QNB-Why is Southeast Asia lagging behind the recovery of the global economy?




For decades, Southeast Asia has been synonymous with economic dynamism, opportunity and growth. This was especially true for the six largest economies of the Association of Southeast Asian Nations (ASEAN-6): Indonesia, Thailand, Singapore, Malaysia, Vietnam and the Philippines. Indeed, the ASEAN-6 economy outperforms most other countries in terms of GDP growth and other activity indicators until early 2020. However, this situation, which dates back decades, has undergone significant changes due to the turnaround caused by the Covid-19 pandemic. .. After the shock caused by the global spread of Covid-19, ASEAN-6 countries are lagging behind leaders in short-term economic performance.

Developed countries are experiencing a rapid recovery from a pandemic. Approximately two years after the peak of the pandemic shock, when the business falls into a severe recession this year, the US and Eurozone are already forecasting to meet or significantly exceed prewar GDP trends. In contrast, most ASEAN-6 economies are still significantly worse than they were in the pre-pandemic period. The only notable exception is Vietnam. Vietnam has not suffered a pandemic thanks to effective policies aimed at containing the virus epidemic in 2020, and has also benefited from strong global demand for manufactured goods.

Current estimates compared to pre-pandemic estimates of GDP in 2022

(Deviation in% from pre-pandemic trends in terms of cumulative GDP)

Source: Haver, IMF, QNB analysis

If no pandemic was declared, the growth gap between ASEAN-6 countries and developed countries would turn negative in 2021 and significantly set the 2022 historical standard compared to the 2022 growth forecast for 2019. It should be noted that it is expected to fall below. Spreads have fallen from 289 basis points (bps) in the 10 years before the pandemic to about 98 bps, which is the forecast for this year, after being at a disadvantage in the past year. This means that on average, in 2021, ASEAN-6 countries will grow about 1% faster than developed countries, rather than the usual 2.89% outperformance. Small growth inequality indicates slower growth catch-up and convergence towards higher levels of economic productivity, productivity and living standards found in developed economies.

Differences in growth between ASEAN-6 countries and developed countries (Spreads at basis points)

Source: Haver, IMF, QNB analysis

In our view, three factors explain the recent slump in ASEAN-6 countries.

First, the difference in immunization rates between ASEAN-6 and developed countries affects the pace of recovery. The immunization program has made significant progress in developed countries since its inception in 2021, but has been delayed in immunization in ASEAN-6 countries. As a result, ASEAN-6 countries are more vulnerable to more infectious variants of Covid-19, such as Delta.

The spread of the virus and the need to respond to it required several more stringent social distance measures in ASEAN-6 countries, hindering stable recovery and resulting in an ominous “discontinuous” business pattern. Omicrons are more infectious than Delta, but so far, movement restrictions within ASEAN-6 countries are mild.

Second, the current patterns of relative economic performance compared to historical norms between ASEAN-6 countries and developed countries relate to different monetary and fiscal policy spaces. ASEAN-6 countries, especially low- and middle-income countries, have little room to move to revive their economies during a recession. Due to weak economic systems and poor equity, most ASEAN-6 countries lacked the resources to support households and businesses, as did the more advanced economies. Economic authorities have protected the balance sheet of the private sector from the pandemic crisis in developed countries, but not in ASEAN-6 countries. Therefore, the more affected private sector in ASEAN-6 countries will take longer to recover to pre-pandemic consumption and investment levels than their peers in developed countries. In other words, the private sector in developed countries has been stimulated by both post-pandemic spending and savings, with government relocations and other large plunges in political interests. In contrast, the private sector of ASEAN-6 countries faces higher levels of uncertainty and less political support, spending cuts and, in some cases, devote themselves to savings to make up for lost income. There was even a thing.

Third, China’s slowdown is a particularly strong headwind for ASEAN-6 countries due to direct and indirect trade and financial relations. China’s growth has a strong multiplier effect, which often spreads globally and to ASEAN-6 countries. This is especially true for “Factory Asia” manufacturers and exporters such as Thailand, Malaysia and Vietnam, as well as commodity producers such as Indonesia, Malaysia and the Philippines. Thus, the current slowdown in China’s growth caused by significant tightening of monetary, fiscal and regulatory policies is indirectly affecting the economic performance of ASEAN-6 countries. China’s GDP growth fell from more than 18% (g / y) year-on-year, which was the highest level in the first quarter of 2021, to 4% in the fourth quarter. This situation represents a very negative background for the growth of ASEAN-6 countries.

In short, delayed initiation of high-dose vaccination, low-spending, low-stimulus policies, reduced investment and savings, and a slowdown in China explain the current period of stagnation in countries around the world. ASEAN-6. However, I believe this phenomenon is short-lived. The causes of the performance gaps observed in the last quarter are already beginning to fade. In emerging Asia, immunization programs have been strengthened, developed countries have begun to strengthen policies, and China has announced that it is slowly ready to revive its economy. As a result, relative performance is expected to begin to converge towards historic standards in 2023 and 2024.

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