SFC Outlook 2024｜Hoe Ee Khor: ASEAN+3 Region Poised for Stronger Growth in 2024

南方财经全媒体记者李依农 上海报道

As we embark on the journey of 2024, the global economic landscape remains veiled in uncertainties. In an exclusive interview with SFC, Dr. Hoe Ee Khor, the Chief Economist of the ASEAN+3 Macroeconomic Research Office (AMRO), shares insights into the economic trajectory of the ASEAN+3 region amid these challenges.

According to Dr. Khor, ASEAN+3 region poised for stronger growth in 2024. He notes the transition from export headwinds to a more favorable tailwind this year, particularly through stronger domestic demand and resilient spending in China and the U.S.

Geopolitical challenges also take center stage, with Dr. Khor expressing, "Geopolitics has been a big shock." He delves into the Middle East conflict and the potential inflation risks stemming from it, cautioning against underestimating the geopolitical landscape's impact on regional growth.

On the collaborative front, Dr. Khor sheds light on the reciprocal benefits between China and ASEAN economies, stating, " Strong growth in China would be good for the region. And similarly, strong growth in the ASEAN is good for China."

Regional growth driven by a stronger export focus this year

SFC Markets and Finance: What will be the main engine to the ASEAN+3 growth in year 2024?

Hoe Ee Khor: The ASEAN+3 region has done well. Last year it grew by about 4.4%. And this year we expect it to grow by 4.5%. This is a little bit higher. But last year was a very good year because China's growth was quite strong. It was 5.2%, which is a big rebound from the year before. I think that set the basis for this year.

Last year, the region was hit by a very strong headwind from exports. This year, the headwind has receded, and it's turned into a bit of a tailwind, though it's not a very strong tailwind. Nevertheless, this year we expect exports to be one of the drivers of growth.

Last year, growth was basically driven by domestic demand. And that will remain this year. Domestic spending is quite resilient and will continue to be a main driver of growth this year. And China will get even stronger. We have seen some of the indicators. Retail sales in China, for instance, are picking up. That's important because that will feed into higher imports, for exports in the region.

We also see that domestic spending in the U.S. is also picking up. Last year, the growth in the U.S. was driven by services. And that’s why exports were quite weak in the U.S. but there's been a rotation of growth now. So, the growth in the US this year will be driven more by spending on goods. And the spending on goods will feed into higher imports from the region.

So the main factor will be domestic spending,in terms of higher consumption,but also stronger investment.And then there will also be stronger exports from the region,both through China as well as through the U.S.

And the final factor is tourism. Tourism was hit very badly during the pandemic and has been recovering last year, but it has not fully recovered yet. So this year we expect tourism in the region to continue to recover, and reach more than 100% of what it used to be during the pandemic. Those are the four main drivers of growth for the region this year.

So, we expect the region to grow by about 4.5%. ASEAN countries will grow by about 4.9% compared to 4.5% last year. And that's because the ASEAN countries were export-dependent and sort of hit more badly last year. This year, with the stronger exports, we expect that growth will be higher than last year.

SFC Markets and Finance: In a previous forecast about three months ago, you warn against fully discounting the risk of recession in the United States and euro area. What is the probability of a recession in these two economies? Which economy is more worrying?

Hoe Ee Khor: We were worried that last year the U.S. would have a recession. That didn't happen. Because the U.S. was much more resilient than most analysts expected. I think that number for the U.S. just came out, for the fourth quarter, and it was still stronger than expected—the U.S. for the year as a whole is now growing by 2.5%.

This year, I think we all expect the U.S. to slow down,the question is whether it's going to be a slowdown or a recession.I think now most analysts expect that it will be a slowdown, not a recession.The risk of recession has also receded.

Before, I think the Federal Reserve still had a relatively high probability of recession for this year. It has reduced the risk from 70% to 63%. That’s for the U.S. Federal Reserve. But in the private sector, it was more like 40%. And they reduced it to 20% this year. So, there's still a risk, it's smaller but still a significant risk that we cannot rule out.

I think this risk is linked to the dynamics of inflation. Inflation has come down to about 3% now. And everybody expects that it'll continue to go down slowly. But if there is a shock somewhere, a supply shock, and inflation spikes up again, I think that will put pressure on the Fed to raise interest rates in order to contain inflation. If that happens, then the risk of a recession in the U.S. is much higher. So it is a small risk.

