There has been steady growth in the Southeast Asian (SEA) region in recent times. This growth is reflected in the upward trend of key macroeconomic parameters in the first quarter (Q1) of 2024. These parameters include the gross domestic product (GDP), trade momentum, performance in industrial activities, labour markets and prices. The region’s performance has also seen improvement on other financial indicators like currency, interest rates and capital flows. It also witnessed stronger economic performance in six countries of SEA, namely, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. The growth in GDP was higher in Indonesia, Malaysia, the Philippines and Singapore in Q1 of 2024 as compared to the previous quarter (Q4 of 2023).
Several factors like a strong tourism base, positive trade momentum, robust employment rates and stable prices contributed to this growth. The performance in other areas like industrial activities has varied, with Indonesia, Malaysia, and the Philippines recording better growth compared to others. They have attracted higher demand in key sectors such as electronics, manufacturing and mining. Most of the economies have also been able to achieve an inflation rate within the range set by their governments.
The currencies of the countries in the region depreciated against the US dollar in Q1 of 2024. This is on account of the unrevised policy rates by central banks across the six countries except Indonesia. However, there has been a boost in foreign direct investment (FDI) across the region. On this parameter, Thailand registered a significant upward growth with a doubling of FDI inflow in Q1 of 2024 whereas Singapore recorded a dip in FDI in this quarter (3.81 per cent). A two-year high of $1.4 billion FDI was recorded in the Philippines in February 2024.
Indonesia
In Malaysia, there was growth in GDP, private consumption and trade, increase in industrial activities, a reduction in the unemployment rate and moderation in inflation. The GDP rose from a 5.04 per cent year-on-year (y-o-y) growth rate in Q4 of 2023 to 5.11 per cent y-o-y growth in Q1 of 2024. This is attributed to larger government expenditure, partly attributable to the holding of elections during this period and higher household consumption due to Ramadan. The trade surplus increased more than expected to $3.56 billion in April 2024 with exports increasing by 1.72 per cent. Besides, sectors like manufacturing, trade, construction and mining contributed to higher industrial production. The growth rate of industrial production increased from 1.9 per cent in Q4 of 2023 to 2.5 per cent in Q1 of 2024. However, agricultural production, mainly food crops, declined in early 2024 due to the impact of the El Niño phenomenon. Another milestone was the lowest recorded unemployment rate in the country since 1997. It stood at 4.82 per cent in February 2024 with the labour markets rebounding to pre-pandemic levels. Similarly, there was a moderation in inflation from 4.97 per cent in Q4 of 2023 to 3 per cent in April 2024. This was due to lower food prices and a better harvest season.
The country’s currency, however, depreciated by around 4 per cent. It reached IDR 16,300 against the US dollar by the end of April 2024. This is the weakest reported level since 2020, which has led Bank Indonesia (BI) to increase the policy rates to strengthen the currency. The benchmark interest rates were increased by BI by 25 basis points to 6.25 per cent in April 2024.
There was also a sharp increase in FDI inflows into the manufacturing sector in the quarter with the FDI inflow growth rate increasing from 5.3 per cent in Q4 of 2023 to 15.5 per cent (at $12.5 billion) in Q1 of 2024.
Malaysia
An increase in GDP growth and private consumption has characterised economic growth in Malaysia. The GDP growth rate increased from 2.9 per cent in Q3 of 2023 to 4.2 per cent in Q4 of 2023, attributable to an increase in the services, construction and mining sectors by 4.7 per cent, 11.9 per cent and 5.7 per cent respectively, and to higher private expenditure and exports. Private consumption increased due to a moderation in commodity prices and better employment opportunities. Private consumption increased from 4.2 per cent y-o-y in Q4 of 2023 to 4.7 per cent y-o-y in Q1 of 2024. Similarly, there was an increase in exports. This trend translated to higher exports of iron and steel products, machinery, equipment and parts, metal manufactures, crude petroleum and liquefied natural gas. The resultant y-o-y growth was 2.2 per cent at RM 362.41 billion in Q1 of 2024. There was also an increase in the industrial production index to 3.3 per cent in Q1 of 2024 from 0.8 per cent in Q4 of 2023 while the unemployment rate stayed at the pre-pandemic level of 3.3 per cent. Increased infrastructure activities, recovery in exports and tourism are some of the factors that allowed employment to increase from 16.35 million persons in Q4 of 2023 to 16.4 million persons in Q1 of 2024. The inflation rate remained moderate at 1.6 to 1.7 per cent in both quarters.
However, from January 2024 to May 2024, the currency value dipped 2.4 per cent against the US dollar. The Malaysian ringgit has been affected by changing expectations of monetary policy and the prevalent geopolitical tensions in the ASEAN region. The government is making a concerted effort to address this condition. It is encouraging repatriation and the conversion of foreign investment income by government-linked companies and government-linked investment companies. Further, the Malaysian government has also retained its benchmark overnight policy rate at 3 per cent based on the country’s improved economic activity. Net FDI inflows, however, have plummeted to RM 5.5 billion in Q1 of 2024 from RM 19.6 billion in Q4 of 2023.
The Philippines
The Philippines has stayed on the track of economic expansion in Q1 of 2024 despite the marginal growth in its GDP, which increased from 5.6 per cent y-o-y in Q4 of 2023 to 5.7 per cent y-o-y in Q1 of 2024. This is below the targeted range of 6 to 7 per cent set by the government. Some of the sectors that registered positive growth include the industry sector with 5.1 per cent growth, the services sector (6.9 per cent) and food services (13.9 per cent). The tourism sector remained on the path to recovery while agricultural production fell because of the El Niño effect. An increase in the inflation rate to 3.8 per cent in April 2024 dampened the growth rate of private spending, which dropped from a growth rate of 5.3 per cent in Q4 of 2023 to 4.6 per cent in Q1 of 2024. Exports, however, increased because of the growth in the export of electronic products and services. The export growth rate rose from 2.5 per cent y-o-y in Q4 of 2023 to 7.5 per cent y-o-y in Q1 of 2024. Similarly, manufacturing production improved as well.
