The global economic outlook is uncertain with the baseline forecast for growth falling from 2022 to 2023.1 As with many countries around the world, those in Southeast Asia enjoyed strong economic growth in 2022 following the COVID-19 pandemic. However, such growth has begun to slow across almost all economies in the region in the second quarter 2023—affected by global economic conditions, tightening monetary policies, lower commodity prices, and persistent inflationary pressures (Exhibit 1).2
Regional economic overview
In this article, we focus on the economies of six countries in Southeast Asia: Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. We start by setting the scene with a regional overview.
Key indicator details can be found in Exhibit 2.
In the following section, we focus on the six specific countries in Southeast Asia, examining their macroeconomic conditions and financial markets.
Indonesia
Indonesia’s second quarter GDP trajectory has seen an upward swing. It has stayed at above 5 percent for seven consecutive quarters, with private consumption being the key driver of growth—particularly due to private consumption during Eid al-Fitr, Eid al-Adha, and school holidays. Holiday allowances (Tunjangan Hari Raya) and the 13th-month salary for civil servants also augmented purchasing power. Meanwhile, growth in household consumption was fueled by higher spending in sectors like transportation and communication, clothing and footwear, and hotels and restaurants.7
While exports have remained relatively resilient in the first quarter 2023, they have contracted in the second quarter. This is due to Indonesia’s high dependence on commodity exports, where prices have normalized since the start of 2023. Despite a deceleration in fixed investment activities and a decline in exports, the second quarter has seen an accelerated pace of economic expansion, increased industrial production, and reduced inflation (Exhibit 3).
Macroeconomic outlook
GDP: Indonesia’s economy grew at a faster pace in the second quarter 2023 at 5.2 percent year on year (y-o-y), compared to 5.0 percent in the first quarter. A strong growth in private consumption has driven this improvement, with it increasing from 4.5 percent y-o-y in the first quarter 2023 to 5.2 percent y-o-y in the second. Still, fixed investment has slowed to 2.1 percent y-o-y in the second quarter 2023 from 3.3 percent in the first quarter, weighed down by higher cost of capital and weak prospects of global growth.
Trade: Exports declined by 2.7 percent y-o-y in the second quarter 2023, down from 11.7 percent y-o-y in the first quarter, while imports grew to 3.0 percent y-o-y from 2.8 percent in the first quarter—caused by a 0.2 percent decline in mining products exports. Despite services’ exports remaining strong due to an increased number of foreign visitors and foreign exchange inflow, the normalization of global commodity prices in 2023 has hampered overall export performance.
Industrial activity: Industrial production increased by only 0.3 percent in the second quarter 2023 from 1.6 percent y-o-y in the first quarter. PMI rose from 50.3 in May to 52.5 in June 2023, continuing its 22-month improvement.
Labor: Indonesia’s unemployment rate remained steady at 5.7 percent in the second quarter 2023, the same as that of the first quarter 2023.
Inflation: Over the past few months, inflation has been steadily easing, declining from 4.0 percent month on month (m-o-m) in May to 3.5 percent m-o-m in June.
Financial markets
Currency: Although the Indonesian rupiah (IDR) depreciated 0.8 percent m-o-m against the US dollar in June, the longer view is more optimistic, with the IDR strengthening by 2.0 percent m-o-m against the US dollar since January 2023.
Policy rate: Bank Indonesia (BI) maintained the 5.75 percent policy rate at its June 2023 meeting, indicating that the current rate setting is adequate to ensure that inflation remains within the target range.8 Although BI expects headline inflation to drop further by the end of 2023, inflation will still be within the upper end of BI’s new inflation target. BI has also been using tools—like currency interventions—more actively to promote forex stability and growth.9
Capital flows: FDI inflows were $5.2 billion in the second quarter 2023 versus $5.0 billion in the first quarter. Due to decent export performance, forex reserves increased by $7.0 billion reaching $131 billion in the first quarter 2023.