We expect the U.S. to slow down this year rather than going into recession. But nevertheless, this is a risk that we cannot rule out completely. If there's a recession in the U.S. and in Europe, then it's going to shave off growth from the region by about half. So instead of 4.9%, you'll be looking at 2.5% growth, which is a very substantial reduction. This is coming up from the simulation model that we run. We hope that doesn't happen in the end because that is not our baseline. Our baseline is that the U.S. slows down, have a soft landing, inflation will continue to come down and the region will be able to grow faster.

Potential escalation of Middle East conflict poses inflation risk

SFC Markets and Finance: To what extend will geopolitical issues pose a threat to regional growth? What is the biggest uncertainty this year?

Hoe Ee Khor: Geopolitics has been a big shock. As you know, the war in Ukraine, although the risk from the war in Ukraine has subsided, but then the Middle East flared up last year, sometime in October. because of the war in Gaza. And so far, the spillover from the Middle East, the conflict in Gaza has been relatively contained. It has affected shipping. A lot of the ships from Asia to Europe have been diverted. They're now going around the Cape of Good Hope instead of going through the Suez Canal. And that has added about 1 million U.S. dollars per vessel, it's a big cost, right? And has also increased the length of time by about ten days. So overall shipping cost is going up, and that feeds through into the price of products.

But so far, the impact on inflation from the Middle East has been quite small. It spiked up some but not much. And more recently it has come down again. But we know that the Middle East conflict can escalate and become a lot worse. And if it happens, there will be even more disruption. And then there could be a spike in oil prices again. So this is the reason we're trying to avoid it. We hope that it doesn't materialize, but we cannot rule it out again. So there's a geopolitical risk.

The other geopolitical risk is the tension between the U.S. and China. And it has continued to escalate, after Trump and into Biden's era. But more recently, we see that both administrations are trying to dial down that tension a bit. I think it's good for not just China and the U.S., but for everyone, because it means that there will be less disruption to trade and investment.

SFC Markets and Finance: Meanwhile, we also anticipate major central banks to cut rates this year. How soon and how quick you think the Fed, for example, should act? And will that bring positive effects to Asian economies?

Hoe Ee Khor: I think the year ended on a positive note in a sense, most people feel that the U.S. economy has achieved a soft landing. And the Fed came out and said that there will likely be no further rate hikes for the year. So now the expectation is when the Fed is going to reduce the rates. And the market thought that maybe they would start reducing in the second quarter. The expectation is that, more likely, if inflation remains well-behaved, the Fed will start cutting rates maybe in the second half of this year.

But really, even though the Fed has not cut the rate, the interest rates really have come down. If you look at ten-year yield, if you look at the five-year yield, all have come down. It was around the high 4%, between 4.5%~5%, now it's in the low 4%, just above 4%. It even went down to below 4% earlier. Everyone is in a waiting game to see how inflation behaves. So there's a lot of noise, I think you're going to see that kind of bumpy ride.

Going forward, when new data comes out, if it is positive data, the market would rally. So that would be good for (the market). In any case, I think the higher for longer is no longer the baseline. Now, the issue is how soon the Fed is going to cut rate and how quickly rates will come down. I think that changes the setting for central banks in the region too. Because many central banks in the region already peaked and are on hold as well, and they are waiting for the Fed to cut before they move themselves. But some of them may start cutting earlier, because if you look at the inflation dynamics in the region, inflation has come down much faster here than in the U.S. and many of the central banks are ready to cut. But they are holding back because if they cut, there's pressure on the exchange rate. The exchange rate of the countries in the region have already depreciated quite a bit, but because they are depreciating together, it's okay. They don't feel like they are the only one that's getting beaten up by the Fed.

But certainly, I think they want to prevent the exchange rate from depreciating further or weakening further, because if the exchange rate is too weak, there's a pass-through effect from higher prices of commodities into inflation. It's not a very strong pass-through there, but most of the central banks would rather wait until the Fed cuts before they go along with that.

Economic growth between China and ASEAN is reciprocally beneficial

SFC Markets and Finance: What is your outlook for China's economy this year? How much of an impact does China have on ASEAN's economy?

Hoe Ee Khor: We are quite positive about China. We are very optimistic in Vietnam. If we compare our forecasts with the analyst forecasts, I think we are on the high end, because we are expecting China to grow by 5.3%, slightly higher than last year. But most of the analysts are expecting growth of below 5%. I think the average is maybe between 4.5% to about 4.8% in that range.

