Growth across South-East Asian economies contracted in the third quarter of 2021 because of the challenges imposed by the Covid-19 Delta variant. However, South-East Asia is expected to be the fastest-growing region in the world in 2022 with a growth forecast of 6.1%, as a result of high immunisation coverage with Malaysia just behind Singapore in fully vaccinated population.
The forecast was presented by Sian Fenner, Lead Asia Economist at Oxford Economics, at an Economic Insight Forum held by chartered accountancy body ICAEW on 2 December 2021. At the forum, industry leaders and experts discussed South-East Asia’s economic outlook with a focus on regional trade agreements and their impact on supply chains and business relations.
The forecast given at the event showed that recovery lagged for South-East Asian economies in Q3 2021 as countries battled a resurgence of cases due to the spread of the Delta variant. Tightened restrictions weighed heavily on consumer spending while significant disruptions in production and weakened manufacturing hindered growth across the region. Vietnam recorded a 12% fall in manufacturing activity quarter-on-quarter, which contributed to a lower GDP forecast of 6.2% on the year, a record low for the region’s best performing economy during the pandemic. GDP in Malaysia, Philippines, Thailand, and Vietnam in Q3 2021 was 4% to 6% lower compared to pre-pandemic growth in Q4 2019 and was only marginally higher in Singapore.
Prospects for South-East Asia in the year ahead are brighter, driven by easing restrictions and improved mobility as the pace of vaccinations steps up across the region. The lifting of restrictions and resumption of domestic tourism should also see a strong rebound in household spending and services in 2022.
Overall, South-East Asia’s GDP growth is expected to reach 6.1%. Malaysia, the Philippines, and Vietnam are expected to experience high growth in 2022 with Malaysia forecasted to achieve 6.7% GDP growth, double the pace achieved in 2021. Indonesia’s GDP is also expected to increase from 1.4% to 6.0%, a healthy growth after two years of falling below trend. In Singapore, GDP growth will be more muted at 3.8%.
A Positive Outlook for the Region in 2022 but Uncertainty Abounds
The recovery of the tourism sector will likely be a partial one, as the uncertainty of new variants and increased costs associated with vaccine tests will continue to contribute to consumer hesitancy to travel. Sticking with its zero-Covid approach, China’s decision to keep outbound travel low will also dim the growth of the region’s tourism sectors.
The recent Omicron variant introduced an element of unpredictability, as there is currently little knowledge of the efficacy of current vaccines against it and what the health implications might be for the population. According to the forecast made at ICAEW’s event, the impact of the variant is expected to be acute but contained to Q1 2022. In the worst-case scenario where economies return to lockdowns, global GDP growth will drop from the current forecast of 4.5% to 2.3%. This would have a ripple effect on weaker export demand for South-East Asia, which is projected to reduce growth from 6.1% to 4.3% in this scenario.
“The Omicron variant poses a risk to the recovery and growth of South-East Asia economies, especially if it is able to circumvent the defences built up by the current vaccination progress. At this turning point, it is essential for governments, businesses, and people in the region to demonstrate a spirit of solidarity and take collective responsibility in complying with public health guidelines, and diligently reporting Covid-19 infections. Small efforts will amount to a big difference in allowing us to live with a “new normal” and help build back a region of stronger and more sustainable economies,” said Elaine Hong, ICAEW Regional Director for China and South-East Asia.
Supply Chain Disruptions to Persist Well in 2022
The ease of restrictions since August and relatively healthy world trade activities have contributed to the growth of South-East Asia’s manufacturing Purchasing Managers Index (PMI). Capacity on major shipping routes between Asia, Europe and the United States has recovered to pre-shipping levels, up 6% during the first nine months of 2021.
Nonetheless, global demand has outstripped supply, leading to delays in shipping and economies will have to find a way to build their resilience to supply chain disruptions and tackle inflation. In addition, capacity at ports will remain tight as Asian manufacturers work through a backlog of orders and strive to meet global demand. For example, in efforts to meet global demand, Malaysia’s main port, Port Klang is experiencing the shortest average turnaround time for vessels among major global ports, about two days, while the global average is about one week.
While the worst may be over, a full easing in supply chain disruptions will not be possible before the second half of 2022.
Other key findings from the Q4 Economic Insight Forum include:
Inflation on the Rise in South-East Asia
Inflation has been elevated for many Asian economies, driven by rising commodity prices and weather-related spikes in food security. It is expected to average about 2.8% across the region in 2022.
Malaysia Stands in Good Position for Reopening
With over 90% of its population fully vaccinated and the recent lifting of the most restrictive measures, the worst seems to have passed for Malaysia. Recovery on industrial production exports and indicators on retail mobility statistics contributed to a strong rebound in household spending in October and November in 2021, which will have a spill-over effect on employment and provide confidence for consumer spending.
In addition, the government’s expansionary budget for next year and large fiscal stimulus packages should steady its recovery. This trend is already being reflected in a huge increase in retail and export volumes which went from more than a 20% deficit year-on-year in 2020 to grow to more than 20% in 2021.
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