In 2023, the fading momentum from post-pandemic re-opening combined with weak global trade to stifle economic expansion. Central banks across the region opted for tight monetary policies in an attempt to control inflation, but this has led to stagnated growth. There are several key forces that will shape the economic outlook for Southeast Asia, as per the report.
Firstly, slower global growth is expected to dampen the recovery in export demand among the emerging markets of Southeast Asia. This is in part due to below-trend growth forecasts for major economies like the US, Europe, and China. The US economy is expected to see a period of slower growth as pent-up demand and excess savings effects fade, coinciding with tightened monetary conditions. In Europe, a weaker demand environment combined with tighter monetary policy is likely to result in below-trend economic expansion. China is also expected to experience slower growth in 2024, owing to restrained policy stimulus.
Secondly, financial factors such as global risk sentiment, high energy prices, and elevated US interest rates will continue to put a squeeze on capital flows in the region. High US interest rates have particularly resulted in lower interest rate differentials with Southeast Asian economies, leading to capital outflows from local currencies into US dollars. If US interest rates remain high, this pressure is likely to persist, thereby impacting the financial stability of these emerging markets.
Thirdly, a potential shift in US monetary policy with anticipated rate cuts later in the year could influence Southeast Asian central banks to follow suit. This is expected to happen despite the ongoing challenges of capital outflows and exchange rate volatility. These rate cuts in the US are likely to occur in the latter part of 2024, as inflation is expected to moderate.
Fiscal policy in the region is also on a path of gradual consolidation. Governments ramped up spending during the pandemic, leading to increased fiscal deficits and debt burdens. However, the rate of fiscal consolidation varies across countries. While Indonesia has moved quickly to strengthen its fiscal position, countries like Malaysia and the Philippines are doing so more gradually.
Despite external headwinds, domestic demand is expected to remain resilient, buoyed by stable labour markets and strong private consumer activity. In fact, improving labour markets are likely to further support domestic demand in 2024, offering some relief amid external pressures.
Fibre2Fashion News Desk (DP)