Asean economies head into 2026 on a strong note

INVESTORS’ initial fears of a trade-tariff induced export and growth slowdown in 2025 proved unfounded. Instead, regional economies – particularly Malaysia and Singapore – registered strong growth and activity into year-end. Three factors resulted in this surprising positive turn for Asean economies.

Resilience and strength in regional exports

Evidence mounts that supply chain realignment is generating an increase in intra-regional trade and benefiting Asean exports. This momentum is particularly evident in regional economies plugged into the artificial intelligence (AI) and electronics supply chain.

For instance, Malaysia and Singapore both experienced a strong jump in exports, led by the electronics and semiconductor sector. Persistent global AI-related capital expenditure has created a clear “halo effect”, transmitting stronger demand across the entire electronics value chain as the AI replacement cycle intensifies.

Regional currencies defy expectations

Second is the strength in South-east Asian regional currencies. At the start of the year, there was widespread fear that intense US tariffs against China and Asean would cause export contraction across the region. This could lead to pronounced US dollar strength or, worse, a synchronised devaluation of the yuan and regional currencies.

The reality was markedly different. Given that Asean economies have a large export component, strong export performance bolstered regional currencies. This was magnified by the underlying global trend of de-dollarisation, which intensified across the year.

Strong export proceeds, coupled with a diminished global desire to accumulate US dollars, resulted in currency appreciation in Asean as exporters actively repatriated export proceeds.

In addition, China’s policymakers did not choose “the easy way out” by responding to higher tariffs with a devaluation of the yuan. Instead, the People’s Bank of China actively managed the depreciation pressure on the yuan, allowing it to appreciate alongside the weakening US dollar. This has decoupled the yuan from the weakening domestic economy and troubled property market in China, removing a key source of volatility for South-east Asia.

Benign inflation trajectory across the region

Investors were also worried that the higher trade tariffs would spike inflation globally. However, supply chains in various industries proved more flexible than expected, with many intermediaries helping to absorb the tariffs. This meant limited passthrough of higher prices to end-consumers.

Strong currencies across Asean also increased purchasing power, dampening imported inflation risks. Furthermore, the influx of competitively priced goods and services from China helped drive down manufacturing costs, keeping inflation in check. As a result, most inflation trajectories across Asean economies remained soft.

Regional and global risks challenging the 2026 outlook

Asean economies start 2026 on a strong note. Despite this strong start, the year ahead is not without its challenges.

Within Asean, idiosyncratic risks persist. Economies not fully plugged into the AI surge and electronics renewal cycle will need to play catch up.

While most regional currencies performed well, the dong and rupiah remained weak. Specifically, the weak rupiah was cited as a key factor for Bank Indonesia in its decision to refrain from further rate cuts. Meanwhile, the Prabowo government remains focused on its various stimulus measures to push Indonesia’s economic growth rate beyond the current 5 per cent handle.

On the inflation front, Thailand faces increasing deflationary risk with the headline consumer price index falling 0.76 per cent in October, intensifying the 0.72 per cent contraction in September. The trend is fuelled by supply side forces and soft underlying demand.

Thailand’s gross domestic product growth also turned out weaker than expected, slowing sharply to 1.2 per cent year on year in the third quarter, from 2.8 per cent in the second quarter. Both manufacturing and construction sectors have returned to contractionary territory, while tourism recovery remains weak.

Beyond the region, there is intense uncertainty over the US Federal Reserve’s monetary policy outlook. Within the Fed, there is growing disagreement over the need to continue cutting interest rates into 2026.

Complicating matters is the disruption in collection of various key macroeconomic data (such as on employment and inflation) due to the federal government shutdown. Another source of uncertainty is the upcoming renewal of Fed leadership after chair Jerome Powell’s term ends in May 2026.

Elsewhere, major economies face increasing uncertainty and risks.

The UK economy faces a challenging fiscal outlook. Across Europe, growth and fiscal outlook remains in flux amid intensifying efforts to achieve an elusive peace deal between Russia and Ukraine.

The Bank of Japan is grappling with a further sharp rise in long-term bond yields as the Takaichi government pushes forth with fiscal stimulus. Finally, China’s recovery remains challenging – GDP growth will likely slow down from 4.8 per cent in the third quarter to 4.4 per cent in the fourth quarter.

Nonetheless, Asean crosses into 2026 on sure footing, buttressed by the strong fundamentals of robust exports, strong regional currencies and benign inflation.

The writer is head of markets strategy at UOB