Southeast Asian Economies: Moderating Growth Momentum

After growing rapidly in 2010 at 7.2 per cent, the Southeast Asian economies are showing signs of cooling, but are not necessarily collapsing to 2008-09 levels. According to the estimates of the International Monetary Fund (IMF), the Southeast Asian economies grew at a moderate rate of 5.4 per cent in 2011, with Indonesia growing at 6.4 per cent, while Singapore and Malaysia are each estimated to have grown by 5.2 per cent (Table 1). The economies' ability to undertake substantial fiscal and monetary policy responses has benefited the region as a whole.

In general, the output expansion in 2011 was driven in most cases by broad-based domestic demand. Private consumption was strong across most countries, despite rising inflation. Consumption benefited from increases in employment, farm incomes (owing to favourable prices for agricultural commodities), and wages (Singapore, Malaysia, the Philippines). Private investment was also robust in most of Southeast Asia in 2011, encouraged by high capacity utilization, growth in credit, and positive business sentiment.

In 2011, the contribution to growth from net exports was mixed. Countries like Singapore, Malaysia, and the Philippines, who are more open to trade, saw much slower export growth than in 2010 on weaker external demand. Imports rose across the region, driven by buoyant private consumption and investment, and larger volumes of oil and commodities.

During the year, the economies of Southeast Asia were hit hard by the supply-chain disruptions, first from the March earthquake in Japan and then later from the flooding in key areas of Thailand. This affected the manufacturing activities and exports from these countries.

Table 1.

Growth Performance of Southeast Asia

In 2010 and 2011, some important characteristics emerged among the Southeast Asian economies. First, the growth performance in the region has been more divergent; while Indonesia is looking the most resilient around 6 per cent, growth momentum seems to be most volatile in Singapore and Thailand. The rest are in between these two groupings.

The region is also progressing fast on economic rebalancing. Of Southeast Asia's aggregate exports, the share shipped to the Group of Three (G-3) economies (the United States, the European Union, and Japan) fell from 37 per cent in Q1-2007 to 30 per cent in Q2-2011. By contrast, the share of exports shipped to China went up from 9 to 12 per cent, and to the rest of the world from 54 to 58 per cent over the same period. Due to the lacklustre G-3 demand, Southeast Asia is putting more focus on generating domestic demand through its loose macro economic policies and large public infrastructure project spending. This will affect the economic outlook of the region going forward.

Risks from External Factors

At the end of 2011, Europe's problems were the most critical factor to influence the performance of Southeast Asian economies. Banks, mainly European ones, hold billions of euros of risky government debt, and if they fell into another credit crunch due to losses from these portfolios, that could lead to a global recession. Although the European Central Bank is unwilling to underwrite the mounting debt, it may eventually be forced to step in. But till then there would be much uncertainty and fear of collapse in the financial and the real economy. The IMF predicts the euro area to grow by 1 per cent in 2012, after estimating it to have grown by 1.6 per cent in 2011. In 2012, the euro area is also likely to see severe fiscal austerity measures, which may push the region into a modest recession.

As for the United States, it had continued to struggle with its economic problems in 2011. However, towards the end of the year, the U.S. economic data surprised many on the upside, allaying concerns of a potential U.S. double recession. According to the IMF, the U.S. economy is estimated to have grown by 1.5 per cent in 2011 and is likely to accelerate albeit slightly to 1.8 per cent in 2012. The economy...