The manufacture of electronics, food and chemical products contributed massively to a growth in industrial activities to 4.5 per cent y-o-y in Q1 of 2024.
On the negative side, there was an uptick in the unemployment rate from 3.5 per cent in February 2024 to 3.9 per cent in March 2024, mainly because of the EL Niño factor that led to 318,000 fewer jobs in agriculture during this period. Similarly, the inflation rate rose, mainly due to escalated prices for food and non-alcoholic beverages from 3.7 per cent in March 2024 to 3.8 per cent in April 2024.
Amongst financial parameters, the Philippines’ currency has followed a trend similar to that in other countries. It was at its weakest in Q1 of 2024 since October 2022, with the exchange rate depreciating to PhP 57 against the US dollar. Its central bank maintained the interest rate at 6.5 per cent. However, capital inflows have been strong with a 29.3 per cent increase in FDI from February 2023 to February 2024. It touched a two-year high of $1.4 billion in February 2024.
Singapore
Economic growth in Singapore has been strong in Q1 of 2024 in terms of GDP levels, consumption expenditure, and trade and industrial activities, among others. According to the Ministry of Trade and Industry, the GDP growth rate rose from 2.2 per cent y-o-y in Q4 of 2023 to 2.7 per cent y-o-y in Q1 of 2024 owing to a boost in the services sector. This was bolstered by a strong performance in wholesale and retail trade, and the information and communication subsectors. There was also an increase in overall consumption expenditure with both private and public consumption showing an upward trend. In Q1 of 2024, consumption increased by 5.8 per cent y-o-y as compared to 2.5 per cent in Q4 of 2023 with private consumption increasing by 53.8 per cent and public consumption by 6 per cent. Similarly, trade and industrial activities increased while the unemployment rate was marginally higher than in the previous quarter. The inflation rate was within the expected range of 2.5 to 3.5 per cent targeted by the Monetary Authority of Singapore (MAS), down from the peak level of 5.5 per cent in early 2023. MAS also maintained its policy rate and exchange rate policy band at the same level since October 2022.
In line with the trend seen in the other countries of the region, the Singapore dollar depreciated by around 2 per cent against the US dollar in Q1 of 2024. There was also a decrease in FDI inflows by 3.81 per cent from $34 billion in Q4 of 2023 to $32.7 billion in Q1 of 2024. However, Singapore’s foreign exchange reserves increased from $342 billion in Q4 of 2023 to $354 billion in Q1 of 2024.
Thailand
Thailand’s economic growth has been modest in Q1 of 2024 with a reduction in public sector investment, exports and government expenditure. This has had its effect on private consumption and investments. Private consumption increased at a slower rate than in Q4 of 2023, falling from 7.4 per cent to 6.9 per cent, while exports shrank by 1 per cent y-o-y from Q4 of 2023 to Q1 of 2024. As a result, the country’s GDP growth rate dipped by 1.7 per cent between Q4 of 2023 and Q1 of 2024.
Additionally, the growth rate of industrial production declined by 3.5 per cent y-o-y in Q1 of 2024. Manufacturing activities in particular reported a drop for the sixth consecutive quarter as the sector faces the challenge of ageing infrastructure. Its present infrastructure requires an overhaul with integration of more advanced technology to meet global standards. In addition, the purchasing managers’ index also suffered a drop to 48.6 in April 2024 from 49.1 in March 2024.
However, there has been an improvement in the employment situation in the country with the growth rate of employment increasing from 0.81 per cent in Q4 of 2023 to 0.98 per cent in Q1 of 2024. There has also been a moderation in the inflation rate, which declined by 0.8 per cent y-o-y in Q1 2024.
The Thai baht suffered the second-largest depreciation in Asia after the Japanese yen. It weakened by 7.8 per cent against the US dollar in Q1 of 2024.
Key interest rates have been kept consistent at 2.5 per cent as the government aims to strengthen long-term macrofinancial conditions.
Vietnam
Economic growth in Vietnam has been led by a few key sectors like tourism, manufacturing and services. The GDP growth rate slowed down to 5.6 per cent y-o-y in Q1 of 2024 as compared to 6.7 per cent in Q4 of 2023, although the growth rate of private consumption remained steady at 4.9 per cent. The industrial growth rate fell from 7.8 per cent y-o-y in Q4 of 2023 to 6.2 per cent in Q1 2024. Despite the slowdown in the industrial growth rate, exports increased by 18 per cent in this period. Inflation increased from 3.5 per cent y-o-y in Q4 of 2023 to 3.77 per cent in Q1 of 2024 due to an increase in the prices of raw materials, consumer goods and oil.
As in other countries of the region, the Vietnamese dong depreciated: it fell 2.1 per cent y-o-y against the US dollar in Q1 of 2024. The Vietnamese central bank maintained its policy rates during the quarter and is expected to leave them unchanged in the first half of 2024. There has been an increase in FDI inflows with inflows worth $6.2 billion in Q1 of 2024, translating to a growth rate of 13.4 per cent y-o-y.
In sum
The outlook for the remaining part of 2024 and thereafter is somewhat mixed. Geopolitical tensions are likely to result in unpredictable economic conditions in these six countries. There can be several hurdles related to high inflation in the region, not least because of the rising challenges of climate change.
This is an extract from a report by McKinsey & Company on “Southeast Asia Quarterly Economic Review: Sustaining the Momentum”
