Recoveries not ready to go solo: Moody's Economy.com

The economic recovery among members of the Association of Southeast Asian Nations is gathering significant momentum. Most economies booked impressive annual growth rates in the fourth quarter of 2009, thanks to recovering external demand and improving domestic economies. Surging foreign trade helped Thailand record its fastest quarterly growth in a decade. The recovery in global demand helped by policy stimulus measures and inventory restocking has played a major role in driving industrial production, which is boosting Malaysia’s growth. In the Philippines, rising industrial output managed to offset a typhoon-induced contraction in agricultural output.

Greater business and consumer confidence and improving labour markets are fueling consumption and investment. Notably, the pickup in private investment boosted Indonesia’s real GDP to just below the trend rate of the past five years. In other economies where private investment is languishing, public spending is propping up investment as more of the fiscal stimulus comes on stream.

Despite robust conditions in many countries, the sustainability of the expansion is questionable. For instance, weak manufacturing in Singapore led GDP to contract in the fourth quarter. Policymakers will need to prolong fiscal and monetary stimulus measures until the expansion is on firm footing.

Export-led recovery
Since the second quarter of 2009, the ASEAN-5 region has experienced an export-led recovery. While exports also led the recoveries following recessions in 1998-1999 and 2001-2002, this time around, intra-Asian trade has boosted shipments, compensating for relatively weak demand from the U.S. and Europe. Demand has been particularly strong from China and India, which should both post GDP growth close to their trend rates in 2010. Strong growth in these heavily populated nations has sharply increased demand for natural resources. Reflecting this demand, Indonesia—whose export basket is heavily weighted toward commodities—has experienced the strongest growth in exports.

The boom in exports has also had a big impact on manufacturing. Inventory adjustment and fiscal stimulus measures across the globe led to strong manufacturing growth during the second half of 2009. In Thailand, industrial production grew by a record 35.7% y/y during December 2009, while in the fourth quarter industry in the Philippines expanded at the fastest pace in a decade.

Leading indicators point to sustained growth in exports and manufacturing, though the increase is likely to moderate from the second quarter of 2010. The sharp appreciation in ASEAN-5 currencies since early 2009 has hurt competitiveness. The boost from inventory adjustment in the world’s larger economies is waning, and fiscal stimulus measures across Asia will be gradually removed. The ASEAN-5 will become more reliant on private demand in major trading partners, which is expected to be strong in only a few emerging economies.

Confidence is key
With the boost from exports expected to fade, private investment and consumption will exert a greater influence on growth in 2010. Thus far, private investment has been weak across the region, constrained by subdued inward foreign direct investment, which plummeted in late 2008 and early 2009. Business sentiment has rapidly rebounded in Indonesia, the Philippines, Thailand and Malaysia after a sharp dip at the end of 2008. Capacity utilization has also risen sharply across the region, which should support investment in 2010. In Indonesia and Thailand, investment is expected to be a major driver of growth this year and in 2011.

The outlook for consumption varies markedly. The uniform pickup in business sentiment across the region has not been replicated in consumer confidence surveys. Based on leading local surveys, consumer confidence is fairly strong in Indonesia and Malaysia, but despite recent improvement, remains weak in Thailand and the Philippines. In coming quarters, accelerating inflation and the withdrawal of fiscal stimulus support will weigh on confidence. Indonesian authorities have flagged plans to raise road tolls and electricity prices, while falling agricultural output in the Philippines following last year's typhoons has accelerated food price inflation. Meanwhile, the recent rapid rise in international commodity prices is filtering through to local prices across the region. Improving labour market conditions should support confidence, which could also be boosted by elections in the Philippines in May.

Labour markets improving
Labour markets were hit hard as the slump in exports in late 2008 and early 2009 lowered manufacturing production. The sharp contraction in private domestic demand in most economies also weighed on employment in the region’s large services sector. Initially, job losses were mitigated by reducing workers’ hours and lowering wages. Employers were reluctant to shed staff, despite signs of a slowdown, possibly mindful of the manufacturing skill shortages before the crisis. Ultimately, the rapid deterioration in output forced employers in most of the region to cut headcounts.

Large fiscal stimulus outlays stemmed employment declines. In Malaysia, incentives for firms to hold on to local staff at the expense of foreign workers supported employment. In Thailand, training programs for the unemployed and public subsidies for construction projects reduced labour force slack. In Indonesia and the Philippines, public infrastructure projects supported employment prospects.

Unemployment rates rose sharply in manufacturing export-orientated Singapore, Malaysia and Thailand. The downturn in consumer demand for electronics and cars led to sharp production cuts, which weighed heavily on employment. Singapore’s labour market is almost entirely driven by manufacturing. Labour market conditions there deteriorated first and remained depressed longer than in neighbouring countries. Singapore’s unemployment rate peaked at 4.1% in not seasonally adjusted terms during the second quarter of 2009, which was higher and later than in Malaysia (4% in the first quarter) and Thailand (2.1% in the first quarter).

