S-E Asia economic growth to remain sluggish at 4.5% in 2020: report

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A view of Vinhomes Central Park and Landmark 81, Ho Chi Minh city, Vietnam
DECEMBER 05, 2019 - 2:12 PM

SOUTH-EAST Asia’s GDP growth will likely remain at 4.5 per cent in 2020, amid high risks of a re-escalation in trade tensions between the US and China, according to the latest report produced by the British advisory firm Oxford Economics.  

The region has recorded sluggish performance in the third quarter of 2019, with its GDP growth rising only 4.5 per cent year-on-year from 4.4 per cent in Q2 2019. Thanks to the US-China trade war, trade uncertainty remains a key drag on manufacturing, exports and investment.

“We expect the ongoing trade tensions to continue weighing on the overall growth outlook for South-East Asian economies. Against a weak global backdrop, supportive fiscal measures are expected to underpin an improvement in GDP growth across certain economies, albeit moderately,” said Mark Billington, Institute of Chartered Accountants in England and Wales (ICAEW) regional director, Greater China and South-east Asia.

Even though the US and China are talking again, it is still too early to break out the champagne. “Friction between the two countries remains high and the bulk of imposed tariffs are unlikely to be lifted anytime soon,” said Sian Fenner, ICAEW economic advisor and Oxford economics lead Asia economist.

The report concluded that the outlook for exports and private investment remains challenging and continues to dampen regional GDP growth in the coming year.

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Export-oriented economies have suffered the worst blow from the ongoing trade conflict, with Singapore only narrowly avoiding a technical recession in Q3 2019. 

While Vietnam has incidentally benefited from trade diversion effects from the trade war, weaker Chinese import demand and heightened trade protectionism will drag Vietnamese GDP growth down to 6.6 per cent in 2020, from 7 per cent in 2019. 

Indonesia’s GDP growth is expected to ease modestly from 5 per cent in 2019 to 4.9 per cent in 2020. Accommodative monetary policies and targeted fiscal measures will likely prevent a significant impact of decelerating private spending and investment growth on the country’s economic growth, according to the report. 

Similarly, Malaysia will likely face a slowdown in GDP growth from 4.4 per cent in 2019 to 4 per cent in 2020, against a backdrop of slower export growth and moderating domestic demand. 

With a gloomy future ahead, coupled with a more dovish US Federal Reserve and low inflation, regional central banks have adopted more accommodative policies. 

The report expects the Philippines, Malaysia and Indonesia to cut interest rates by a further 25 basis points over the coming quarters, followed by an extended pause with fiscal stimulus to complement central bank efforts in cushioning the economic slowdown.

That being said, not all countries enjoy the same ease in fiscal maneuvering. 

Most South-east Asian economies such as Thailand and the Philippines are likely to roll out stronger fiscal impulses. With sufficient fiscal surpluses, Singapore has the most fiscal room to ease policy. Given the high trade uncertainty, the Republic is likely to announce measures such as cash handouts and funding support for Small and Medium Enterprises (SMEs) in next year’s budget.

On the other hand, both Vietnam and Malaysia are constrained by current levels of public debt. Despite the announcement of a mildly expansionary budget for 2020, the Malaysian government’s continued emphasis on fiscal consolidation and the risks of fiscal slippage suggest limited room for further support.

Produced by Oxford Economics and commissioned by ICAEW, the Economic Update: South-East Asia report is a quarterly review of the region, focusing on Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Oxford Economics is ICAEW's partner and economic forecaster.