Economic Outlook for Southeast Asia, China and India 2023 - Update

Recent developments and near-term outlook

ASEAN-5

Indonesia

Indonesia’s economy grew by 5.3% in 2022, supported by recovery in private consumption and robust export performance benefitting from high commodity prices. In addition, policies to encourage investment and efforts to bolster downstream industries started bearing fruits. This growth momentum continued into 2023, with growth of 5.2% in the second quarter, marking seven consecutive quarters of year-on-year growth above 5%. Economic expansion is mainly driven by household spending, investments and government spending, which offset a slowdown of exports. Household consumption recorded 5.2% growth in the second quarter of 2023, supported by a surge in personal mobility and strong consumer confidence. Government spending rose 10.6% in the same period supported by personnel expenditure and the government accelerating construction of roads and irrigation systems. Overall investment growth rebounded in the second quarter, posting a year-on-year growth of 4.6% from a weak expansion of 2.1% in the previous quarter. Despite strengthened services exports following a significant increase in international tourist arrivals, growth of exports of goods and services experienced a huge drop from 12.2% in the first quarter down to -2.75% in the second quarter, amid a global economic slowdown and declining prices of major export commodities, such as coal, palm oil and metals.

On the supply side, while most sectors recorded growth in Q2 2023, the manufacturing and services industries both stood out as the major drivers of growth. The services industry expanded 7.4% year-on-year following the complete removal of all remaining mobility restrictions and a robust recovery of the tourism sector. The manufacturing sector grew by 4.9%. Indonesia’s real GDP growth will be steady in 2023 at 4.7% and growth is projected to improve to 5.1% in 2024. Activities leading up to the Q1 2024 general elections and local elections in Q4 2024 should contribute to spending.

Headline inflation began easing in March this year and declined to 3.1% year-on-year in July 2023, settling into the central bank’s target range for three months in a row. As of July 2023, Bank Indonesia had held its seven-day repo rate at 5.75% for six consecutive months after a rise in January 2023. On the fiscal side, commodity windfall and tax reform packages have contributed to the government returning to its fiscal rule, with a deficit of 2.4% of GDP in 2022, achieving the fiscal consolidation goal ahead of target. Government external debt also declined in the second quarter of 2023 at USD 192.5 billion, down from USD 194.0 billion in the first quarter. Indonesia implemented a tax harmonisation law in 2022 that brought about changes in income tax and the value-added tax rate. Several other policy reforms followed the implementation of this law. The fiscal deficit is expected to stay below the mandated ceiling in 2023 as the tax measures continue and as the need for pandemic-related spending gradually eases following the government’s decision to end the national emergency status of the COVID-19 pandemic.

Malaysia

Malaysia’s economy continued its trend of slowing growth in the second quarter of 2023, recording real GDP growth of 2.9%. This brings down growth in the first half of 2023 to 4.2%, mainly due to the prolonged decline in exports which have dropped 9.4%, as weak external demand persists amid a global economic slowdown. Domestic demand remains the key growth driver underpinned by private consumption and investment. The latter is supported by capacity expansion, developments of multi-year projects and higher fixed asset spending by the government. Meanwhile, government spending also rebounded, posting 3.8% year-on-year growth in the second quarter, after a decline of 2.2% in the first quarter.

While growth in the services sector moderated in the second quarter to 4.7% from 7.3% in the first quarter, the continued recovery in inbound tourism will ensure that the sector remains a major source of economic activity. The construction sector recorded the highest annual growth of 6.2%. Both sectors are expected to bring more employment opportunities and further increases in wages, which will reinforce consumer consumption. Expansion of the job market will help a substantial proportion of household borrowers with risky debt-to-service ratios. Domestic demand will thus continue to support growth in 2023, underpinned by the strengthening job market. Fiscal policy for 2023 is appropriately contractionary, which will result in a contraction of the budget deficit in the near term. The value of the Malaysian ringgit against the dollar is expected to improve for the rest of the year contingent on the monetary policy stance in the United States and the momentum of recovery in China.