In stark contrast, Indonesia’s unemployment rate fell in 2009 as the economy avoided recession. The large domestic sector, aided by growth in fixed investment and private consumption and less reliance on exports, helped the economy add jobs in 2009. The latest estimate of the unemployment rate is 8.1%, much lower than the 11.2% recorded in 2005.

After the Philippines economy's mild and brief recession in late 2008 and early 2009, unemployment has been trending steadily downward. Despite the harm that typhoons Ondoy and Pepeng did to agricultural employment, fiscal and monetary stimulus measures, strong remittances, and rebounding external demand lowered the unemployment rate in the second half of 2009.

Unemployment has been on a downward trend as the economic recovery picks up pace, and despite the recent dip, employment growth has been robust for most economies. Singapore’s unemployment rate declined sharply in the final quarter of 2009, to a level not seen since mid-2008, thanks to a large jump in jobs growth. Malaysia’s unemployment rate stood at 3.6% in the third quarter, down from a six-year high of 4% in March 2009. The labour market is tightening in Thailand, with the unemployment rate down to a 13-month low of 1%.

Industrial production to support employment
Firming demand from key export markets and strengthening business activity as firms restock should boost manufacturing employment in Singapore, Malaysia and Thailand. Robust domestic demand should support service employment. Indonesia’s economy is rapidly expanding, and the government is putting greater emphasis on rapid investment growth, which augurs well for future employment and production.

With the region’s economies expected to expand during 2010, employment looks set to rise and unemployment fall. However, employment will become harder to sustain once the benefits from the fiscal stimulus dissipate and once export growth and industrial production moderate because of subpar global growth. In the long run, more private investment is needed to spur output and employment.

Singapore. GDP growth of 4.2% is expected in 2010. Electronics and pharmaceuticals industries have improved on the back of inventory restocking and increased overseas demand, but these boosts are likely to fade. Completion of the integrated resorts helped construction during 2009, but tighter monetary policy will slow the property market. Government spending will help, and the 2010 budget includes funds to boost productivity and raise local wages over the next five years.

Indonesia. GDP growth is expected to accelerate from 4.5% in 2009 to 5.6% in 2010, which is close to the trend rate. Leading indicators point to a rapid recovery in private demand. Despite a recent dip, consumer confidence remains near a five-year high. Loan demand has surged, and business sentiment is buoyant, while foreign direct investment has rapidly recovered, a trend not witnessed elsewhere. The government has already flagged it plans to withdraw stimulus measures and will likely reduce the budget deficit to below 1% of GDP. Rate hikes are expected from the second quarter.

Philippines. GDP is expected to grow 3.8% in 2010 and approach its trend rate of around 5% in 2011. Exports, stimulus measures and remittances have been the major sources of growth thus far, offsetting weak private investment. Campaigning for presidential, legislative and local elections in May will provide a temporary boost and some clarity on fiscal policy. The degree to which monetary policy is tightened in the second half of 2010 will depend on how high rising international commodity prices push domestic inflation.

Malaysia. Robust growth in year-on-year terms during the fourth quarter of 2009 sets the tone for expansion in 2010. Exports are rising, and industrial production is strengthening. Private consumption held up strongly during the recession, and recovering employment levels and consumer confidence should bolster spending this year. Robust business sentiment and a pickup in capacity utilisation should help private investment gradually recover, while the fiscal stimulus will continue to drive public investment.

Thailand. GDP is projected to grow 4.3% in 2010. Exports will receive support from intraregional trade and firming external demand from the advanced economies. But once the boost from inventory adjustment and global fiscal stimulus measures wanes, the surge in exports is expected to moderate as below-trend global growth reduces demand for Thai exports. Consumer spending will grow strongly on the back of low unemployment and jobs growth. Public spending will continue to drive investment during 2010.

Nikhilesh Bhattacharyya is an associate economist in the Moody's Economy.com Sydney office. He covers Indonesia, Malaysia and the Philippines for the World Workstation and is a regular contributor to the Dismal Scientist web site. Nikhilesh received his bachelor of economics degree (honours) from Macquarie University, where he also worked as a research assistant.

Matthew Circosta is an economist in the Sydney office of Moody's Economy.com. He covers the New Zealand, Malaysia and Thailand economies. He previously worked as a research economist at BIS Shrapnel, providing analysis and forecasts of the Australian economy. Matthew earned a degree in economics at the University of Adelaide and an honours degree in economics at the University of Western Sydney.