Malaysia
In the second quarter 2023, Malaysia’s pace of economic expansion was at its slowest in two years, weighed down by decreasing external demand. GDP grew at 2.9 percent in contrast to 5.6 percent in the first quarter. Domestic demand remained the key driver of growth, especially due to increased private consumption and investment. Additionally, household spending grew because of higher rates of employment and increasing wages.
Meanwhile, capacity expansion, progress of multiyear projects, and the government’s higher fixed-asset spending underpinned increased investment activity. And, continued recovery in inbound tourism partially offset the slower goods export growth.
As in other Southeast Asian countries, Malaysia’s headline inflation has been steadily easing in the first and second quarters 2023. Risks to the inflation outlook remain highly subject to changes to domestic policy on subsidies and price controls, global commodity prices, and financial market developments.
The services and construction sectors have continued to support growth, although hot weather conditions have negatively affected production in the agriculture and mining sectors.10 Exports have contracted, mainly due to weak demand for electronic products—these account for a significant 40 percent of Malaysia’s exports (Exhibit 4). In addition, the normalization of commodity prices has also impacted the exports of palm oil and other commodities. As China is Malaysia’s largest export market—accounting for 15.5 percent of total exports—the weak momentum of the rebound in China’s economy during the first half of 2023 has also been a significant headwind to Malaysia’s exports.
Macroeconomic outlook
GDP: Weighed down by slower external demand, as mentioned, Malaysia’s economy expanded at a moderate pace—2.9 percent y-o-y in the second quarter 2023 from 5.6 percent y-o-y in the first quarter. Growth in the second quarter was also affected by the high base effect in the second quarter of 2022, when the economy experienced a strong rebound from reopening after the COVID-19 pandemic. Consumption, which accounts for close to 60.0 percent of Malaysia’s GDP, slowed to 4.3 percent in the second quarter 2023 from 5.9 percent in the previous quarter.
Trade: Both exports and imports sharply contracted in the second quarter 2023. Exports slowed to –9.4 percent y-o-y from –5.3 percent y-o-y in the first quarter 2023, while imports contracted to –9.7 percent y-o-y from –5.8 percent y-o-y in the same period. This export downturn will likely continue until the end of 2023, largely due to a high base in 2022, a slowdown in electronics demand, and relatively low commodity prices.
Industrial activity: Industrial production contracted by 0.5 percent y-o-y growth in the second quarter 2023 from 2.7 percent y-o-y growth in the previous quarter. PMI remained in the contractionary zone as it fell marginally from 47.8 in May to 47.7 in June—the tenth consecutive moderation in operating conditions since January 2023.
Labor: The unemployment rate declined marginally to 3.4 percent in the second quarter 2023, down from 3.5 percent in the first quarter.
Inflation: Amid lower cost factors, inflation declined from 3.7 percent m-o-m at the start of 2023 to 2.8 percent m-o-m in May, reaching 2.4 percent m-o-m in June.
Financial markets
Currency: The ringgit depreciated by 2.4 percent m-o-m against the US dollar in June—contracting almost 7.0 percent m-o-m since January 2023. This has made it the worst-performing currency in the Southeast Asian region as of the end of the second quarter 2023.
Policy rate: Bank Negara Malaysia (Malaysia’s central bank) maintained its policy rate at 3.0 percent at its July 2023 meeting, keeping its monetary policy stance slightly accommodative and supportive of the economy.11
Capital flows: FDI inflows declined sharply in second quarter 2023 to only $1.1 billion from $3.1 billion in the first quarter. This was the lowest since the third quarter of 2020, weighed down by intense cost pressures, high borrowing cost, and expectations of a global slowdown. Forex reserves declined by $3.8 billion, reaching $99.0 billion in the second quarter 2023.
