South-east Asia’s supply chain bonanza from US-China trade war may be ending: World Bank
Despite the region’s robust growth, signs of moderating domestic demand are emerging in Indonesia, Thailand and the Philippines, the bank says in new report
SEVERAL South-east Asian countries such as Vietnam have traditionally benefited from the restructuring of global supply chains by acting as economic connectors for major trading partners, but the scope for playing such a role may be shrinking.
The World Bank explained in its latest report released on Tuesday (Oct 8) that these economies may now be limited to playing a one-way connector role.
This is because while countries have been able tap China’s imports and investments to boost exports to the US, investment from the US has not lifted exports to China, noted the bank in its semi-annual economic outlook for East Asia and Pacific.
This one-way connector role could further be limited as more stringent rules of origin on imports and export restrictions are imposed, added the international financial institution.
To defend against these negative effects of restrictive trade and industrial policies characteristic of recent years, economies could form deep trade agreements with large trading partners, the report suggested.
Furthermore, spillover benefits from China’s growth are diminishing as the economic powerhouse grapples with slowing expansion.
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The world’s second-largest economy had pulled other countries along through its import demand, but that is now growing even slower than its gross domestic product, said the World Bank.
A one-percentage-point slowdown in China’s growth could reduce growth in other developing countries by an estimated 0.14 to 0.21 percentage point, added the bank.
Although economies in the region traditionally benefited more on average from China’s increasing demand for imports than they were hurt by stronger competition in export markets, if exports from China continue growing faster than its imports, the banes could instead outweigh the boons.
Most of the relatively industrialised countries – Malaysia, Thailand, the Philippines, Vietnam and Indonesia – faced direct competition from China in manufactured goods both locally and overseas.
But Indonesia, Myanmar and Laos have benefited from increased Chinese demand for commodities.
The Philippines and Thailand gained from China’s growing appetite for services, while Malaysia and Vietnam benefited from integration into global and China-linked manufacturing value chains.
The relocation of Chinese production also benefited Vietnam and Cambodia.
The report added that China’s growth is estimated to have boosted developing countries’ growth by around one percentage point annually from 1995 to 2019.
This fell to 0.67 percentage point annually from 2020 to 2023, when China’s growth slowed down, said the bank.
Therefore, the prospects of diminishing spillover benefits increase the need for countries in East Asia and the Pacific to seek sources of autonomous growth, especially through deeper domestic reform.
Slowing private consumption, investments
Despite the region’s robust growth, signs of moderating domestic demand are emerging – especially in several South-east Asian economies, such as Indonesia, Thailand and the Philippines.
Traditionally, private consumption is the main driver sustaining the economic expansion of these economies, but its pace of growth has declined over time, warned the World Bank.
This trend is evident in the slower growth of retail sales and imports compared to the pre-pandemic period.
Consumer confidence also remains weak in the region.
The report highlighted that among the larger countries, only Indonesia is expected to expand in both 2024 and 2025 at or above pre-pandemic levels.
Growth forecasts for Malaysia, Thailand and the Philippines all pale in comparison to the period from 2015 to 2019, said the report.
Investment growth has been declining across most countries in the region over the past two decades, with particularly sharp drops in China, Indonesia, Malaysia, and more recently the Philippines.
Both consumption and investment are being squeezed by higher household and financial corporate debt, especially in China, Malaysia and Thailand.
The World Bank highlighted that last year, interest payments on external debt increased significantly in most countries in the region. Cambodia, Thailand and Vietnam recorded marked increases specifically in that of private external debt.
Moderating inflation opens room for monetary policy
Inflation in most of the region is expected to moderate and remain within target bands, reflecting stable input costs, tepid demand conditions and easing food inflation pressures, said the report.
Laos and Myanmar continued to be plagued by high inflation of more than 20 per cent on continued currency depreciation pressures.
Conversely, inflation was especially low in China, Cambodia and Thailand, as most commodity prices stabilised and supply constraints eased.
Across the region, low domestic inflation and falling international interest rates are creating room for a more supportive monetary policy, said the report.
Manuela V Ferro, vice-president of the World Bank for East Asia and the Pacific, said: “Countries (in the region) continue to be an engine of growth for the world economy.
“To sustain strong growth over the medium term, countries must be proactive in modernising and reforming their economies to navigate changing patterns of trade and technological change.”
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