External headwinds will impact Malaysia’s economic performance in 2023. Real GDP growth is expected to moderate to 3.9% in 2023, but is expected to improve to 4.2% in 2024. The downturn of the global electronics industry will continue to weigh on the electrical and electronics sector, which accounts for about 40% of total merchandise exports, and this will impact overall manufacturing exports. A rebound in China’s economy should help to mitigate the contraction in the electronics industry, although the effect may be limited as recovery in China is not strong as expected. Core inflation is slightly easing estimated at 2.8% in July but upside risks remain. The ringgit’s depreciated value will continue to exert pressure on import prices although Bank Negara Malaysia’s presence in the foreign exchange market will help mitigate excessive currency movements. At the same time, dry weather caused by El Niño will likely decrease crop yields causing food prices to rise, while crude palm oil production could drop by 1-3 million tonnes by next year, which would further depress exports.

Philippines

Strong pent-up demand propelled economic expansion in the first quarter of 2023, though the impact was limited by higher inflation and massive borrowing costs owing to aggressive monetary tightening by the central bank. These factors dragged down private consumption and investments in the following months which led to a weakening of the economy in the second quarter. This was further exacerbated by the contraction in government spending resulting in real GDP growth of 4.3% in the second quarter, the lowest in nearly 12 years.

Real GDP growth is forecast to reach 5.6% in 2023 and 6.1% in 2024. A key growth driver in the second half of 2023 will be a strong rebound in government spending, from its 7.1% contraction in the recent quarter, executed through catch-up plans and frontloading of programmes and projects. Fiscal stimulus activities are also being implemented which should fuel activities of both the public and private sectors. Domestic demand is expected to continue to underpin economic growth in the remaining semester of 2023 and up to 2024, supported by labour market expansion, personal income tax cuts, stable inflows of remittances and the steady recovery of tourism. However, private investment is forecast to continue to weaken amid high interest rates and a subdued global economy, though improving business sentiment and the implementation of investment reforms should encourage investor confidence and attract more foreign direct investment (FDI). On the supply side, the services sector will continue its steady upward trajectory and will remain a reliable source of economic activity, boosting GDP growth, due to the improved outlook of tourism as well as rapid growth of the business process outsourcing industry. The manufacturing Purchasing Managers’ Index (PMI) continues an expansionary trend in the sector, although at a slower pace amid sluggish external demand. Meanwhile, fiscal consolidation is underway, and the deficit is forecast to narrow in 2023-25.

Prolonged weak external demand from the United States and China, the country’s top trading partners, will continue to drag down exports in the coming months. Another major downside risk to the growth outlook is lingering high global inflation, which could spur a further tightening of global financial conditions across advanced economies, possibly triggering capital outflows. This could push down the value of the Philippine peso, which is forecast to recover mildly from a sharp depreciation episode in 2022. The persistent global financial turmoil could translate into higher borrowing costs for the government, adding pressure to its public debt. On the domestic front, while headline inflation continues to decelerate, core inflation remains elevated though it is moderating slightly. Upside risks to inflation remain, such as the looming threat that El Niño will impact agriculture output, wage increases in the urban sector and the lingering restrictive policy stance of the US Federal Reserve (the Fed) and the European Central Bank (ECB). The Philippine central bank is likely to maintain a high interest rate regime, which will dampen GDP growth should pent-up demand ease.

Thailand

Thailand’s real GDP growth moderated to a slower-than-expected pace of 1.8% in Q2 2023, bringing growth in the first half of 2023 to 2.2%. The global economic slowdown pulled down export growth to only 0.7% while falling investor confidence led to a significant contraction of investments from 3.1% in the first quarter to just 0.4% in the second quarter. Merchandise exports fell by 5.7% in real terms, mainly due to a reduction in agricultural products such as rubber and manufacturing products such as electronics and computer parts. Economic growth in the second quarter of 2023 was largely driven by robust domestic demand, particularly private consumption which rose to 7.8%, in line with the continued recovery of inbound tourism. This, in turn, fuelled steady expansion in the services sector which grew by 4.1% in the same period.

