Asia slowing down?

The economic revolution has made Asia the most integrated continent in the world. However, the high openness has made developing economies in the region passive in the context of increasingly fierce competition between major powers.

Illustration photo. (Source: Bloomberg)

In its latest report on the world economy, the World Bank (WB) forecast that the Asian region - one of the world's main growth engines - will have its slowest growth rate since the late 1960s, excluding extraordinary events such as the Covid-19 pandemic, the Asian financial crisis and the global oil shock in the 1970s.

Bleak Forecast for 2024

The World Bank has cut its growth forecast for China and warned that developing economies in East Asia will grow at their slowest pace in 50 years, as US protectionism and rising public debt hamper growth.

The World Bank’s gloomy forecast for the economy in 2024 underscores growing concerns about a slowdown in China and the risk it could spill over to Asia. Chinese policymakers have set one of their lowest growth targets in decades for 2023, at around 5%.

For years, the US-China trade tensions and tariffs imposed by the US on Asia's No. 1 economy have boosted import demand to other countries in the region. However, the US's enactment of the Inflation Reduction Act (IRA) and the CHIPS & Science Act in 2022 - policies aimed at boosting US manufacturing and reducing US dependence on China - have indirectly affected Southeast Asian countries.

Exports of affected products from the region to the United States have fallen sharply. Asia has long thrived, even “miraculously,” thanks to trade and investment in manufacturing. Weaker global demand is taking its toll. Rising household, corporate and government debt is dampening growth prospects.

According to analysis by Mr. Aaditya Mattoo, economist in charge of East Asia and the Pacific region of the World Bank, the Southeast Asian region, which has benefited from the US-China trade tension due to trade diversion, is now suffering from the same shifting trend.

The World Bank data shows that the drop in demand due to slowing global growth is affecting all countries, with electronics and machinery exports from China and Southeast Asian countries including Indonesia, Vietnam, the Philippines, Malaysia and Thailand falling sharply after President Joe Biden's protectionist policies took effect.

The increasingly gloomy forecasts reflect that much of Asia, not just China, is starting to be affected by new US policies under the IRA and CHIPS & Science Act.

China "sneezes", the whole Asia "catches a cold"

The Financial Review (Australia) recently warned of a “domino effect” in Asia. Accordingly, China’s slowing growth, with weakening consumer demand and slowing manufacturing activity, is negatively affecting neighboring countries with close ties to the world’s second largest economy.

South Korea’s manufacturing slump is the longest in nearly half a century. Asia’s fourth-largest economy is seen as a hub for the region’s technology supply chain, which has underpinned global growth for decades.

However, the country’s exports fell at their fastest pace in more than three years in July, led by a drop in computer chip shipments to China, while recent data showed factory activity contracted in August, the 14th straight month of the steepest decline on record.

Figures in Japan, where manufacturing activity fell for a fifth straight month, reflected falling factory output and weaker overseas demand.

Concerns have grown in recent weeks after China's economy slipped into deflation, raising concerns about a range of issues from weak consumption, a weakening currency, a shaky property sector and unsustainable local government debt.

As global demand slows, China's economy is struggling further, with its manufacturing sector contracting for the fifth consecutive month in August, official data showed.

“When China sneezes, Asia catches a cold,” said Vincent Tsui, an analyst at Gavekal Research in Beijing. He said that with policymakers in Beijing ignoring calls to boost flagging growth through stimulus, the consequences will be felt across the region.

The commercial and financial centers of Hong Kong (China) and Singapore are most vulnerable, as Chinese demand accounts for 13% and 9% of Hong Kong and Singapore's GDP, respectively, warned expert Tsui.

Park Chong-hoon, head of research at Standard Chartered in Seoul, said that South Korea is unlikely to recover soon unless the Chinese economy recovers quickly, citing challenges stemming from US-China tensions and China’s import substitution trend.

In Southeast Asia, Vietnam’s exports in the second quarter of 2023 fell 14.2% year-on-year, indicating a slowdown in industrial production this year. Malaysia’s growth rate was the slowest in nearly two years, facing a slowdown in its main trading partner. Thailand’s economy grew at a much slower pace than expected in the second quarter of 2023, hit by domestic political instability and low tourist arrivals from China.

As China’s economy weakens, foreign suppliers that thrive on supplying raw materials and machinery are facing tough times, analysts at Gavekal Dragonomics warn. In addition, the collapse of China’s property market will not reverse quickly and the situation could get worse.

According to WB expert Aaditya Mattoo, the growth rate of Asian countries will continue to be constrained until the governments of these countries, including China, carry out deep reforms in the service sector, taking advantage of the digital revolution.

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