Four years ago, the world experienced an unprecedented shutdown due to the global Covid-19 pandemic, leading businesses to close physical stores and move online to stay afloat.
This transition influenced consumer behaviour, creating a shift in preference towards online shopping. As a result, online sales increased from 13% of total global retail sales pre-pandemic to 18% in 2020. To mitigate the economic and health impacts of Covid-19, governments implemented generous stimulus packages. These measures effectively strengthened middle-class spending power and helped prevent low-income families from falling into poverty. As countries slowly reopen, strong consumption persisted, fuelled by high savings rates and pent-up demand further driving global sales.
Today, while developed economies face sluggish or negative growth, emerging Asia demonstrates significant growth potential. Key economic indicators in the region, including GDP growth and retail sales, show resilience even amid worsening global recession sentiment, contrasting sharply with the downward pressures faced by developed markets.
Unlike major economies where central banks like the European Central Bank (ECB) and Bank of England (BoE) are contemplating rate cuts, central banks in emerging Asia have maintained stable interest rates, supported by upbeat GDP figures and moderate inflation. As the personal savings rate in developed countries declined significantly, forcing consumers to tighten their belts, Asia’s relatively stronger economic indicators highlight its continued potential for growth.
As the world’s second-largest economy, China faces notable economic challenges, as evidenced by its weak performance across several indicators. While other nations grappled with inflation rates above 3%, China has maintained an average inflation rate of just 2%. Its Consumer Price Index (CPI) for August 2024 was a mere 0.6%, falling short of expectations despite rising food prices due to poor agricultural yields. Its Producer Price Index (PPI) has been negative since October 2022, currently at –1.8% YoY, signalling potential deflation driven by weak domestic demand and declining global commodity prices The manufacturing sector is also under pressure, reflected by a PMI of 49.1, indicating contraction.
Additionally, wage growth has been decelerating since 2008, and disposable income remains weak at 5.1%, compared to an average of 7.5% before 2020. With economic growth at 4.7% in 2Q, falling short of the government’s 5% target, high household saving rates suggest diminished consumer confidence. This reluctance to spend and deflationary pressures could dampen economic activity, impacting corporate revenues and investment negatively. Reduced investment and consumer spending are likely to exacerbate product gluts and lower profits, ultimately limiting China’s economic productivity.
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Asia’s economic transition
In contrast, India has emerged as the fastest-growing and fifth-largest economy globally, with an impressive GDP growth rate of 8.2%. Morgan Stanley projects that India will surpass Japan and Germany to become the third-largest economy by 2027. The country’s inflation remains moderate at 3.65%, aligning with the Reserve Bank of India’s target of 4% for sustainable growth.
Despite global uncertainties, India’s manufacturing PMI is robust at 57.5, signalling continued expansion in the sector. The Indian government plans to invest a record INR11 trillion ($0.2 trillion) in infrastructure for the fiscal year 2024/25, an 11% increase in allocation to boost the economy. The manufacturing sector plays a vital role in driving economic development, job creation, and technological advancement. Positive investor sentiment reflects strong domestic demand and foreign investment.
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Deloitte’s report on India’s economic outlook shows that rural consumers are increasingly spending on discretionary durable goods, such as automobiles and electronics. Given India’s large population, this shift in spending behaviour is a promising indicator for sustained economic growth.
Asia’s economic transition, particularly in China and Indonesia, reflects significant shifts in growth and development. Over the past three decades, China has evolved from a low to an upper-middle-income country, now prioritising on high-quality, sustainable growth. Moving from a labour-intensive economy to one driven by the tertiary sector and advanced technologies, including semiconductors and AI, this shift underscores China’s focus on maintaining global competitiveness amidst geopolitical risks.
Similarly, Indonesia is leveraging its rich natural resources by moving towards value-added industries. The government’s halt on unprocessed mineral exports and investment in processing capabilities aims to position Indonesia as a leading supplier of batteries and electric vehicles, given its substantial reserves of nickel, tin, and bauxite. This transition is expected to attract foreign direct investment, boost onshore manufacturing, enhance household disposable income, and hence stimulate economic growth.
Amid China’s economic transition and Western diversification efforts in light of US-China tensions, Vietnam is emerging as a global manufacturing hub. Economic data in Southeast Asia highlight significant growth potential, with Vietnam positioned as the region’s fastest-growing economy. Vietnam’s manufacturing sector remains pivotal to its economic expansion, benefiting from relatively low labour costs at US$2.99 ($3.90) per hour, half of China’s US$6.50 per hour, along with a young, educated workforce.
As China grapples with an ageing population, Vietnam presents a viable alternative to meet manufacturing demands. Trade barriers with the West are minimal, thanks to Vietnam’s participation in several free trade agreements, and foreign investment incentives continue to drive growth. The rising middle class fuelled by economic growth is also expected to enhance overall consumption.
Challenges, disputes
However, emerging geopolitical tensions, especially in the Red Sea region, are posing significant challenges to the global supply chain. Freight companies are rerouting around Africa to bypass the Suez Canal, an essential artificial waterway connecting the Red Sea to the Mediterranean Sea, which handles 30% of global container shipping volumes. This detour adds 8–10 days to transit times, negatively impacting global shipping capacity and increased delivery costs, particularly along Asia-Europe routes.
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Additionally, territorial disputes in the South China Sea, a crucial route for Southeast Asia trade with major Asian economies such as China and Japan, are also threatening logistics operations by driving up insurance premiums to offset potential risks. Despite a consistent easing of freight costs since their peak during the pandemic lockdown, these factors will continue to exert pressure on the industry.
The ongoing volatility in fuel prices, forecasted to stay above US$80 per barrel through 2025 due to Opec+ cuts and low inventories, threaten profit margins for shipping companies. To mitigate this, companies must adopt a robust fuel hedging strategy or risk passing increased costs to consumers.
The logistics sector is also vulnerable to climate change, with extreme weather events such as floods and wildfires threatening global supply chains. For instance, Malaysia’s severe flooding in December 2021 disrupted Port Klang, Southeast Asia’s second-largest port, impacting global semiconductor supplies and exacerbating the microchip shortage as the country is responsible for 13% of global chip testing and packaging. This shortage not only boosted chip prices but also highlighted the supply chain vulnerabilities exacerbated by extreme weather. As such, shipping companies must proactively develop contingency plans to mitigate climate-related disruptions.
Despite these challenges, the positive economic forecast for the emerging Asia region and increasing capital inflows presents significant opportunities for the supply chain industry. This is particularly advantageous for shipping and shipbuilding companies, as vessel demand remains strong.
While major markets like China, Japan, and South Korea remain influential, Southeast Asian countries are increasingly attractive to foreign investors, thanks to favourable government policies and relatively low political risk. Additionally, Southeast Asia balances diplomatic relations with major economies, such as Europe and the US, while preserving China as its largest trading partner, adopting a neutral stance that enables the best of both worlds.
Serene Lim Yi Qi is equities dealer at Phillip Securities
