Southeast Asian Economies: Building the Base for Stronger, Better Distributed Growth

This chapter will review recent trends in the economies of Southeast Asia. It will first study cyclical trends in economic variables across the region such as economic growth, inflation, the external accounts, and currency stability. It will then highlight and assess emerging trends in the region which will help drive future patterns of economic activity.

Recent Economic Trends: Region in Good Shape

A Challenging Global Environment

Most Southeast Asian economies remain highly integrated with the global economy. Economic growth and other dimensions of the regional economies are therefore substantially affected by global developments. The year 2012 was marked by significant headwinds and challenges emanating from the global environment.

First, global demand for the region’s exports grew weakly as the major global economies endured another year of challenges. Financial and other stresses also emanated from the major economies. The eurozone economies continued to suffer the consequences of the sovereign debt crisis: fiscal austerity depressed demand while business and consumer confidence was dampened. The United States was in better shape but there too economic growth was mediocre, with a material deceleration in capital spending by the business sector that grew wary over the risks of political impasse over key budgetary decisions. China saw a clear trend of slowing growth through the year which was only beginning to reverse in the third quarter. Japan saw a rebound from the effects of the triple disasters of March 2011, but the recovery lost momentum as the year progressed.

Second, repeated bouts of monetary easing have created a global financial system that is flush with liquidity and where interest rates are at unusually low levels. This has been compounded by a highly uncertain business and financial environment as a result of the eurozone sovereign crisis, the worries over imbalances in the Chinese economy and uncertainty over the elections in the United States. As a result, flows of portfolio capital have been extremely volatile, with risk appetites rising and falling unpredictably through the year and resulting in destabilizing capital flows that rendered management of the region’s currencies and external accounts difficult.

Third, as a result of a weaker global economy, commodity prices in general have fallen. In particular, prices of economically sensitive commodities such as rubber, thermal and coking coal, and base metals have fallen. Prices of food-related crops which are important to the region, such as crude palm oil, have also fallen, hurting incomes for rural households in much of the region.

Fourth, energy prices have, however, remained higher than expected. Although prices have eased, the multiple political flashpoints in the Middle East have kept the risk premium in oil prices at a high level. Thus, even as global economic activity moderated, oil prices did not fall as much as they should have.

Fifth, political events had material effects on regional economies. Tensions over territorial disputes in the South China Sea and East China Sea intensified in 2012. There were signs that Japanese manufacturers have become keener to relocate some production out of China to locations in Southeast Asia as a result. Business spending on capital equipment in the United States was hurt by uncertainty over the U.S. presidential elections and concerns over the political impasse over fiscal policy — this hurt regional exports of information technology goods. Multiple crises in the Middle East supported the price of oil, which did not fall as much as the weakening of global demand should have caused. This kept energy prices in the region at a relatively high level, hurting those countries in particular which continued to provide large fuel subsidies to consumers.

Overview of Recent Trends

Table 1 provides a quick overview of the past year for the economies which provide sufficient and timely data. A number of patterns stand out.

Table 1.

Overview of Economic Trends in Southeast Asia in 2012

First, economic growth in the region mostly held up despite the global headwinds. Figures 1 to 4 and Table 2 show that economic growth in 2012