Real GDP growth is projected to expand at a lower rate of 2.8% in 2023 amid the continued slowdown in export activity, but growth is expected to improve to 3.5% in 2024. A large and steady inflow of tourists from both China and other countries within Emerging Asia will be a key component in the solid recovery of Thailand’s tourism sector. Over the short term, Thailand’s economy will continue to be bolstered by private consumption and international tourism arrivals. Goods exports will weaken, held back by sluggish external demand due to a slow recovery of global manufacturing.

El Niño also poses downside risks to Thailand’s growth, as unusually low average rainfall may lead to drought. Apart from the direct impact on the agriculture sector, droughts and water shortages could also impact manufacturing and tourism. The effects of El Niño could also pose upside risks to inflation along with increased consumption and possible higher spending by the new government. A high level of public debt poses yet another risk.

Viet Nam

Viet Nam saw growth that was weaker than expected in the first half of 2023 due to the persistent downturn in external demand from major global markets, and elevated core inflation pushing down consumers’ purchasing power. Real GDP growth was recorded at 3.3% and 4.1% year-on-year in the first and second quarters of the year respectively, as the country struggles to buoy up its export-dependent economy amid a continued slowdown in demand from its major trading partners. Economic activity in the first half of the year was underpinned by moderate growth in final consumption which increased by 2.7% and investments by 1.2%. Exports in goods and services dropped by 10%.

Viet Nam’s industrial production index continued to contract for the seventh consecutive month, falling by 12.3% in July and signalling a sustained contraction of the export-driven manufacturing sector, further exacerbated by power shortages resulting from the heatwave that affected the country in June. With the external environment remaining unfavourable, Viet Nam’s growth is expected to remain subdued for the rest of the year. The real GDP growth forecast for 2023 is revised downwards to 4.9% but is expected to pick up to 5.9% in 2024. In the near term, private consumption will continue to moderate because of businesses scaling back their employment amid declining business confidence.

CPI inflation will continue to decline in 2023 as global commodity prices ease further. With inflation cooling down, it is likely that the State Bank of Viet Nam will continue its series of interest rate cuts to spur lending and investment, which could help build growth momentum along with the increase in government spending. Government policies to raise domestic consumption should also contribute to sustaining growth in the coming months, such as a lower VAT on some sectors, and an extension of the validity of e-visas to improve tourism. The services sector will remain a key driver of growth, especially in areas such as retail trade, accommodation, catering service, entertainment, and passenger transport. A continued recovery in the tourism sector will provide support to growth, though this will not be enough to offset the imminent headwinds for the balance of the year. A sustained recovery in the manufacturing sector will remain the key driver in boosting the country’s economic activity and headwinds to exports are forecast to gradually ease from late 2023 to 2024 as the US and EU economies start to recover. Another downside risk to the country’s growth outlook in the near-term is the impact of El Niño on the country’s agricultural sector, particularly for crops such as rice, palm oil and coffee.

Brunei Darussalam and Singapore

Brunei Darussalam

Brunei Darussalam’s economy improved slightly in Q1 2023, posting real GDP growth of 0.8%, year-on-year mainly driven by robust expansion in private consumption despite declines in government spending, investment, and exports. From the production side, the services sector grew by 10% supported by growth in air transport and other transport services following the end of travel restrictions, as well as growth in finance and other private services. Meanwhile, the oil and gas sector contracted by 5% amid the decline in the production of crude oil, natural gas, and liquefied natural gas following the COVID-19 pandemic which caused delays in exploration, development, and manufacturing. An increase is expected in the coming months as production challenges are overcome, although the recent cancellation of a large export contract with Japan may hinder this. FDI recorded a net outflow of BND 403.2 million (Bruneian dollars) in 2022, mostly due to falls in the manufacturing, mining and quarrying sectors due to the production challenges mentioned above.

The downstream petrochemical and fertiliser sectors saw growth of 14.3% in 2022 following the completion of major oil refineries and a petrochemical complex, and a full year of production at the new Brunei Fertiliser Industries plant. Increased imports in both sectors, especially in March, show that they continue to be a driver of growth and will support government budget if revenues from oil and gas continue to dwindle. Real GDP growth is forecast to moderate to 2.1% in 2023 and will slightly improve to 2.3% in 2024.

