With clouds on the horizon, S-E Asia well positioned in 2024
WITH 2023 in the rear-view mirror, many of the challenges that had an impact on global markets last year will likely be a key focus for at least the first half of the new year, before major economies face a more protracted slowdown.
The first factor that we are likely to see remain little changed as the new year begins is the high global interest rates environment as inflation remains sticky, although it is declining due to the measures employed by central banks across the world. However, the shift towards more normalised levels of inflation has taken longer than most expected; and so, policy measures to maintain downward pressure on inflation will likely continue well into 2024.
Thus, we do not see policy measures shifting any time soon. This will present a challenge in the near term, when we will continue to see high interest rates, but growth beginning to slow more rapidly. Many economies surprised on the upside in 2023, recording growth levels that were higher than consensus. However, the hangover of high interest rates combined with the ongoing challenges on the geopolitical front will likely mean growth stagnating and declining this year.
Over 2023, the United States recorded strong growth – almost 5 per cent in the third quarter compared with the previous one on a quarter-on-quarter annualised basis. This was mainly due to the fact that US fiscal policy was unusually expansive with a federal deficit of more than 6 per cent of gross domestic product. In 2024, the dampening effect of past massive interest rate hikes, which have almost always led to a recession in the US since the end of the Second World War, is likely to become apparent. We expect a mild recession in the summer half of 2024 and forecast US growth to be just 1 per cent for the year.
As such, the US Federal Reserve will cut interest rates by 150 basis points in 2024, but a return to the very low rates seen before the Covid pandemic is also extremely unlikely.
For South-east Asia, the impact of a slowing American economy will undoubtedly be felt. But, this part of the world will continue to remain insulated, thanks to the ongoing shift in global supply chains. We continue to see countries in the region such as Vietnam, Indonesia and Malaysia build manufacturing hubs.
Global companies continue to adopt a “China plus one” strategy, where they do not rely solely on the manufacturing prowess of China, but diversify their supply chains to include China plus another manufacturing country – these are largely across South-east Asia, elevating the importance of the region and providing a buffer to any global slowdown.
China will also remain an important contributing factor to the success of South-east Asia in 2024. The Chinese economy is also likely to suffer from the longer-term effects of the policy of past years in 2024, although these will not come from higher key interest rates, but from excesses in the inflated real estate sector, for example. This means that economic growth will be dampened for a long time. The loss of confidence in government economic policy due to the pandemic and the crackdown on the tech and tutoring industries also points to low growth. Added to this are the effects of political tensions between China and the US. All in all, we expect economic growth in China to be only 4 per cent for 2024. We should note that China remains an important market for global firms, and we are not seeing any anecdotal evidence of clients across our transaction banking and trade finance businesses withdrawing from the country.
The challenges in 2024 for the world’s two biggest economies underscore the need for South-east Asia to forge ahead with its own agenda in supporting the global supply chain and developing and promoting new industries, particularly those linked to technology, electric vehicles, and sectors with strong links to the US and Europe supply chains.
The growth in renewables and the increasing importance of environmental, social and governance (ESG) considerations across this region also bode well for the economic success of South-east Asia. More than half of our recent syndicated loans in Asia were linked to ESG or green ambitions. Similarly, across trade finance there is a rising need for funding to support the building of wind and solar power investments across Asia.
If South-east Asia continues to forge ahead with its own ambitions and remains a pivotal support to the global supply chain, the region stands well placed to handle any shocks we may be presented with in 2024.
The writer is regional board member Asia for Commerzbank