The Philippines
The Philippine economy grew at its slowest pace in 12 years in the second quarter 2023. It increased at only 4.3 percent y-o-y as high inflation and interest rates hurt consumer demand. High borrowing costs and a normalization in commodity prices drove this lackluster growth, which outweighed the impact of tourism spending and investments. With inflation hovering at 14-year highs in the first quarter 2023, consumption growth also slowed.
Nevertheless, like other Southeast Asian countries, headline inflation has been steadily easing in the second quarter 2023, and remittances from overseas workers have continued to be a formidable and reliable support for household consumption and investment. With a more benign inflation outlook, Bangko Sentral ng Pilipinas (the central bank) is expected to pause its tightening cycle after shocking the market with the most aggressive series of rate hikes seen in the six Southeast Asian countries’ economies since the first half of 2022.12 The trade sector was the silver lining in the scenario; it saw strong export growth and showed resilience to the impact of the slowdown in China, which is the Philippines’ key export market (Exhibit 5).
Macroeconomic outlook
GDP: Economic growth moderated at 4.3 percent y-o-y in the second quarter 2023, from 6.4 percent y-o-y growth in the previous quarter. Growth in the second quarter brought first-half expansion of 2023 to 5.3 percent, below the government’s 6.0- to 7.0-percent target for the year. The poor showing in headline growth was largely due to sluggish investment. Fixed investments slowed considerably from 10.9 percent y-o-y in the first quarter 2023 to 3.9 percent in the second. Consumption growth also slowed—from 6.3 percent in the first quarter 2023 to 5.5 percent in the second quarter—reflecting the impact of inflation.
Trade: Export growth staged a stronger-than-expected rebound, picking up from 1.0 percent y-o-y in the first quarter 2023 to 4.1 percent in the second quarter. Taken together with a 0.4 percent y-o-y growth for imports, net exports contributed 0.9 percentage points to headline growth.
Industrial activity: Industrial production is expected to slow to 2.7 percent y-o-y growth in the second quarter 2023 from 8.6 percent y-o-y growth in the first quarter. PMI remained in the expansionary zone at 50.9, though it still decreased from 52.2 in May. This decrease, which signals the weakest improvement in business conditions since July 2022, is due to declining demand.
Labor: The unemployment rate declined marginally to 4.4 percent in the second quarter 2023 from 4.7 percent in the first quarter.
Inflation: With easing transport and food prices, inflation declined to 5.4 percent m-o-m in June 2023 from 6.2 percent m-o-m in May and 8.7 percent at the start of the year.
Financial markets
Policy rate: The policy rate remained unchanged at 6.25 percent in June 2023 after an aggressive tightening cycle in early 2023—although it is still well above peer countries in the region.13
Capital inflows: FDI inflows slowed to $1.4 billion in the second quarter 2023 from $1.6 billion in the first quarter. Forex reserves decreased by $2 billion, reaching $84 billion in the second quarter 2023.
Asia on the cusp of a new era
Singapore
Singapore’s economy showed a marginal positive increase of 0.5 percent y-o-y growth in the second quarter 2023, enabling it to avoid a technical recession. The country has faced a severe slowdown in manufacturing activity and key exports, including a reduction in electronics manufacturing—a trend that has persisted for over a year (Exhibit 6).
China, Singapore’s major trading partner for petroleum and chemicals products, has faced worsening economic conditions. As China’s reopening boost is fading, any lift to Singapore’s domestic exports (which appears limited) will likely also ease. These conditions have made for weaker-than-expected growth.
As international tourism travel in the Southeast Asia region recovers, the service sector economy is expected to show resilience. Singapore’s unemployment rate has slightly risen due to additional retrenchments (mainly from the electronics manufacturing, information and communication, and financial services sectors) amid the global electronics downturn, restructuring, and heightened volatility in the global financial market. In recent months, Singapore’s inflation has been higher than it has been for over a decade, prompting its central bank, the Monetary Authority of Singapore (MAS), to tighten monetary policy in July 2023 to bring down cost pressure.14
Macroeconomic outlook
GDP: Singapore’s economic growth has moderated at 0.5 percent y-o-y in the second quarter 2023 compared to 0.4 percent y-o-y growth in the first quarter. Consumption growth slowed from 9.6 percent in the fourth quarter 2022 to 5.9 percent in the first quarter 2023, while fixed investment declined by 3.2 percent y-o-y in the second quarter 2023, after expanding at 0.1 percent in the previous quarter.
