Asean countries – particularly Indonesia, the Philippines and Malaysia – have continued to grow close to or above trend growth in recent years, despite poor external conditions.
“The growing affluence of the domestic population, relatively healthy fiscal positions, a largely stable political environment and strong liquidity inflows are lending resilience to economic activity, even as external demand falters,” Edward Lee and Jeff Ng, Standard Chartered analysts, said in the latest Global Research report published by the foreign bank.
Examining sources of growth over the past decade, they find that the contribution of household consumption increased for Malaysia, Thailand and Vietnam in the 2008-12 period relative to the 2003-07 period.
For Indonesia and the Philippines, the contribution of household consumption was relatively stable.
“This is not surprising given their relatively closed economies,” the report said.
For Singapore, household consumption remains a small contributor to growth.
“In fact, Singapore’s economy has become even more open, supporting the case for the continued use of FX as the main monetary policy tool,” they added.
Both maintained that investment has discernibly increased its contribution to growth in Malaysia and the Philippines.
“This reflects government efforts to upgrade their economies and positive domestic investor sentiment. With the exception of Singapore, domestic sources have been the key drivers of growth in the region,” they said.
Rising affluence supports trade
Since 2000, the Asean region has been outgrowing the world.
Admittedly, the region has plenty of catching up to do, as it is still relatively undeveloped.
With the exceptions of Malaysia, Brunei and Singapore, Asean’s per-capita GDP based on purchasing power parity (PPP) is well below that of the world. The region is catching up – Asean per-capita GDP has grown faster than global GDP since 2000.
“This growing affluence is a source of resilience for the region. Intra-regional trade has benefited externally oriented industries, even amid weaker demand from traditional markets such as Europe and China,” the report said.
In 2012, Asean exports grew just 1.7 percent amid a weak global trade environment.
Exports to countries within Asean contributed around 70 percent of that growth.
Had Asean been in a weaker position, externally oriented industries would have been hit even harder.
“The import profile of Asean countries by end-use classification provides some interesting insights (here we examine the Philippines, Indonesia, Thailand and Malaysia). Comparing the amount of consumer-goods imports with total imports (the sum of consumer goods, intermediate goods and capital goods), we find that the Philippines has the highest proportion of consumer-goods imports. It is followed by Indonesia, Malaysia and Thailand. This is in line with the fact that Indonesia and the Philippines are more closed economies than Thailand and Malaysia. Because domestic consumption contributes a larger share of growth, consumer goods make up a larger share of import content. This is particularly the case for the Philippines,” Lee and Ng noted.
They said that Thailand and Malaysia are more export-oriented economies.
As a result, intermediate goods account for a larger share of their total imports.
Meanwhile, imports of capital goods have been increasing for Malaysia and Thailand in the past 1.5 years.
“We believe this was driven by flood reconstruction efforts in Thailand, and by the ongoing Economic Transformation Programme in Malaysia,” they said.
Interestingly, the report noted the Philippines has the highest share of capital-goods imports relative to total imports, but has the lowest investment-to-GDP ratio of the four economies.
“This is inflated by the country’s relatively low ratio of overall imports to GDP. Given the government’s current investment drive, we expect the Philippines to import even more capital goods as investment growth accelerates over the next few years,” they said.
The report also noted Consumer-goods imports appear to be on a rising trend in all four economies.
This reflects the region’s growing affluence and increasing reliance on domestic consumption for growth.
The increase has come at the expense of slower intermediate-goods imports amid weaker external demand.
“We observe three broad trends. First, imports of intermediate goods have underperformed imports of capital and consumer goods. This is in line with the broader picture of weak global demand; on a more positive note, the decline in imports of intermediate goods appears to be finding a bottom. Second, capital-goods imports have been relatively strong. This is a positive sign for domestic investment momentum. Third, while consumer-goods imports have been growing, the pace is slowing (with the exception of the Philippines),” they said.
Slowing consumption momentum
While domestic growth drivers have been supporting Asean growth, consumption is starting to slow, partly due to the high base and the inescapable correlation between domestically and externally oriented sectors.
“Growth in imports of consumer goods is already slowing in all four countries, to different extents. The trend is clearer in Thailand and Malaysia. The Philippines still appears strong on this count, but the latest data suggests a slight slowdown. Imports of capital goods also appear to be slowing, more drastically in Thailand due to the normalisation of investment after flood reconstruction efforts,” they said.
On a more positive note, imports of intermediate goods are improving. Generally, the growth multiplier for spending on consumer goods is lower than for intermediate and capital goods.
Hence, a pick-up in intermediate-goods imports will mitigate the slowdown in domestic consumption.
“A further pick-up will also signal a recovery in global consumer demand. At the moment, intermediate-goods imports suggest that global demand may be bottoming, but the signs are still tentative and we do not expect a strong near-term rebound,” they said.
Economic growth to propel spending
As income levels in Asean rise, consumer spending patterns are likely to change.
“We have compared CPI baskets across Asean with South Korea and the US, developed economies, to discern the relationship between consumption patterns and development,” they said.
They found that consumer spending on lower-value items such as food decreases proportionally as an economy develops.
The Philippines’ proportion of food consumption is 39 percent, much higher than South Korea’s 13.6 percent.
Marginal increases in food demand get smaller as incomes rise, and spending on higher-value items such as housing rises proportionally.
In South Korea, consumer spending on housing is 29 percent of the total, well above the simple average of 18 percent for the Asean -4 countries.
In addition, spending on transport and recreation tends to increase in absolute terms as incomes rise.
Consumer spending patterns are also driven by cultural and social factors.
“The implications of this are that consumer spending will shift from being import-centric towards a balance between domestic and external sources. As Asean develops, industrial production within the region is likely to cater increasingly to the rising wealth of its residents. We think that the increasing commercialization of ASEAN consumers will support production within ASEAN, while generating domestically driven growth,” they said.
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