Inflation returned to pre-pandemic levels in March and further decreased to 0.8% in May due to the decrease in the prices of various modes of passenger transport and continued moderation across categories such as food and non-alcoholic beverages and housing, electricity, gas and other fuels. This will bolster private spending and support the services sector. Government subsidies are further contributing to the reduction of inflation.

Singapore

Singapore’s GDP growth momentum was weak in Q1 and Q2 2023, with year-on-year growth of 0.4% and 0.5%, respectively. Reduced manufacturing output resulted from low external demand in key markets following the global economic slowdown, but robust services growth supported GDP. Outside of a slight spike in March, there was a dip in growth of Singapore’s important electronics manufacturing and net exports, with a decline in annual growth predicted for 2023. Growth of domestic consumption has continued to fall despite decreasing year-on-year inflation in recent months. External pressures have played a role, with weakening sentiments amidst elevated global food, electricity and petrol prices. FDI saw a contraction of 20.9% year-on-year in Q1 as a result of increased borrowing costs following monetary tightening, but infrastructure investments to ensure resilience remain a policy focus of the government for the financial year.

Large growth in the services sector is providing much-needed support to GDP. Following the ending of restrictions last year, air travel and inbound tourism have seen an increase. Total retail sales were up 1.8% in latest data, from May. Most industries recorded year-on-year increases in sales due to increased domestic and tourism demand. All areas of food and beverage services recorded year-on-year growth in April, especially food caterers. The construction sector has also seen growth thanks to a strong labour market. Singapore’s economy is forecast to moderate in 2023 to 1.4% amid a continued slowdown in external demand though growth is expected to improve to 2.5% in 2024.

Inflationary pressures have eased thanks to monetary policy tightening by the Monetary Authority of Singapore. Food inflation has decreased and this should ease price pressures since Singapore is highly reliant on food imports. Housing inflation has also decreased thanks to macroprudential measures to cool the property market. Singapore’s current account surplus increased to SGD 31 billion (19% of GDP) in Q2 2023, driven mainly by surpluses in goods and services balances.

CLM countries

Cambodia

Real GDP growth in Cambodia is projected to be at 5.1% in 2023 but pick up again to 5.9% in 2024. Growth in Cambodia’s main exports, garments and footwear, will moderate in 2023 due to weakened demand from major importers in the advanced economies, leading to a manufacturing sector slowdown and a contraction of employment in the sector. Tourism is enjoying a strong rebound with travel restrictions no longer in place and 2023 projections for Cambodian tourism have already been surpassed in terms of both volume and spending. This will allow the services sector to make up for some of the decline in growth via manufacturing. Agriculture may take a step back, however, because of the expected El Niño conditions in 2023.

The Cambodian riel continues to face depreciation pressures with respect to the US dollar. Slow progress in Cambodia’s de-dollarisation blunts the effectiveness of monetary policy actions. Fiscal policy will remain focused on combatting the effects of inflation. Private sector debt loads remain high, particularly in real estate. In addition, household debt as a share of GDP rose from 2019 to 2022.

Cambodia’s trade deficit will likely remain elevated due to a combination of the need to import petroleum products and weakened export demand. This is the case even though gasoline and diesel prices have nearly fallen back to levels seen at the start of Q4 2021, after peaking in Q2 2022. Exports of fish and agricultural products grew nearly twentyfold quarter-on-quarter from Q4 2022 to Q1 2023 driven by exports to China enabled by the recent China-Cambodia FTA and an increase in rice exports to the European Union, even as rice exports to China have softened through 2023. Furthermore, Cambodia’s large current account deficit remains a risk. The deficit stems from high demand for imported goods and slow tourism recovery, though tourism has picked up and visitor arrivals in the first half of 2023 came in at 77% of the volume observed in the first half of 2019. Current account deficits have historically been supported by FDI, but approved FDI contracted in the first two months of 2023, partly due to China’s growth being weaker than expected.

