Southeast-Asia is transitioning to the 'next normal' in economic growth

Doha, Qatar: In recent decades, Southeast Asia has been the world's most dynamic region, showing bright economic growth performance. The six largest countries of the Association of Southeast Asian Nations (ASEAN-6), comprising Indonesia, Thailand, Singapore, Malaysia, Vietnam and the Philippines, have been among the fastest growing economies in recent times. Once the covid-pandemic ends, these countries are expected to return to the strong growth rates of previous years. But 2023 turned out to provide a less supportive environment than initially forecast, and ASEAN-6 economies will continue to underperform in 2024 relative to their pre-pandemic growth rates, QNB said in its economic commentary.

In this article, we discuss two key factors that point to the underlying growth of ASEAN-6 economies in 2024.

First, external demand will remain soft this year, indicating weak support for the economic growth of the globally integrated ASEAN-6 countries. International trade is a key determinant of growth in the ASEAN-6 economies. In fact, exports account for 20–30% of GDP for Indonesia and the Philippines, 65–95% for Thailand, Malaysia and Vietnam, and 180% for Singapore. In 2023, global trade performance was disappointing, with the latest preliminary estimates suggesting a slight contraction. In the last 40 years, only 2009 saw a contraction in global trade as a result of the Global Financial Crisis (GFC) and the Covid-19 pandemic in 2020.

This year, we expect a mild recovery, with international trade expanding by around 2.8% on the back of a rise in global manufacturing. While this pace of growth is an improvement over last year, it represents a significant underperformance compared to the long-term average of 4.6% over 2000-2022. Given the importance of trade to the ASEAN-6 economies, the slowdown represents a major headwind to economic growth, making it more difficult for the region to return to pre-pandemic growth rates.

Second, high interest rates in major advanced economies (AE) and ASEAN-6 countries have set a more challenging environment for economic growth. In advanced economies, interest rates have remained at tight levels for years. The US Federal Reserve and the European Central Bank have increased their policy interest rates by 525 and 400 basis points (bps) respectively from mid-2022.

Similarly, central banks in the ASEAN-6 countries implemented their own monetary tightening cycles to control spiraling prices. In these economies, the average increase in policy rates was 240 basis points (bps), higher than at the start of the Covid-19 pandemic. Central banks in the region are expected to reach a turning point in monetary policy by mid-year, given softening economic growth and sustained downward trends in inflation.

Overall, while growth in the ASEAN-6 is still strong by international standards, it remains below its pre-pandemic historical performance, given weak external demand and tight domestic and international financial conditions.