Asean+3’s potential growth could nearly halve by 2050: Amro
South-east Asian economies will be hardest hit if geoeconomic fragmentation deepens
[SINGAPORE] The prevailing narrative of the Asean+3 region as a global economic growth powerhouse might hold in the medium run, but momentum is faltering over the long term.
As the region responds to near-term risks from tariffs, it should continue to aim at achieving development goals to revitalise declining long-term growth and further build resilience to external shocks, said the Asean+3 Macroeconomic Research Office (Amro).
The region’s potential growth – defined as the rate at which an economy expands while at full capacity and full employment without triggering inflation or external imbalance – is set to shrink to nearly half by 2050 on weaker capital accumulation and slower labour-force expansion.
Amro estimates the rate to decelerate from around 4 per cent in 2023 to 2.8 per cent by end-2050.
This could fall further to 2.3 per cent should geoeconomic fragmentation deepen, with Asean economies bearing the brunt, said the macroeconomics surveillance organisation that monitors the ten Asean member states alongside China, Hong Kong, Japan and South Korea.
The region altogether contributes to more than 40 per cent of global economic expansion.
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“In the decades to come, achieving high growth rates for the Asean+3 region will no longer be enough: growth must also be high-quality, inclusive and sustainable,” said Amro in its annual flagship report released on Tuesday (Apr 15).
As Asean+3 economies continue to mature over the next three decades, the rate of growth of capital stock is expected to moderate, explained the organisation.
This decline is unlikely to be sufficiently offset by human capital – despite its consistent growth contributions across economies – in part due to underinvestment in skills-upgrading in some countries.
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Thus, capital accumulation – historically the dominant engine powering the region’s above-global-average growth rates – is projected to account significantly less across all sub-regional aggregates, added Amro.
Pain points
Such is the case for Indonesia; whereas Malaysia and the Philippines are expected to maintain resilient capital accumulation but struggle with declining labour inputs and weak productivity growth, noted the report.
The non-Asean economies in the grouping will primarily grapple with longstanding demographic constraints, just like Thailand, which faces the extra challenge of weak investment rates, added Amro.
For middle-stage economies – such as Indonesia, the Philippines and Thailand – industrialisation has somewhat stalled since the global financial crisis, with manufacturing productivity stagnating relative to global leaders, said Allen Ng, Amro’s regional surveillance group head.
The economist added in a press conference that the region’s ongoing transformation towards services is incomplete, with the sector lagging those of similar peer economies outside the region.
“Most concerning is that workers moving into services have predominantly entered into lower value-added services, and these patterns explain why substantial employment shifts have generated only limited increases in value added and productivity,” explained Ng.
Not all doom and gloom
“The good news is that declining growth need not be our region’s destiny,” continued the economist.
A mix of policies that target investment gaps, foster economic dynamism, nurture innovation and are backed by strong, credible state mechanisms during implementation, accompanied by regional cooperation, will pave the way for sustained growth, said the report.
Amro highlighted five priority themes for policymakers – first of which is the upgrading of manufacturing capabilities. It noted that the manufacturing sector is key to Asean+3’s growth trajectory and will allow the region to catch up with its peers faster.
Second, growing the services sector must be seen as a complementary pathway rather than a substitute for manufacturing, noted the report, highlighting the region’s significant untapped potential in the services trade.
Other priorities include narrowing investment gaps, boosting innovation and leveraging on technology, as well as strengthening state capacity.
Concluded Ng: “The region’s economic miracle of the past decades was not pre-ordained. It was built on both policy choices and with the regions working together and actively engaging with the rest of the world in an open, rules-based manner.”
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