Lao PDR

Real GDP growth in Lao PDR is projected to be at 3.4% in 2023 and improve to 3.8% in 2024. Lao PDR is caught in simultaneous high inflation and sharp currency depreciation, each of which strains households and firms. Year-on-year inflation decelerated slightly in Q2 2023, for the first time in eight quarters, but remained above 35%, while the Lao kip lost more than half of its value from June 2021 to June 2023. To combat these problems, the country’s central bank has aggressively raised the policy rate. An increasing debt load is another major concern.

Lao PDR’s exports show signs of improvement, even as a year-on-year decline in Q1 2023 ended ten consecutive quarters of year-on-year growth. FDI increased year-on-year in Q1 2023 after five quarters of year-on-year decline. Agriculture accounts for nearly 70% of employment in Lao PDR and contributes more than a quarter of its GDP. El Niño weather conditions, projected for 2023, could reduce agricultural yields. Recoveries in agriculture and manufacturing could be hindered by labour shortages driven by workers seeking higher wages in neighbouring countries. Hydroelectricity is Lao PDR’s largest export. After delays due to the COVID-19 pandemic response, a dam in Luang Prabang will come under construction in the second half of 2023. However, concerns abound over the dam’s proximity to the Luang Prabang UNESCO World Heritage site, a fixture of the country’s tourism sector, and the effects that flooding resulting from the dam could have on the site and the people who live nearby or depend on it for employment.

Public expenditure remains well below pre-pandemic levels, especially in key areas such as health and education as fiscal austerity measures are being used to rein in Lao PDR’s sovereign debt stock. Furthermore, rising prices of materials have increased construction costs for public expenditure projects, leading the government to postpone or cancel several planned ones.

Myanmar

Real GDP growth in Myanmar is projected to remain weak in 2023 and 2024. The country’s trade deficit has widened as imports have increased while exports have declined. Manufacturing has slowed amid frequent electricity shortages and heightened administrative hurdles, especially in international commerce. Cyclone Mocha struck Myanmar in May 2023, flooding cropland and fisheries, harming livestock through loss of grazing land, and negatively affecting the economy. Fiscal deficits will likely remain larger than they were prior to the COVID-19 pandemic. The coup in Myanmar and the resulting political and safety uncertainty pose risks to growth, especially in tourism and foreign direct investment.

China and India

China

China’s sudden decision to abandon its stringent zero-COVID policy in late 2022 has brought changes that reshape the short-term outlook for the Chinese economy. The strong recovery was led by in-person services, while goods sales and online services sales remained stable. Sales of domestic tourism services shot up due to pent-up demand after the opening. However, judging from recent high-frequency data, the recovery has started to lose momentum. The PMI’s manufacturing component has begun to contract, and the services component has weakened as well. New export orders are weak, as indicated by the contraction of the respective PMI component, owing to weak global demand. The employment component has remained in contractionary territory for most of the time since the outbreak of the pandemic, reflecting high uncertainty and translating into higher household savings.

Economic growth in 2023 is likely to be lower than initial forecast of 5.4% and will continue to decline to 5.1% in 2024. Exports are expected to remain weak until global demand recovers. Consumption has also been weaker than expected since the beginning of the COVID-19 pandemic. While demand-side stimulus measures aim to bolster consumption, their impact is likely to be short and frontload consumption without changing its overall volume substantially. For consumption to reach its potential, more fundamental structural reforms are needed. In particular, the social safety net needs to be strengthened to reduce precautionary savings. A wider range of medicine and treatment need to enter the scope of reimbursement to make sure that no one falls into poverty due to high medical costs. Furthermore, all workers should be covered by unemployment insurance to provide for living costs during business cycle downturns or economic transformations.

