The economies of South-East Asia should enjoy an improvement in growth this year. Despite geopolitical uncertainty and growing protectionism, demand for the region’s exports is picking up, domestic demand remains firm, and the region is benefitting from secular trends such as the relocation of production out of mainland China.
Demand uptick
Economic performance in the first quarter of this year beat expectations. Overall, with the main engines of global demand becoming more supportive, the region is likely to maintain a decent pace of economic recovery this year.
Lead indicators of world trade volumes have improved, while other indicators such as new export orders in the US and elsewhere also rose in May, reflecting a healthy global trade picture.
Electronics giants are racing to exploit opportunities unleashed by AI
There has been a turnaround in the electronics cycle, as the sector’s inventory correction is completed and companies race to exploit opportunities unleashed by artificial intelligence and other tech advances. The electronics giants in Asia such as South Korea and Taiwan have seen an impressive rebound in factory orders and, with a suitable lag, this should benefit electronics exporters such as Malaysia and Singapore.
America’s resilient economy has been increasing its imports of manufactured components through the first five months of the year. In the same vein, the manufacturing downturn in Europe appears to be bottoming out, while Japan’s outlook has been bolstered by strengthening factory activity.
In mainland China, the economic recovery that appears underway will be further bolstered by policy efforts to stabilise the property sector and more calibrated incentives to boost investment. As a result, mainland China’s 5% growth target for this year is probably achievable and should translate into stronger Chinese demand for the region’s raw materials and intermediate goods.
Finally, it looks as if Chinese tourists are finally returning to South-East Asia, which should further drive the tourism recovery. The World Travel and Tourism Council projects that Chinese outbound travellers will spend CNY1.8 trillion (US$0.25 trillion) on overseas tours, about 10% more than they did in 2019, before the pandemic.
The new orders pipeline and business confidence have become more positive
Domestic vitality
Surveys of businesses across the region show that services are faring well. Sectors such as software and consumer have decent growth momentum, helping to drive growth in jobs and sustain consumer spending at a healthy pace.
But the bigger story is the reconfiguration of supply chains to the benefit of South-East Asia. Part of this is due to the tensions between mainland China and Western nations but another part arises from the region’s superior fundamentals. For example, infrastructure improvements are translating into lower logistics costs, even in once-laggard countries such as Indonesia and the Philippines, alleviating what used to be a serious constraint on the region’s growth. Red tape reduction, labour market reforms and foreign investment liberalisation are also helping to draw in more capital.
Downside risks
As a result of all this, leading indicators for the region including the new orders pipeline and business confidence have become more positive. But there are two sets of risks in particular that the region’s policymakers must address with care.
First, domestic price pressures remain a challenge. Weak domestic currencies have raised input costs while rising wages and higher commodity prices have also hurt. At a time when global portfolio investors are nervous about emerging currencies, central banks need to maintain a rigorous monetary policy stance not only to contain inflation risks but also to defend their currencies.
Second, with the US and Europe imposing trade restrictions on mainland China, the region’s exporters of intermediate inputs to mainland China could suffer collateral damage. These exporters need to move nimbly to diversify their markets. And the region’s trade diplomats have to leverage their strategic importance to the big powers to secure a better defence against the rising protectionist wave.
Over time, the region has weathered a series of shocks, from the global financial crisis to the Covid pandemic to the sharp spike in global interest rates. This track record of resilience suggests there is a good chance that the region can manage these very real risks.
