South-East Asia’s GDP growth dampened by trade tensions

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Economic growth across the South-East Asia (SEA) region is expected to slow from 5.1% in 2018 to 4.5% in 2019 and remain unchanged in 2020, amid high risks of a re- escalation in trade tensions, according to The Institute of Chartered Accountants in England and Wales (ICAEW) latest Economic Update: South-East Asia report. As a result, the outlook for exports and private investment will remain challenging and continue to dampen regional GDP growth.

Regional growth has slowed since 2018 and remained sluggish in Q3 2019, with GDP growth across the SEA region rising only 4.5% year-on-year from 4.4% in Q2 2019. The US-China trade conflict has been a key driver for this slowdown in growth, with trade uncertainty remaining a key drag on manufacturing, exports and investment.

Export-oriented economies have been the most impacted by the ongoing trade tensions, with Singapore only narrowly avoiding a technical recession1 in Q3 2019. The exception has been Vietnam, which has benefited from some trade diversion effects caused by the trade war. Nonetheless, momentum in Vietnam is expected to ease to 6.6% in 2020, from 7% in 2019, given weaker Chinese import demand and increased trade protectionism.

Sian Fenner, ICAEW Economic Advisor and Oxford Economics Lead Asia Economist said, “Although there has been some progress in the talks between the US and China, friction between the two countries remains high and the bulk of imposed tariffs are unlikely to be lifted anytime soon. Alongside slower Chinese domestic demand, we are cautious that the outlook for regional exports and private investment will remain challenging. As such, we expect South- East Asia’s GDP growth to moderate to 4.5% in 2020, remaining unchanged from 2019.”

Increased fiscal stimulus to complement accommodating monetary policy

Alongside a more dovish US Federal Reserve, low inflation and a deteriorating economic outlook, regional central banks have shifted to a more accommodating stance. The Philippines, Malaysia and Indonesia are expected to reduce interest rates by a further 25 basis points (bp) over the coming quarters, followed by an extended pause with fiscal stimulus to complement central bank efforts in cushioning the economic slowdown.

However, the room for fiscal manoeuvring will differ across the region. Most South-East Asian economies such as Thailand and the Philippines are expected to roll out stronger fiscal impulses. After running a series of fiscal surpluses, Singapore has the most fiscal room to ease policy. Given the highly uncertain trade environment, Singapore’s government is likely to announce measures such as cash handouts and funding support for Small and Medium Enterprises (SME) in next year’s budget.

In contrast, both Vietnam and Malaysia are constrained, given current levels of public debt. In Malaysia, despite the announcement of a mildly expansionary budget for 2020, the government’s continued emphasis on fiscal consolidation and the risks of fiscal slippage suggest limited room for further support.

“We expect the ongoing trade tensions to continue weighing on the overall growth outlook for South-East Asian economies. Against a weak global backdrop, supportive fiscal measures are expected to underpin an improvement in GDP growth across certain economies, albeit moderately. Overall, South-East Asia’s GDP growth in 2019 and 2020 are still set to be below potential at 4.5%,” said Mark Billington, ICAEW Regional Director, Greater China and South- East Asia.

Other findings in the report include:

  • Indonesia’s GDP to moderate to 4.9% in 2020, cushioned by accommodating monetary policies and fiscal measures
    The Indonesian economy grew by 5% year-on-year in Q3 2019, broadly unchanged from the previous quarter, supported by a contribution from net trade that was better than expected.

    On the other hand, domestic demand components are less positive, with a slowdown recorded in private consumption, government spending and fixed investment growth in the last quarter. In addition, net exports are forecast to be a drag on growth in 2020 against the backdrop of sluggish global growth, weak Chinese domestic demand, and policy uncertainty surrounding US-China trade tensions. Continued import controls from 2018 and weak export earnings will also keep a lid on investment growth in the short term.

    Nonetheless, accommodating monetary policies and targeted fiscal measures will likely prevent a significant deceleration in private spending and the impact on Indonesia’s GDP growth. Bank Indonesia can explore further policy rate cut and the government is also looking at expansionary fiscal measures, which should help to sustain consumption and investment. Overall, Indonesia’s GDP growth is expected to ease modestly to 4.9% next year from 5% in 2019.
  • Malaysia’s GDP set to moderate to 4% in 2020, from 4.4% in 2019, amid a sluggish external environment and fading tailwinds
    In line with previous forecasts, Malaysia’s GDP growth eased back in Q3 2019 to 4.4% year-on-year, from 4.9% year-on-year in Q2 2019. Sequential GDP momentum maintained a solid pace, with strong quarterly gains in private and public consumption, together with more positive inventory developments and household spending, outweighing weaker investment and exports.

    Looking ahead, GDP growth momentum is expected to moderate over the next year, as a result of more muted household spending and the impact of a sluggish external environment on the domestic economy. Indeed, there are already signs of softening in the underlying fundamentals that have been supporting domestic demand.

    Employment growth eased to 1.9% year-on-year in Q3 2019, while the inflation rate is also edging higher, although this is not yet a concern. Against a backdrop of slower export growth and moderating domestic demand, Malaysia’s GDP is expected to grow by 4.4% in 2019 and slowing to only 4% in 2020. As a result of the slowdown in GDP growth, the government is likely to implement more monetary policy easing to support growth.

The full ICAEW Economic Update: South-East Asia report is available here.

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