Trade: Both exports and imports contracted in the second quarter 2023. Exports have declined to –8.4 percent y-o-y (following –2.0 percent in the first quarter 2023) due to lower global electronics demand. Meanwhile, imports have also contracted to –11 percent y-o-y from –2.6 percent y-o-y in the first quarter 2023.
Industrial activity: Industrial production declined sharply from –5.5 percent y-o-y growth in the first quarter 2023 to –7 percent y-o-y growth in the second quarter. This was due to the decreased output of electronics, chemicals, and biomedical manufacturing. PMI also fell from 54.5 in May 2023 to 54.1 in June, but remained in the expansionary zone.
Labor: Singapore’s unemployment rate increased marginally from 1.8 percent in the first quarter 2023 to 1.9 percent in the second quarter. Retrenchments rose for the third consecutive quarter by 3,820 workers, up from a 2,990 increase in the previous quarter.
Inflation: Like other Southeast Asian countries, headline inflation has been steadily easing over the past few months. It declined from 6.6 percent at the start of 2023 to 5.0 percent m-o-m in May and 4.7 percent m-o-m in June, amid lower cost factors and elevated inflationary pressure.
Financial markets
Currency: The Singapore dollar depreciated marginally by 0.5 percent m-o-m against the US dollar in June, compared to 0.6 percent m-o-m in May 2023.
Policy rate: The MAS maintained its monetary policy in mid-July in an off cycle move to slow inflation further, not switching from inflation-fighting mode to growth-supporting mode. This tightening was the MAS’ fourth in the past nine months.15
Capital inflows: FDI inflows slowed to $17.5 billion in the second quarter 2023 from $22 billion in the first quarter, while forex reserves increased by $18 billion reaching $317 billion in the second quarter 2023.
Thailand
Thailand’s economy grew at a much slower pace than expected in the second quarter 2023. It increased by only 1.8 percent, down from 2.7 percent in the previous quarter. Several factors have contributed to this. Weak exports and slower investment have undercut tourism recovery, while slackening global growth has stymied the economy.
China, Thailand’s major trading partner, is also experiencing slow economic growth, which has impacted Thailand’s trade. Further, investor confidence fell following Thailand’s May elections, which led to a prolonged period of political uncertainty as more time was required to form a new government (Exhibit 7). In early September, a new prime minster from the Pheu Thai party and members of cabinet were formally endorsed, and have pledged quick action to boost the country’s economic recovery including handing out cash to stimulate spending and tackling rising energy costs.16
Thailand’s inflation is among the lowest in Southeast Asia and has been steadily easing over the past few months. Private consumption has seen growth, with labor market and incomes improving, especially in tourism-related sectors. PMI declined from May 2023 to June, but stayed above the 50 no-change mark, signaling the manufacturing sector’s steady expansion.
Macroeconomic outlook
GDP: Thailand’s economy moderated at 1.8 percent y-o-y in the second quarter 2023 in comparison to 2.7 percent y-o-y in the first quarter. Growth in private consumption drove the economy, increasing by 7.8 percent compared to 5.8 percent in the previous quarter. However, fixed investment slowed to 0.4 percent y-o-y in the second quarter 2023 from 3.1 percent in the first quarter, weighed down by higher cost of capital and weak global economic growth prospects.
Trade: Exports contracted to –5.6 percent y-o-y in the second quarter 2023 from 4.5 percent y-o-y in the first quarter. Further, imports contracted from 2 percent y-o-y in the first quarter 2023 to –5 percent y-o-y in the second.
