The Asia Pacific region is poised for strong short-term growth if conditions remain favorable. But global economic instability, especially in China, and a trend toward protectionist policies threaten to put a damper on its rosy outlook.
The good news is that, according to the International Monetary Fund’s 2023 World Economic Outlook Update, APAC is expected to grow by 4% in 2023 and 4.2% in 2024. That’s second only to the energy-rich Middle East.
The Profound Influence of China
Of course, the prospects for APAC depend on what happens in China, whose situation is currently less stable than over the past few decades. China has seen a huge, unheard-of decline in growth since the pandemic began, and the outlook from IMF has been revised down multiple times. Currently, projected GDP growth for China stands at 5.2% in 2023 and 4.5% in 2024. With the recent decision to reopen, things are starting to turn around, but many uncertainties remain. Numbers will continue to fluctuate.
A key factor is how a U.S.-China trade war evolves. The conflict seems to be escalating to include things like bans on technologies. Tariffs can be measured for a roughly good idea about how they may impact trade and investment flows. Nontariff barriers are opaque, and their impacts can be quite dramatic. This will have a big effect on China-centered regional supply chains — which affect ASEAN in particular and APAC in general.
Some labor-intensive businesses have already relocated from China to places like Vietnam and Thailand as a result. Capital-intensive components of the key supply chain industries — like electronics, machinery, automotive parts, and automobiles — have not been affected much yet.
That’s not to say they won’t be affected if the conflict continues to escalate.
The Russia/Ukraine War
If a trade and technology war weren’t enough, we had a real war in February when Russia invaded Ukraine. That drove up energy prices and caused a huge spike in geopolitical risk and commodity costs. The war increased the urgency for APAC countries to transition their energy policies while keeping an eye on inflation.
The U.S. responded to inflation concerns after Russia’s invasion with aggressive monetary tightening. That came after aggressive loosening for many years in the form of quantitative easing. That yo-yo-ing of policy responses may induce a so-called global recession in 2023. But it’s really a recession in the advanced economies — the U.S. and Europe, mainly. No one is talking about recession in APAC countries.
APAC Recession and Labor Concerns
APAC countries’ major concern from a recession in the West is the impact on exports, and indirectly on debt levels. All Asia-Pacific economies increased fiscal deficits or worsened their fiscal positions after COVID-related spending. A rise in service costs through rising interest rates, as well as the valuation effects of a stronger U.S. dollar, may push some developing countries over the edge. It happened in Sri Lanka. Laos is teetering on the brink of crisis. Bangladesh had to go to the IMF to pay for its fuel imports because of the rise in service costs on its existing debt levels.
Some countries are hesitant to return to pre-pandemic labor migration policies and are restricting exports of goods and services, mainly in the food area. Malaysia implemented controls on live chickens, Indonesia on cooking oil, and India on a whole range of commodities.
Competition for high-skilled workers has countries aggressively pursuing them in key sectors. At the same time, low-skilled labor flows have not returned to pre-pandemic levels. The rise in anti-globalization sentiment has seen some shifts in policy, such as the increased use of subsidies. For instance, Japan and the U.S. offer generous incentives for firms to return home. Reshoring, friendshoring, and nearshoring are about not just restricting capital flows but also reversing capital flows.
(These firms, however, tend to take those subsidies, return home, wait a while, and then return to China.)
In terms of low- and medium-skill range, countries like Malaysia are questioning whether they need to return to pre-pandemic levels of reliance on foreign workers. Employers are complaining that they can’t fill vacancies in these low-skill areas, but governments are saying they need to save these jobs for locals. Meanwhile, locals are not willing to do those types of jobs at those wages.
Anti-Globalization Sentiments
All these factors contribute to an anti-globalization sentiment that could derail this fragile recovery from the pandemic. This is basically protectionism in new clothing, and the shift toward so-called self-reliance comes at a time when the need for regional cooperation is increasing, but the appetite for it is waning.
Another factor to consider is that most of the Asia-Pacific region is aging, but not at the same rate.
India and the Mekong — Cambodia, Laos, and Myanmar — have relatively young populations where the ratio of working age versus total has yet to peak. It has peaked and is already trending downward in all the other original ASEAN countries, East Asia, and Australasia.
The shrinkage in the labor force in these countries will significantly impact growth. Countries have some tools to fight this, such as raising the retirement age and increasing the participation of women in the labor force, but rising labor mobility is a clear win-win solution. Young populations, which happen to be in poor countries, can help mitigate labor shortages among aging societies.
The pandemic and its aftermath have increased the need for greater labor mobility and other forms of factor mobility but have also reduced the appetite for them.
This protectionism and rising inequalities can threaten social and political order, so the conditions for growth and prosperity will be at risk.
So there’s no worse time to be going through this increase in anti-globalization sentiment, but this is where APAC finds itself. It must find a way to resist the breakout of it and resist the temptation to look inward.
About Jayant Menon
Jayant Menon enjoyed a two-decade-long career at the Asian Development Bank. At ADB, he was Lead Economist in the Office of the Chief Economist and worked on the India Desk, the Regional Economic Monitoring Unit, the Southeast Asia Department, and the Office for Regional Economic Integration. Before joining ADB, Jayant worked as an academic in Australia for more than a decade, mainly at the Centre of Policy Studies at Monash University at its original campus in Clayton, Melbourne. Since February 2020, he has served as Senior Fellow at the Institute of Southeast Asian Studies (ISEAS-Yusof Ishak Institute) in Singapore, where he works on trade and investment issues in the region but with more of a research focus and co-edits the Journal of Southeast Asian Economies.
This article is adapted from the GLG Webcast “APAC Macroeconomic Outlook 2023: Key Trends and Risks to Watch.” If you would like access to this event or would like to speak with experts like Jayant Menon or any of our approximately 1 million industry experts, contact us.
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