With the recent default on coupon payments of another large property company, property sector debt problems are gradually coming to the surface. While these credit events may imply greater risk aversion and thus more restricted financing conditions for property companies in general, they do not constitute systemic risk as the regulations governing mortgage financing are stringent. Moreover, debt renegotiation and restructuring appear to be feasible ways to resolve debt issues. Similarly, recent defaults by a trust company do not pose a threat to financial stability as asset management rules have become more stringent since 2018. In addition, a Trust Protection Fund was established to buy risky assets in 2021 and the trust industry’s exposure to real estate has fallen significantly.

Amid weaker-than-expected growth momentum, China implemented policies to shore up growth in June. The central bank lowered short- and medium-term policy rates by 10 basis points on 13 and 15 June, respectively, and on 20 June it cut the benchmark rate, the one-year loan prime rate, by 10 basis points to 3.55%. Continued weaknesses confirmed by data release necessitated further cuts: on 15 August, medium-term policy rates were cut by 15 basis points and on 21 August the one-year loan prime rate by 10 basis points to 3.42%. The cuts are implemented in an incremental manner to protect banks’ net interest margins and are expected to trigger lowering of deposit rates. Lower interest rates are expected to ease the debt burden on households and coupled with easing measures on the demand side (e.g. relaxing some restrictions on buying and reselling real estate or lowering down payments) could potentially facilitate property sales and investments. A large carryover of infrastructure projects is expected in 2023, as the proceeds of bonds issued were not used in 2022, while tax exemption and reduction measures have been announced for small and micro enterprises. High global energy and food prices did not pass through to the Chinese economy. In contrast, recent CPI data exhibit a dive into negative territory. As this reflects movements in food prices, which have traditionally been the major driver of CPI inflation trends due to a high Engel coefficient, deflationary concerns arise, but they are not yet a cause for worry. In any case, measures to revive consumer confidence and to support the economy need to be adopted. China’s large oil and grain reserves will mitigate the impact of rising global energy and food prices. Structural reforms aiming to boost growth should be stepped up. The country issued a “guideline on improving the market-based allocation mechanism of production factors” in April 2020, with a pilot plan released in January 2022. This principle should be pursued along with a greater role for the private sector in allocating capital to achieve greater efficiency and revive growth.

India

India’s economy has fared better than expected despite global headwinds affecting the region. The country ended fiscal year 2023 with surprisingly robust growth of 6.1% in the last quarter, largely fuelled by private consumption and investment on the demand side. The economic outlook for fiscal year 2024 appears to be positive, though certain external and domestic factors indicate a moderate pace of growth. Pent-up consumer demand is expected to dissipate gradually, weighed down by high inflation in energy and food prices which will persist in the second half of 2023 with July inflation hitting a 15-month high at 7.4%, up sharply from 4.8% in June.

Investment will remain a key driver of growth, though appetite for investment will moderate as earlier domestic monetary tightening progressively takes effect. However, the Reserve Bank of India is expected to start easing policy rates in early 2024, subject to a decline in headline inflation. Government spending will increase on the back of substantial frontloaded capital expenditure on infrastructure and its rapid execution, as earmarked in the 2023/24 fiscal budget. Barring slow progress on regulatory reforms, steady inflow of FDI should bolster the manufacturing sector, particularly electronics, chemicals, automobiles and textiles. Overall, real GDP is forecast to grow well above the regional average projected at 6.0% in 2023 and rising to 7.0% in 2024.

The agriculture, manufacturing, mining, construction and services sectors all recorded solid growth in the last quarter of the fiscal year. Downside risks are a contraction in the agriculture sector caused by weather disturbances such as El Niño and heatwaves. The advent of El Niño is expected to cause erratic or insufficient rainfall, which will reduce agricultural output and farmers’ incomes and push up food prices. This could impact plans to cut the policy repo rate in early 2024. Energy disruptions caused by El Niño may trigger energy price volatility, though the impact will vary across regions. The urgency for fiscal consolidation may put pressure on government spending, though this may be delayed with national elections upcoming in 2024. Nonetheless, the fiscal burden on the central government remains high. Downside risks to consumption demand include the impact of export slump to the labour market in export-oriented industries; food inflation; the rise in home loan equated monthly instalments amid rate hikes; and the impact of all this on the budgets of middle-class families.