JAKARTA (TheInsiderStories) – Economic growth across South-East Asia (SEA) region is expected to moderate to 4.8 percent this year, from 5.3 percent in 2018, amid slowing global trade and escalating US-China trade tensions, according to ICAEW’s latest reported.
It said, domestic demand should provide some relief, together with accommodative macro policies, although this may vary across economies. Overall GDP growth across the region slowed to 4.6 percent in first quarter (1Q) 2019, down from 5.3 percent recorded in 1H 2018.
This is a result of the slump in export growth across SEA economies due to weaker Chinese import demand, a slowdown in the global ICT cycle, and an increase in trade protectionism over the past year. Total export volumes were, on average, 1 percent lower than a year ago in 1Q 2018, with uncertainties over external demand also likely to have weighed on firms’ production and investment intentions in the quarter.
Similarly, the deterioration in export momentum across the region has continued into the second quarter, with only Vietnam bucking the trend, although the country’s growth has also decelerated from last year. Amid renewed US-China trade tensions, this trend is likely to continue into the year.
GDP growth across the region is expected to moderate to 4.8 percent this year, before further easing to 4.7 percent in 2020. As a small and open economy that is heavily dependent on exports, Singapore will experience the sharpest slowdown, with its GDP growth set to moderate from 3.1 percent in 2018 to 1.9 percent in 2019.
Meanwhile, although growth is set to ease in Vietnam, at 6.7 percent, this would place it as the fastest growing SEA economy.
“We expect exports and overall economic growth to continue to come under further pressure, as the reescalation of trade tensions between US and China is unlikely to ease any time soon,” said Sian Fenner, ICAEW Economic Advisor & Oxford Economics Lead Asia Economist.
He added: “With export volumes already on the downside since the start of the year, any further increase in trade tensions between the world’s two largest economies will likely see a much more prominent slowdown in regional growth.”
Room to Boost Domestic Demand with Supportive Macro and Fiscal Policies
Domestic demand will provide some cushion to the drag on growth from weaker exports, aided by accommodative macro policies. Indeed, a sharp policy reversal by the US Federal Reserve and subdued inflation across the region have opened the door for easier monetary policy across the SEA region. However, this may vary across economies.
For example, central banks in the Philippines and Malaysia have already reduced policy rates by 25bp each amid global uncertainities. Meanwhile, Indonesia, Thailand and Vietnam will likely keep their interest rates constant.
Bank Indonesia will remain focused on maintaining external stability and State of Bank of Vietnam will keep policy interest rates unchanged, with authorities likely to raise its credit growth target if economic conditions warrant further stimulus.
Fiscal policies will be more supportive of regional domestic demand during 2019-20 with infrastructure investment partly offsetting more cautious investment by businesses. A notable exception is Malaysia, as an ongoing review of infrastructure projects and fiscal consolidation targets will limit any support this year into next.
Mark Billington, ICAEW Regional Director, Greater China & SEA commented: “Renewed trade tensions between US and China come at a time when export growth across South-East Asia is already facing a challenging external environment. Looking ahead, exports will continue to face downward pressures and the negative effects will be felt across South-East Asia, further moderating overall growth.”
Singapore’s GDP growth to slow to 1.9% in 2019
GDP growth was revised down slightly to 1.2 percent in 1Q 2019 from the advanced estimate of 1.3 percent. While sequential growth was up by 0.9 percent quarter-on-quarter, the details were mixed.
Household spending remained resilient and non-residential and infrastructure construction were strong, however, growth has eased and demand for durable goods, such as motor vehicles, is particularly weak.
In addition, the impact of weaker global trade and US-China trade tensions are increasingly being felt in the open and export-dependent economy. Exports were 2.1 percent lower than a year ago in 1Q 2018, while concerns over the outlook for external demand saw investment in machinery and equipment fall and firms opting to reduce stocks.Looking ahead, the outlook for exports is weak, following more tariff hikes by the US and China.
Overall, Singapore is expected to face more downward pressure on its overall economic growth and set to experience the sharpest slowdown in the region, with GDP growth slowing to 1.9 percent in 2019 from 3.1 percent in 2018.
Vietnam’s GDP to grow by 6.7% in 2019
Economic momentum moderated to 6.8 percent in the first quarter of 2019, below the 7.3 percent increase in 4Q 2018. While the rest of the SEA economies have recorded sharp falls in exports, Vietnam’ merchandise exports in US dollar terms were 10.4 percent higher than a year ago in April.
Despite an increase in exports, momentum is expected to trend lower, given weaker Chinese import demand and increased trade protectionism. While trade diversion from the re-escalation of America – China trade tensions may temporarily benefit Vietnam, the country is still highly exposed to China.
However, external demand is unlikely to fall as foreign direct investment (FDI) and manufacturing production are expected to remain significant drivers of growth. FDI inflows will likely remain strong over the medium term due to its close proximity to China and positive labour dynamics, including low relative wages.
Vietnam’ infrastructure metrics are also improving and its participation in trade agreements, notably as part of ASEAN, and policies to attract foreign direct investment are favourable.
Domestic demand will also continue to stay healthy during 2019-20 with household spending remaining solid amid stable inflation and rising incomes, while sustained tourism should support the service sector. Overall, Vietnam’s GDP is forecast to grow by 6.7% this year, with a modest deceleration over 2020-21 to 6.1% per annum.
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