So we are optimistic,and the reason we are optimistic is because,we still see China has not fully recovered.And last year was not a very good year for China,even though it grew by 5.2%,because of the headwind from exportsand also because we see that domestic spending has not fully recovered.

This year, we expect China economy to do better because the headwind from the real estate sector is going to be smaller. And maybe even then, mostly this year, if the real estate sector is able to recover slightly, then the other sectors are doing well, manufacturing is doing relatively well. If you look at manufacturing, investment is quite strong. And I think I mentioned earlier that retail spending is also picking up. We see that in the indicators there. For all these reasons, we think that this year the economy could actually be stronger, growth will be stronger than last year.

Of course, along the way, there could be other shocks that happen, but we are optimistic that, the Chinese economy will not be as weak as some of the other estimates that we are seeing.

SFC Markets and Finance: What is your outlook on the cooperation between China and ASEAN countries in terms of economy and trade?

Hoe Ee Khor: China is the biggest trading partner for ASEAN, and ASEAN has become the biggest trading partner for China during the pandemic.They are each other's biggest trading partner now.And so, strong growth in China would be good for the region.And similarly, strong growth in the ASEAN is good for China.But China is also the biggest trading partner for 150 countries around the world.So, it's a very important economy for everyone.

I think the main thing about China now is that because China is at the stage of development where it's beginning to outsource, it's moving up the value chain. So, it's beginning to outsource labor-intensive sectors like garments, and some parts of manufacturing as well. So if you look at Vietnam, Cambodia, and now Malaysia, they are attracting investment from China in the manufacturing sector. The Chinese industries are beginning to move production to Vietnam, to Cambodia, the ASEAN countries.

Besides that, China is probably the most advanced in terms of electric vehicles, batteries, solar, wind, power, renewable energy. And because of climate change, a lot of countries are now moving away from fossil fuels to renewable energy. So many of them are trying to attract investment into the new EV industries, from everywhere. I mean, not just from China, but China is one of the biggest investors now in EVs, right?

Indonesia, because it has natural resources in nickel, is a very attractive destination for the Chinese to set up production because they can leverage the nickel deposits there. Also, Thailand and Malaysia, because they already have an auto industry and they want to shift from fossil fuel to electric vehicles. So they are also trying to attract the Chinese electric manufacturers to move their production to those countries. Besides that, they're also trying to attract investment in solar energy, in wind power energy, and these others.

There's a lot of investment flows between China and the rest of the region which is very important. Because in the old days, China's investment in most countries used to be just in natural resources, mostly copper, iron, or coal, and all that. But now there's also investment in manufacturing and services. Alibaba, Tencent, now they are big players in the global stage. And they are also investing abroad because they also want to diversify the market to other parts.

SFC Markets and Finance: Two years into the implementation of RCEP, what are the benefits for regional trade?

Hoe Ee Khor: Unfortunately, RCEP came into effect during the pandemic when things were very slow. But one of the big benefits of RCEP, first of all, it is the biggest trading bloc in the world, covering about 34% to 35% of the global economy. Secondly, I think the most important part, the benefit of RCEP is that it liberalized the tariff for intermediate goods, at a time when there's a reconfiguration of trade. The reconfiguration of trade means China is outsourcing the production of intermediate products, which are cheaper to produce in other countries. In the past, this would attract tariffs, when you export or import intermediate goods. But under RCEP, there would be no tariff on intermediate goods, as long as there is a certain amount of domestic value-added content. So, because of that, it means that a lot of the reconfiguration will take place within the region, because they can now import and export freely across the border. So, I think that's one of the big benefits of RCEP.

The other benefits would be thatthey are also liberalizing the services sector,services are one of the most protected sectors anyway. Because of that,I think it also opens e-commerce and other forms of services,across the region.So, I think if the region can take advantage of RCEPto remain more integrated,this will help offset some of the protectionist tendenciesthat we see now in the U.S. and Europe,there's a lot of protectionist measures now taken by these countries,so the region can be a model for open trade.And I think that's very important,not just for the region, but for the rest of the world.That will continue to uphold globalization,rule-based multilateral trade at the same time.

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记者：李依农

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出品：南方财经全媒体集团