Industrial activity: Industrial production contracted by 7.6 percent y-o-y in the second quarter 2023 from 4.4 percent y-o-y in the previous quarter. This was especially true for export-oriented industries following softening demand from major economies. PMI declined from 58.2 in May 2023 to 53.2 in June—however, it remained above the 50.0 no-change mark for the 18th consecutive month.
Labor: Thailand’s tourism has recovered steadily since the COVID-19 pandemic. With the uptick in tourism activities and tourism-related jobs, the unemployment rate has remained low, close to 1.1 percent in the second quarter 2023—the same rate as in the first quarter.
Inflation: In June 2023, inflation declined to 0.23 percent m-o-m from 0.53 percent m-o-m in May. A decline in food and energy prices—such as the price of pork, which has decreased for three consecutive months—has helped moderate food price inflation.
Financial markets
Currency: The Thai baht depreciated to 1.9 percent m-o-m against the US dollar in June 2023, following the year’s trend. Overall, it has depreciated almost 5 percent m-o-m since January.
Policy rate: The Bank of Thailand maintained its policy rate at 2 percent in June 2023, following its last rate hike in May. This was the sixth consecutive rate hike aimed at tackling inflation.17
Capital inflows: FDI inflows decreased to $2.0 billion in the second quarter 2023 compared to $2.5 billion in the previous quarter. In addition, forex reserves grew by $11 billion, reaching $220 billion in the second quarter 2023, aided by the recovery in tourism.
Vietnam
Vietnam’s economy picked up pace in the second quarter 2023 as GDP growth accelerated to 4.1 percent y-o-y growth from 3.3 percent—the seventh consecutive period of expansion. Nonetheless, this is still slower than the pace of previous upswings owing to global export demand losing steam (Exhibit 8).
Growth in the second quarter was driven largely by the service sector, which accounts for more than 40 percent share of GDP, mainly as a result of an increase in tourism promotion activities and domestic consumption stimulation policies. The manufacturing sector, however, lagged behind—various factors have impacted it: hot weather conditions drove up electricity consumption and reduced hydroelectric power supply, causing power outages in May and June 2023 and disruptions to manufacturing output.18
The State Bank of Vietnam (SBV) cut policy rates in June 2023. This was after easing rates early in the year, cutting policy rates by 100 basis points (bps) in March and 50 bps in April to increase liquidity and support economic growth.19 This surprise move has set Vietnam apart from regional peers amid the global financial turmoil. Meanwhile, the country’s inflation control and improvements in foreign currency liquidity—backed by FDI inflows and the recovery of the tourism sector—have helped stabilize the Vietnamese dong versus the US dollar exchange rate.
Macroeconomic outlook
GDP: Vietnam’s economy accelerated at 4.1 percent y-o-y in the second quarter 2023 from 3.3 percent y-o-y growth in the first quarter. The service sector was the main contributor to GDP expansion (6.11 percent) in the second quarter. Agriculture, forestry, and fisheries followed at 3.25 percent, with industry and construction at 2.50 percent. Consumption growth moderated from 14.2 percent in the first quarter 2023 to 8.0 percent in the second quarter, while fixed investment improved to 5.6 percent y-o-y in the second quarter 2023 from 3.6 percent in the first quarter.
Trade: Both exports and imports sharply contracted in the second quarter 2023. Economic slowdowns in the European Union and the United States are key factors in the negative performance of Vietnam’s economy, given that these economies combined account for 42 percent of Vietnam’s total exports.20 As a result, exports slumped to –14.2 percent y-o-y from –11.7 percent y-o-y growth in the first quarter 2023. Meanwhile, imports contracted to –22.3 percent y-o-y from –19.6 percent y-o-y in the first quarter 2023.
Industrial activity: Industrial production growth remained at close to 0.0 percent in the second quarter 2023 after contracting by –2.1 percent in the previous quarter. PMI posted below the 50 no-change mark in June 2023 for the fourth month running, signaling a sustained deterioration in the industrial sector. At 46.2, up from 45.3 in May, the latest reading points to a solid decline in operating conditions because of the power outages in the country.
