The past year has seen Asian economies weathering a series of shocks, from President Trump’s ‘Liberation Day’ tariffs and a surge in Chinese exports that hit domestic producers, to the Middle East conflict and the ensuing energy price shock. This resilience will be tested in coming months as supporting factors fade and new headwinds emerge. It will be countries with robust economic structures such as Malaysia and Singapore that are better positioned to withstand the coming period of turbulence.
A major reason for the resilience we have seen has been the greater adaptability of companies and policymakers. Faced with a trade war, manufacturers nimbly reconfigured supply chains that enabled exporters outside the Chinese mainland to step up shipments to the US even as the country’s exports to the US withered. Policymakers pragmatically negotiated deals with the US that contained the damage; they abjured retaliatory measures against the US while offering investments and other accommodations that secured them tariff concessions. As a result, at least for now, the impact on trade has been contained.
AI spending surge
Resilience was also helped by the surge in capital spending associated with AI. South Korea was among the biggest winners but Malaysia, Singapore, Thailand and the Philippines also had manufacturing segments that did well out of the AI boom. Moreover, it helped that the surge in oil prices caused by the Middle East conflict was contained as a result of large inventories of crude oil and the Chinese mainland’s ability to drastically reduce oil demand. Overall, global financial conditions remained loose as well, providing some relief to the regional economies.
Bad weather is likely to hit agricultural production and cause food prices to spike
The fall in oil prices since the US and Iran agreed to a pause in fighting has provided relief to the region. Fortunately, the occasional episodes of renewed clashes have not pushed oil prices up significantly as markets believe that neither side really wants a resumption of hostilities.
Challenges
However, other challenges are emerging which will hurt economic prospects in Asia. First, bad weather is likely to hit agricultural production and cause food prices to spike. Forecasters predict a ‘super’ El Nino weather pattern that will cause extreme temperatures, droughts and floods in various parts of the region. This is expected to strengthen through the coming months before peaking in December or January. The region is already suffering its consequences; the monsoon rains in India have been a severe disappointment, for example, and yields for palm oil, coffee, cocoa, cotton and grains including wheat and rice are expected to suffer.
Countries with robust financial sectors can absorb external shocks such as currency volatility
Second, the AI capital spending surge may not continue. Investors are increasingly nervous about whether the massive capacity being built will provide adequate returns – after all, costs are rising and there are question marks over the AI business models. In addition, political pushbacks against the data centres needed for the AI buildout are increasingly evident, while the potential job losses and wealth and income inequality that many expect are adding to political resistance.
Third, Asian trading nations have to expect a new round of tariffs from the US in coming months. The US Trade Representative is studying issues such as policies on forced labour and excess industrial production capacity that can be used to justify additional tariffs on a range of countries, with successful exporters such as Vietnam singled out.
The experience over the past few decades suggests that the principal factors that will help countries overcome the likely difficulties will be the following:
- Economies with sound monetary and fiscal policies have the space to cut interest rates and utilise stimulus spending to support their economies without upsetting bond, currency and equity markets.
- Countries that have worked hard at diversifying their economies, with multiple growth engines to rely on, have a better chance of enjoying continuing growth.
- Countries with robust financial sectors can absorb external shocks such as currency volatility and sudden large capital outflows.
Despite being highly open economies that are vulnerable to shocks in the global economy, Malaysia and Singapore tick the boxes above and are likely to do better than their neighbours in the coming year.
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