Demand is growing again, making the region look like there was never a pandemic
While many parts of the world are teetering on the brink of recession, the ASEAN region is headed for an economic downturn in the first half of 2022. This shows that economies can be very robust in recovery after a disaster. Demand and investment are back up, making the region look like there was never a pandemic.
The GDP in Vietnam, the Philippines and Malaysia is predicted by the World Bank to grow over 6 percent, while Indonesia and Cambodia growth is expected to be around 5 percent. Singapore, Thailand, Lao PDR, and Myanmar are all expected to grow around the 3 percent mark.
Most of this growth was underpinned by strong growth in exports, a recovery in local demand and investment. There is massive urban development happening across the region, with tourism rebounding very quickly after travel restrictions were lifted. The streets are now vibrant with full markets and restaurants due to a new consumer confidence.
This is unlike the rest of the world. China still seems to be pursuing a zero covid policy which is resulting in losses which is hampering economic growth. The US economy is slowing due to rising fuel costs, while Europe is facing energy shortages.
However, this does not stop massive Chinese investment in the region. The changes in Hong Kong have benefited Singapore, with much of Hong Kong’s financial industry moving to Singapore. Local companies in the region are also starting to benefit from stage two of the Belt and Road Initiative (BRI), where government-owned or controlled trading companies buy resources and goods in the region to export back to China.
However, some of the ASEAN countries have a number of potential problems. Although exports have grown rapidly in Indonesia, Malaysia and Vietnam, the international economic slowdown may dampen demand later in the year, and in 2023. To some extent, this could be offset by a massive increase in international tourism, but this will distort all. apparently balanced growth.
Weakening currencies, rising public and private debt, rising energy costs, and a massive expansion of the money supply over the past two years have fueled an arc of inflation. This is especially the case in Indonesia, the Philippines, Cambodia, Thailand, the Lao PDR, and Myanmar.
The big concern about inflation is not inflation itself, but the response of central banks to raise interest rates, which can dampen domestic demand and investment.
Most economic analysts still believe that ASEAN will remain relatively buoyant in the coming year. There are some concerns in Singapore that the property bubble could burst. However, the IMF raised Malaysia’s GDP growth expectation to 5.4% this year, although it predicted a dip to 4.4% in 2023. This is down from an earlier 4.7% estimate.
ASEAN’s economic recovery has created some chronic labor shortages in Singapore, Malaysia and even Thailand. This could hinder potential construction and manufacturing growth if these issues are not resolved.
ASEAN governments must address the growing increase in wealth inequality that has been stirred up during the pandemic. Large portions of ASEAN populations have experienced declines in their relative income levels as inflation and the spending power of disposable incomes decline. A large number of families in the lower to middle income levels are finding it difficult to cope with the rising cost of living. Purchasing power will continue to erode over the next 12 months. Relative poverty levels would rise accordingly.
The major economic shift within ASEAN is the growing level of intra-ASEAN trade and investment. This is where the ASEAN grouping can be partially protected from any global economic downturn.
ASEAN brands and franchises are becoming very prominent in the region today, reflecting growing intra-ASEAN trade and investment.
As commodities such as rubber and palm oil prices were poor, exports of manufactured products partially offset this. Manufacturing has been attracted to the region due to the relatively low cost regimes throughout the region. ASEAN governments are not as concerned about renewable energy and environmental issues as their Western counterparts.
In the short term ASEAN has a buffer against any future international recession. However, it is not known how deep and long a potential recession will be. What happens in China is crucial for ASEAN.
However, there is some pessimism about domestic demand in 2023. These perceptions are driven more by the uncertainty of the international situation, speculation about interest rates and news of an international recession. The situation in China also seems uncertain as capital flight from China has increased since the Communist Party’s 20th Congress, where Xi Jinping was elected for a third term as president. China is now the largest trading partner of most ASEAN nations, and a major source of foreign investment. However, some capital flight will find its way into the ASEAN economy, where, for example, the Cambodian economy is fed by illegal Chinese money.
The challenges ahead for ASEAN will be keeping debt and inflation under control, dealing with low export and foreign investment growth, dealing with eroding exchange rates, and a continued struggle of foreign exchange speculation as the world heads into a deep recession. .
Meanwhile, the urban landscapes throughout the region show heavy investment in construction. The key will be that this is not speculative and based on rising demand. Otherwise, the bubble could burst on this post-Covid rebound.
Murray Hunter’s substack can be accessed here.
