ADB cuts South-east Asia growth forecast for 2023 on weak manufacturing demand

SOUTH-east Asia could see softer economic growth this year, as the Asian Development Bank (ADB) downgraded its 2023 growth projection for the region slightly to 4.6 per cent, from 4.7 per cent previously.

Growth is expected to pick up to 4.9 per cent in 2024, a downward revision from ADB’s earlier projection of 5 per cent, as “weaker global demand for manufactured exports has slowed growth even as domestic demand remained intact”, ADB said in its latest Asian Development Outlook report on Wednesday (Jul 19).

Maybank economist Chua Hak Bin was more cautious in his growth outlook for 2023, tipping the Asean-6 economies to grow by 4.2 per cent in 2023. But he was more upbeat in his 2024 expectations, and said the region would grow 4.9 per cent next year.

“Headline inflation has fallen sharply across Asean, allowing central banks to pause or even cut rates for the rest of the year,” said Chua. “Asean central banks will likely ease monetary policy and cut policy rates in 2024 as the Fed starts easing. This will help support business investment and housing markets.”

Additionally, with manufacturing supply chains shifting to Asean and foreign direct investments rising, the additional investments and capacity will help boost manufacturing growth in the region when global demand, particularly for electronics, recovers, he added.

The manufacturing and export downturn may also be “past its worse” and should improve from the fourth quarter, said Chua.

OCBC chief economist Selena Ling said China’s disappointing reopening pace and smaller-than-expected policy stimulus suggests that regional demand may remain muted in the near term.

“In addition, the US-China challenges, especially in the space of chips and advanced manufacturing, remain,” she added.

Edward Lee, Standard Chartered’s (StanChart) chief economist for Asean and South Asia, cited post-Covid normalisation, slower global growth, higher interest rates and inflation as well as the ongoing electronics sector slowdown as other headwinds to the South-east Asia region.

Growth projections for this year for Singapore and Vietnam were revised downwards by the ADB, as weaker external demand weighs on manufacturing output. Meanwhile, Thailand’s forecast was raised, while those of Indonesia, Malaysia and the Philippines were unchanged.

Khoon Goh, head of Asia research at ANZ, said the downgrades to Singapore and Vietnam’s forecasts were not surprising “given the very weak export picture and the reliance on external demand for both countries”.

StanChart’s Lee was similarly optimistic on Thailand, believing that it will be the only economy within the region to grow faster than last year, due to the lagged recovery of its tourism sector.

South-east Asia’s growth outlook for 2023 is just under the overall projection for developing Asia, where the economy is expected to grow by 4.8 per cent. Developing Asia refers to ADB’s 46 members, which stretch from the Cook Islands in the Pacific to Kazakhstan in Central Asia.

In 2024, however, South-east Asia is expected to surpass developing Asia, which is tipped to grow at 4.7 per cent, from April’s estimate of 4.8 per cent.

Excluding China, the rest of developing Asia is projected to grow by 4.5 per cent in 2023 and 5 per cent in 2024, lower than ADB’s earlier forecasts of 4.6 per cent for 2023 and 5.1 per cent for 2024.

South-east Asia’s inflation forecast has been revised down to 4.3 per cent in 2023 and 3.2 per cent in 2024, reflecting easing global commodity prices and tighter monetary policy.

The overall inflation projection for developing Asia was also pared to 3.6 per cent in 2023, but raised to 3.4 per cent for 2024.

While the signs so far are encouraging that global commodity prices – such as crude oil – remain subdued, food prices may be impacted by the changing weather patterns brought on by El Nino, noted OCBC’s Ling.

Meanwhile, ADB maintained its forecast of 5 per cent growth in 2023 for China, and 4.5 per cent in 2024.

Economic activity in China bounced back in the first quarter, with services activity particularly strong, especially in hospitality, catering and transportation. Despite weakness in key indicators such as retail sales, growth in the second quarter is expected to pick up further on a base effect, said ADB.

Overall, Asia and the Pacific continue to recover from the pandemic at a steady pace, said ADB chief economist Albert Park, on the report’s latest findings. But while many economies are benefiting from domestic demand and a strong recovery in tourism, industrial activity and exports remain weak. This has darkened the outlook for global growth and demand next year.

With interest rates in the US and other advanced economies likely to shape growth in Asia and the Pacific, upside and downside risks are in balance, noted ADB in its report.

Should inflation be tamed more quickly than currently expected in the advanced economies, the authorities there are likely to adopt a more dovish monetary policy, which would support growth in the region.

But the regional outlook could be dented by an array of immediate and emerging challenges, including financial stability risks brought on by fragility in banks and other financial institutions, interest rate risks and geopolitical uncertainties over Russia’s war in Ukraine.

Changing weather patterns, including a return of El Nino disruption this year, could also have macroeconomic consequences, said ADB.