In Asia, exports are back

The composition of gross domestic product (GDP) growth in Asia is shifting. In the first quarter of 2024, outside mainland China and India, the contribution of ‘net exports’ increased in several economies, largely due to improving exports.

While annual export growth has not turned positive in all economies, the three-month average trend is improving.

Gains made in the US market as well as the position in the semiconductor value chain are defining the magnitude of export recovery. Though exports to the US have increased for nearly all economies, the largest gains have been for South Korea, Taiwan and Vietnam.

The first two of these are also benefitting from their strength in advanced semiconductors as demand is structurally improving. Vietnam’s exports are supported by both productivity gains in the tradables sector and shifting of supply chains from mainland China.

Though not uniformly so, the second change in the region’s growth dynamics is moderating household consumption. However, this slowdown and its implications need to be considered in a nuanced manner.

Taking into account both these drivers and the policy mix, ANZ Research forecasts 2024 Asia (ex-mainland China and India) GDP growth at 3.5 per cent, broadly unchanged from its previous assessment.

Normalising domestic demand

In Taiwan and Thailand, the shift represents a mere normalisation after unusually strong growth in 2023, as it has not been accompanied with a deterioration in consumer confidence.

In the Philippines, the slowdown in private consumption is more genuine, driven by weaker purchasing power. ANZ Research views this slowdown positively as it should alleviate inflation and current account pressures. The current account deficit has been narrowing.

Private consumption accelerated in Indonesia, Malaysia and South Korea in the first quarter 2024. This was supported by pre-election spending in Indonesia and a stable labour market in Malaysia.

Buoyancy in Malaysia is unlikely to sustain in the coming quarters as fuel subsidy rationalisation is likely to hurt household purchasing power, unless fully offset by cash transfers. South Korea’s improvement in private consumption appears more sustainable as easing inflation has bolstered household purchasing power. There are also signs the export recovery is feeding through into labour demand.

Capital formation remains lacklustre, with investment-to-GDP ratios broadly remaining below pre-pandemic levels in most economies. Based on capacity utilisation rates and corporate sentiment surveys, ANZ Research does not foresee a material upturn in investment except in Malaysia and South Korea.

In Malaysia, investment approvals, both domestic and foreign, had increased by 4 per cent of GDP in 2023 to 18.1 per cent. That could potentially provide a significant boost to investment and overall GDP growth. In South Korea, various investment drivers including a falling inventory-shipment ratio, property prices and capacity utilisation have turned for the better.

Mild policy support

ANZ Research remains of the view that policy support will continue to be mild. Based on 2024 budgets now available, the fiscal impulse is projected to be negative in all economies except South Korea and Thailand.

In the case of Thailand, ANZ Research believes the much-delayed digital wallet (cash transfer) program of 2.6 per cent of GDP will have only a minor impact on household consumption for two reasons. Some of the program outlay will come from reallocation of expenditures as opposed to new spending. Moreover, the high level of household indebtedness is likely to reduce its multiplier effect. Much of the transfers may go into savings as opposed to new spending.

On monetary policy, ANZ Research has recalibrated its policy rate forecasts and now forecasts rate cuts this year only in South Korea. Moreover, this is likely to be only 25 basis points, compared with a previous expectation of 50.

South Korea’s economy is characterised by a high level of indebtedness and therefore should benefit from lower rates. It has also experienced more durable improvement in its external position.

Thailand has similar characteristics. Rate cuts in Indonesia and the Philippines are also not on the table this year. In the Philippines, though receding, inflation is still running close to the upper bound of the official target range. In Taiwan, strong first-quarter GDP data has raised the risk of further tightening.

The inflation divide

Developments on inflation continue to be favourable, although a divide has emerged between advanced and developing economies in the region. Inflation has been stickier in Singapore, South Korea and Taiwan. By contrast, it has eased considerably in the Philippines, where inflation has remained in the official target range despite elevated food prices. The outturns are still not low enough to permit rate cuts.

Consistent with the rising contribution of net exports to overall GDP growth, current accounts have also improved. The key exception has been Indonesia where it has mildly deteriorated due to weaker terms of trade. Conversely, there has been considerable improvement in Malaysia and the Philippines. Where the current account deficit is narrowing on the back of lower trade deficits and steady remittances.

ANZ Research believes the evolving growth-inflation-external position mix is becoming more stable. It still does not permit an early policy pivot in most economies, but the developments are comforting. The single most important risk is unforeseen weakening in US demand that could upset the region’s external led recovery.

Sanjay Mathur is Chief Economist, Southeast Asia & India at ANZ

This is an edited version of a note from the ANZ Research report “ANZ Research Quarterly: striving towards a new normal(isation)”, published June 25, 2024.