A pause in Southeast Asia’s economic recovery can steepen permanent economic losses as people stay home more and spend less, according to a report by S&P Global Ratings published.
Major emerging markets in the region — Indonesia, Malaysia, the Philippines, and Thailand — are living with the effects of new COVID-19 waves that only recently look to have peaked, said the report titled ‘Delay Risk on the Rise for Southeast Asia’s Recovery.’
“Our baseline estimates still assume emerging southeast Asia will return to its pre-pandemic level of GDP around August of this year,” said economist Vishrut Rana.
“However, delay risks are rising, and a prolonged recovery will drag on the region’s growth rate and lead to higher permanent economic costs,” he added.
As hospitals are filled up with COVID-19 patients in recent months, governments again restricted mobility and households voluntarily stayed home more often. Through late 2020 and into the early part of the new year, mobility stalled and then fell — most dramatically in Malaysia.
While this has not led to a return to the harsh lockdowns of early 2020, it can drag on first-quarter economic performance.
Rana said the biggest threat to timely economic recovery is individual consumer behaviour as people stay home more and spend less. Household spending is key for growth in these economies.
For example, household consumption accounts for almost 60 per cent of GDP in Indonesia and Malaysia compared to less than 40 per cent in China.
Coming into 2021, activity in southeast Asia’s big four emerging markets was between 2 and 8 per cent below pre-pandemic levels. These economies usually grow quickly so this implies very large gaps between where these economies were and where they would have been in the absence of COVID-19.
A two-month delay in the recovery can cut S&P’s 2021 growth forecasts by about 1 percentage point to 5.2 per cent. About two-thirds of this decline will likely come from weaker-than-expected activity in the first quarter, which would have carry-over effects into the second half.
It will also mean higher growth rates in 2022 off a lower base. The longer an economy is stuck with unemployed resources, the larger the damage to balance sheets and workers.
More businesses will close, and more workers will lose jobs, skills and motivation. Together, this will hold back the level of activity once the economy reaches its new normal.
S&P forecasts the permanent loss at about 7.4 per cent. This will rise to 8.1 per cent in a scenario with a two-month delay in the recovery timeline. The Philippines and Thailand will likely see the largest permanent losses at about 12 per cent and 10 per cent respectively.
The Philippines suffered from a deep contraction in 2020 amid exceptionally tight mobility restrictions. For Thailand, the issue is structural and related to the tourism sector, which S&P expects to be one of the last industries to recover from the pandemic.
Aside from the direct effects of the coronavirus, some other risks are tilting to the upside. Most important, external demand may boost growth more than expected this year, especially if the US adds more stimulus soon.
China’s recovery may also rebalance faster than expected, lifting consumer spending and imports, including from the rest of Asia.
Emerging economies in southeast Asia have secured enough vaccine doses for 40 to 50 per cent of their populations on average, although efficacy of the vaccines and timing of distribution remain unclear.