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Economy

Southeast Asia set for more headwinds after lackluster 2Q growth

More stimulus expected as trade war bites export-reliant economies

Singapore downgraded its full-year growth forecast to a range of 0% to 1% from the previous 1.5% to 2.5%.   © Reuters

SINGAPORE -- Southeast Asian economies will likely face continued external headwinds for the rest of the year as the U.S.-China trade tensions weigh on the region, pressuring governments to take steps such as cutting interest rates to boost their economies.

The trade tensions began biting Southeast Asia late last year.

According to official April to June gross domestic product figures released as of Monday, five of the region's six major economies -- Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam -- saw slower growth than in January to March, with Thailand and Singapore suffering most because they face falling demand for their key manufacturing exports, such as electronics.

On Monday, Thailand cut its growth forecast for all of 2019 to between 2.7% and 3.2%, down from its previous forecast for 3.3% to 3.8% growth. In April to June, the economy grew at its slowest pace in nearly five years, expanding 2.3%.

The main reason for the downgrade was an export slump, with the government forecasting a 1.2% decline in exports of goods, in dollar terms this year, versus a 7.5% rise in 2018. The Office of the National Economic and Social Development Council cited "the slowdown of trade-partner economies, as well as the intensifying pressures from trade-protection measures." 

Exports were equal to 66% of Thailand's GDP in 2018, according to the World Bank.

Thailand followed Singapore, which last week lowered its 2019 growth forecast to a range of 0% to 1%, from the previous 1.5% to 2.5%. The city-state's growth rate for the second quarter was 0.1%, the weakest in 10 years, due to a contraction in the electronics sector.

"The Singapore economy is likely to continue to face strong headwinds for the rest of the year," the Ministry of Trade and Industry said, citing "a challenging external macroeconomic backdrop," and "a deepening downturn in the global electronics cycle."

Other countries in the region looked less vulnerable to external factors, but the April to June data show the trade tensions and subsequent global slowdown have also affected them.

Growth in Indonesia, the region's largest economy, hit a two-year low of 5.05% in the second quarter due to falling prices for its commodity exports, such as palm oil. This, in turn, has dampened consumer sentiment in the country.

Vietnam, whose GDP rose 6.8% in the previous quarter, saw growth tick down to 6.7% in April to June. The Philippines saw a similar decline from 5.6% to 5.5%. This indicates that even those two countries, which are thought to have benefited from manufacturers' shift out of China, are struggling with internal factors. These include weak public investment and a water shortage in the Philippines and slow growth in Vietnam's agricultural sector.

Malaysia bucked the trend, with growth accelerating to 4.9%, up from 4.5% in the first quarter, backed by a 7.8% rise in private consumption. But the central bank remained cautious, noting that "the external sector is likely to continue to be affected by slower global growth, amid ongoing trade tensions."

With subdued growth in the April to June quarter and an uncertain external environment, governments and central banks in the region are under pressure to rev up their economies through monetary and fiscal measures in the coming months.

"Southeast Asian countries may face global headwinds of manufacturing contraction, trade risks and supply-chain shuffling over the course of the next few quarters," Margaret Yang, an analyst at CMC Markets in Singapore, told the Nikkei Asian Review. "Apart from interest rate cuts, policymakers will perhaps need to also carry out fiscal stimulus, tax relief and employment incentives if a serious downturn is emerging," she said.

Thailand on Friday announced a stimulus package worth 316 billion baht ($10.2 billion) to support farmers and low-income earners to boost domestic consumption and offset the drag from overseas.

Singapore's Prime Minister Lee Hsien Loong said during Sunday's National Day speech that the current situation does not warrant immediate stimulus, but added that "if the situation gets much worse, we will promptly respond with appropriate interventions to sustain the livelihoods of our workers."

The central banks of Thailand and the Philippines earlier this month cut their policy rates by 25 basis points to 1.5% and 4.25%, respectively. Bank Indonesia in July cut its interest rate for the first time in nearly two years.

Prakash Sakpal, an economist at ING, said he expects one more rate cut in Thailand in the fourth quarter of this year. Malaysia may also cut its key interest rate by 50 basis points from current 3% to 2.5% by year's end, according to Sakpal. "It's hard to imagine the economy continuing to outperform the rest of the world as global trade tensions scale new heights. ... Persistently low inflation [1.4% in July] allows scope for more policy easing," Sakpal said.

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