Labor: The unemployment rate remained at 2.2 percent in the second quarter 2023, the same as the previous quarter and the lowest since the end of 2019.
Prices: Similar to other Southeast Asian countries, headline inflation has been steadily easing over the past few months. It decreased to 2.4 percent m-o-m in June 2023 from 2.0 percent m-o-m in May and 4.8 percent at the start of the year. This is due to declining global energy prices, which have translated to a decrease in transport prices.
Financial markets
Currency: The dong depreciated marginally at 0.3 percent m-o-m against the US dollar in June 2023, compared to 0.2 percent m-o-m in May.
Policy rate: The SBV cut its policy rate by 50 basis points to 5 percent in June. The move came after the government called for the central bank to take urgent measures to reduce interest rates to support businesses and economic growth.21
Capital inflows: FDI inflows were at $3.7 billion in the second quarter 2023, an increase from $3.0 billion in the previous quarter. Forex reserves increased by $4.8 billion, reaching approximately $88.0 billion in the first quarter 2023.
No matter what state the above countries’ economies are in, however, all of them stand to benefit from the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between countries in Asia–Pacific, signed in 2020.22
The RCEP: A kick start for significant growth
The RCEP aims to establish a modern, comprehensive, and mutually beneficial economic partnership between 15 countries in Asia–Pacific: ten ASEAN member states, and Australia, China, Japan, New Zealand, and South Korea.23
The RCEP enables ASEAN to become one of the world’s largest economic blocks
As the RCEP continues to be implemented in 2023, it is estimated that it will eliminate as much as 90 percent of tariffs on goods traded between its member states, giving them access to markets that make up 27 percent of global GDP, 30 percent of the world’s population, 25 percent of global trade, and 31 percent of current FDI inflows.24
In the past decade, ASEAN countries’ share of global FDI inflows increased from an annual average of 7 percent in 2011 to 2017, 11 percent in 2018 to 2019, and 12 percent in 2020 to 2021.25 As the RCEP takes effect, it is expected to significantly boost FDI and exports in the region.
What does this mean for ASEAN businesses?
With access aided by the RCEP to large markets such as China, Japan, and South Korea, Southeast Asian economies should be able to scale their operations, explore new revenue streams, and diversify their export destinations.
The RCEP’s emphasis on supply chain connectivity and production specialization will likely have a significant effect on supply chain dynamics in the region—businesses can strategically rethink their supply chain strategies and identify areas where specialization could enhance efficiency and optimize costs. In addition, collaborative partnerships within the RCEP network could lead to the creation of more robust and resilient supply chains.
The RCEP also supports small and medium-sized enterprises (SMEs) and e-commerce, which could open doors for businesses to engage in cross-border trade more easily. SMEs can leverage digital platforms to reach international customers and access markets that were previously more difficult to penetrate. This would particularly benefit countries like Indonesia and Thailand that have a significantly higher proportion of SMEs than other countries.
However, with greater access comes greater competition, necessitating a renewed focus on innovation, quality, and differentiation. Business leaders could strategically position their products and services to capture a share of this expanded market while maintaining a competitive edge.
Challenging global economic conditions and tightening monetary policies have caused growth in most Southeast Asian economies to soften in varying degrees in the second quarter 2023.
Within the six countries that are the focus of this article, Indonesia, Singapore, and Vietnam have showed signs of slight economic growth, while Malaysia, the Philippines, and Thailand have displayed a slower economic recovery than expected after the COVID-19 pandemic.
The RCEP is likely to have a positive effect as it opens access to bigger markets for Southeast Asian countries and enables the region’s businesses to scale quicker than before. As the RCEP’s impact increases, countries like Indonesia, Malaysia, the Philippines, Singapore, and Thailand could look forward to more fruitful economic times.
