This article first appeared in Forum, The Edge Malaysia Weekly on September 11, 2017 - September 17, 2017
Asian economic growth is set to accelerate. After a long period of patchy and unconvincing recovery, there are signs that the global rebound is gaining enough traction to be a durable one. Better still, this upward lift is supporting higher export growth in Asia. More encouragingly, domestic engines of growth also seem to be regaining some vigour. Overall, this means that the regional economies have more buffers and so could be more resilient against political or other shocks that financial markets are currently worried about.
Global demand offering more durable boost to Asian exports
The data released in the past couple of weeks has been strikingly positive. In the US, the manufacturing sector is at its most vigorous since 2011, judging by the Purchasing Managers’ Index. Global semiconductor sales are expanding at their fastest rate since 2010. In Europe, French business confidence is at its highest level since April 2011 and German business confidence is close to a record high. That is why bank lending in the eurozone is recovering, with Germany leading the way — businesses are more confident about the future and are borrowing to expand, which suggests that the rebound will continue. Even in Britain, where concerns over the impact of Brexit are growing, the fall in the sterling has boosted exports — surveys show that the proportion of companies reporting booming export orders are at a record high.
Encouragingly, this global recovery is now feeding more palpably into Asian export growth. SouthKorean exports — a bellwether for global demand — grew by an average of around 18% in July-August. Malaysia just reported that exports in July surged 31%. Better still, the brighter prospects for exports are translating into stronger industrial production. In Singapore, industrial production soared 21% in July, one of the highest growth rates the country has enjoyed in five years. Growth appears to have continued into August when Singapore’s Purchasing Managers’ Index reached its highest level in three years while the electronics index has not seen such high levels since November 2010. In Malaysia, surveys of purchasing managers show that higher export demand has boosted optimism among manufacturers to its highest level since December 2013.
Domestic turnaround more evident as previous years’ negatives fade away
This year has seen the forces that dragged the region’s growth down begin to reverse:
Government expenditure an additional boost to domestic demand
The public sector has been a reliable fallback for many economies in times of economic softness, particularly in early 2015 when the global economy was in a trade funk. Governments opened their coffers and poured financial resources into the economies in a bid to reignite growth rates and support structural transformations. In recent quarters, government consumption expenditure across the core Asean economies has supported growth, particularly in Singapore and the Philippines.
Missing ingredient in domestic demand story has been investment
The big disappointment has been investment. In 2Q2017, investment contracted in Singapore and Thailand, with public sector investment mainly responsible for the decline. This means that falling government investment has become a drag on growth after stimulating the economy from early 2015 through the middle of last year. In Malaysia, growth in investment slowed to just 4.1% in 2Q2017 from 10% in the first quarter while Indonesia has seen steady but unspectacular growth of investment in the low single digits. It is in the Philippines, though, where investment growth has surged, up by around 12% in the first half of this year.
For domestic demand to be a sustainable engine of growth, we need to see investment recover more strongly. There are some glimmers of hope:
Looking ahead: Prospects remain good for Asean
We think there is good reason to remain confident that the uptick will be sustained.
First, the lead indicators for growth in the region remain good. The official lead indicators are rising across most of Asean. In addition, purchasing manager surveys suggest that new orders are flowing in strongly enough to sustain expanded production in coming months.
Second, we suspect that there will be further upside surprises in global demand. Economic activity is now expanding across virtually all parts of the globe, with exceptions only in countries suffering political crises such as Venezuela or parts of the Middle East. The big developed economies are performing well and the Organisation for Economic Co-operation and Development lead indicators suggest that this will continue. China’s growth has stabilised and the latest purchasing manager surveys for both manufacturing and services show that activity is holding up well despite government measures to cool real estate and bank lending. India appears to have finally put the shock of its demonetisation and imposition of GST behind it, with the latest Purchasing Managers’ Index finally moving back into expansion. Moreover, large emerging economies such as Brazil, Russia, Turkey, South Africa and Nigeria, which have endured recessions in the past year, are seeing a modest recovery.
It is the nature of such a globally synchronised recovery that recoveries in one region feed into others in a mutually reinforcing upcycle: That is how upside surprises to growth emerge. That makes the recovery more resilient to shocks such as political or financial stresses.
Despite the signs of rising momentum, many observers remain concerned that the rebounds we have seen so far may not last. One reason has been the rise in geopolitical and trade tensions. But is it likely that these concerns really hurt Asean?
Implications: Where will shifts in policy be?
Within the region, one set of implications is on policy going forward:
In short, the overall prospects are good, the risks can be contained and policymakers are likely to move cautiously to continue supporting the economy.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
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