronger than in other big emerging markets. Russia and Brazil are forecast to record substantial contractions in GDP in 2015 (-3.5% and -1.5%, respectively), followed by a weak recovery in 2016 and 2017.

India will be key in lifting the aggregate regional growth rate, accounting for almost half of the forecast growth for the region excluding China. Notably, Fitch expects that India's GDP growth rate this year will surpass China's for the first time since 1999, forecasting an acceleration to 8.1% in 2016 (FY17) before settling back to 8.0% in 2017 (FY18). The implementation of structural reforms and resulting pick-up in investment remain key themes for India's growth outlook, and recent data confirm the strengthening demand.

That said, the extent and pace at which reforms translate into higher rates of growth continues to be dependent on implementation, and there are signs that acceleration may be slower than previously expected. While maintaining the expectation for an increase in growth, Fitch has lowered its real GDP growth forecasts for India to 7.8% and 8.1% from 8.0% and 8.3% for FY16 and FY17, respectively.

China's policy-driven economic rebalancing, in contrast with India, should result in a steady reduction in growth to 6.0% by 2017, down from a 9.3% average over 2005-2014. Policy efforts to reduce shadow financing, reform local government borrowing and curb over-investment in real estate will continue to weigh on the economy and contribute to the gradual trending down in growth.

The rebalancing is positive for economic stability in the long run. For now, the build-up in fixed-asset investment in the real estate sector remains a key source of macroeconomic risk. However, recent data does point to a diminishing risk of an outright collapse in activity in the sector. Monetary easing so far this year should contribute to a pick-up in growth in the second half of 2015, though activity data in May points more to stabilisation as opposed to acceleration.

Our latest Global Economic Outlook which includes updated macro-economic forecasts and analysis can be found on www.fitchratings.com