Southeast Asian economies are facing a downturn as markets follow trends in the US and China. If the slide continues, it risks worsening wealth inequality and poverty across the region.
Concerns about economic recession are spreading across Southeast Asia. gross domestic product (GDP) growth, financial markets and trade in ASEAN have begun to mirror economic slowdowns in the US and China.
While the region may not slide into a full recession, it presents a threat to equitable development across Southeast Asia. Economic slowdowns push lower-income groups into poverty and expose structural flaws in the economic models prevalent in the region.
Recession warnings in China and the US drive concerns in Southeast Asia
The trade dispute between the United States and China has caused major economic uncertainty, making it difficult for manufacturers and investors to maintain growth. Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam have all reported drops in economic growth, though their markets have begun to rebound as the Chinese and US governments begin to take steps to avert a crisis.
Bond markets in Southeast Asia show signs of mirroring the inverted yield curve indicators of the US, with 10-year yields in Singapore and Malaysia dropping as investors avoid high-yield markets like Indonesia.
Some analysts have also pointed to the fact that China’s GDP growth has slowed to its slowest in over 25 years. This is to be expected—China’s GDP is 14 times what it was 20 years ago, labour costs in the country are dropping and the national debt is rising. China’s industrial production growth, which includes manufacturing outputs, also dropped to its lowest since 2002.
But it’s still a major cause for concern in ASEAN. Governments across the region have become increasingly reliant on China. In July, ASEAN surpassed the US to become China’s second-largest trading partner, after the EU. Southeast Asian economies with the strongest economic ties to China are the most exposed by the economic downturn.
The threat of “debt traps” from Belt and Road Initiative (BRI) Projects have loomed over the region. They prompted Myanmar’s government to scale back the Chinese-funded Kyaukphyu Special Economic Zone and Mahathir in Malaysia to cancel a US$3-billion pipeline and renegotiate the cost of its East Coast Rail Link railway project.
Aside from the debt, BRI partnerships tie the economies of host countries to Chinese industries and investments. In Myanmar, Singapore, Cambodia, Malaysia and Vietnam, more than one-fifth of the per-capita GDP is directly linked to trade with China.
Southeast Asian economies slip in response
Questions about the trade dispute and China’s economic slowdown are prompting concern in ASEAN, especially around the drop in Chinese manufacturing. Singapore’s Ministry of Trade and Industry (MTI) has said that their economic slowdown is “partly due to the escalation in the US-China trade conflict in recent months.”
In August, Singapore reported that its economy contracted during the second quarter of this year, with growth dropping to minus 3.3%. The country adjusted its forecasted growth for the year from 1.5% to 0-1% and if the economy continues to shrink in the third quarter, it will have tipped into a recession.
Some economists consider Singapore to be a key indicator for economic growth in Southeast Asia, as its economy is the second-most trade-dependent in the world, topped only by Luxembourg.
Thailand’s economy has also slowed and seen its slowest growth in almost five years. The slump stems from a drop in exports, which account for around 40% of the country’s GDP. Thailand’s manufacturing sector, especially electronics and automobiles, has struggled with disruptions from the US-China trade dispute.
But the impact of China’s economic slowdown may only balance out the gains seen by Southeast Asia as a result of the China-US trade dispute. In May, 40% of companies surveyed by the American Chamber of Commerce were planning to, or had already, relocated their China-based manufacturing facilities over tariffs or related concerns. Southeast Asia was the top destination for these companies, with around a quarter of them already planning to make the move.
Downturn threatens to worsen inequality and poverty
Southeast Asian governments have integrated their economies into Chinese supply chains and become increasingly dependent on trade as a growth driver. But this model hasn’t benefited everyone equally.
Lower-income populations have seen an ever-shrinking portion of the benefits from this growth. In Vietnam, the wealthiest man in the country earns more in a single day than the lowest-income workers will earn in a decade. In Indonesia, the four richest men hold more wealth than the 100 million poorest people. The richest 1% in Thailand control almost 67% of the country’s wealth, with the lowest-income 10% having no conventionally-measurable wealth.
The 2008 recession worsened poverty and set back sustainable development, especially in Indonesia, Laos, Singapore, Malaysia and, more recently, Thailand. Another economic downturn in the region will disproportionally hit lower-income populations, as well as business owners and investors.
Governments must strengthen social support programs, take steps to redistribute wealth and monitor how major macroeconomic indicators are impacting people living in or on the verge of poverty.
Many states may be tempted to lower taxes in order to support businesses but this can’t be done at the expense of sustainable development programs. In most ASEAN states, those on the margins of the economy have little chance to vote for their own interests. Even if Southeast Asian economies rebound, this growth is based on rising inequality that will persist without serious reform.