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Many Southeast Asian economies have continued to be hammered by
escalating new COVID-19 Delta waves during August. The economic
recovery that was underway in Southeast Asia during the latter part
of 2020 and early 2021 has been increasingly impacted by widespread
lockdowns that have disrupted industrial production and consumption
spending.
Despite efforts to ramp-up vaccinations, relatively low COVID-19
vaccination rates in many of the ten member countries of ASEAN have
left the region highly vulnerable to the COVID-19 pandemic in the
near-term. There are considerable risks around how quickly vaccines
can be deployed and how rapidly the pandemic will be brought under
control in different ASEAN countries. The key to sustained recovery
is expected to be based on achieving much higher vaccination rates
and consequent easing of the intensity of the Covid Delta waves
sweeping across the region.
ASEAN Recovery hit by new Covid waves
As a result of the severe negative impact of the COVID-19
pandemic and widespread lockdowns and travel bans, many ASEAN
economies were in deep recession during 2020. The impact of global
lockdowns in key markets such as the US and EU also resulted in a
sharp slump in exports for many ASEAN nations during the first half
of 2020. Among the worst hit economies were the Philippines,
Thailand, Malaysia, Cambodia and Singapore, as protracted lockdowns
hit industrial production, construction and consumption
expenditure. Travel bans across the ASEAN region also hit the
international tourism and travel sectors severely.
Domestic economic activity showed significant recovery in many
ASEAN nations during the second half of 2020 and early 2021, as
lockdowns were progressively eased and new export orders
strengthened. However, with the onset of new Covid Delta waves in
many Southeast Asian nations since April 2021, economic momentum
has again weakened in many ASEAN nations in recent months.
The ASEAN manufacturing sector continued to show contractionary
conditions during August, according to the latest IHS Markit
Purchasing Managers' Index data. This reflected rising COVID-19
cases and restrictive lockdown measures across many ASEAN
countries. Operating conditions declined sharply, amid further
rapid falls in factory production and new orders, while sentiment
among goods producers towards output over the year ahead slipped to
a 13-month low.
The headline ASEAN Manufacturing PMI posted 44.5 in August, down
slightly from July's reading of 44.6, to signal a third straight
monthly deterioration in the health of the ASEAN manufacturing
sector. For the first time since May 2020, each of the seven
constituent nations recorded deteriorations in conditions during
August. The steepest pace of contraction was seen in Myanmar, where
the PMI (36.5) remained among the lowest on record. This was
followed by Vietnam, where the headline index (40.2) fell to the
lowest since April 2020 amid the ongoing COVID-19 outbreak.
Continued contractionary conditions were recorded in Malaysia and
Indonesia, although both saw the rates of decline ease from
July.
In the service sector, the impact of lockdown measures has also
continued to hit consumption expenditure across most ASEAN
nations.
Given the escalating COVID-19 waves, international travel
restrictions are still expected to remain a major impediment to the
recovery of international tourism and business travel in the ASEAN
region during the remainder of 2021. Furthermore, domestic tourism
has also been heavily disrupted, creating a further severe negative
shock for the ASEAN tourism industry.
The path of recovery is therefore likely to be uneven across
different industry sectors, with industries like electronics
manufacturing, household consumer products, financial services and
information technology likely to be leading the recovery, while the
tourism and air transportation sectors are expected to have a more
gradual recovery path.
Across the seven ASEAN nations that comprise the IHS Markit
ASEAN Manufacturing PMI, all seven saw business conditions decline
during August.
The IHS Markit Indonesia Manufacturing Purchasing Managers'
Index posted 43.7 in August, up from 40.1 in July, although
remaining in significant contraction. In line with the headline PMI
reading, both output and new orders continued to fall in August.
Delivery delays also persisted in August due to COVID-19
disruptions, as evident through the lengthening of lead times for
the nineteenth consecutive month.
In Malaysia, an easing of some COVID-19 lockdown measures helped
take some of the pressures off Malaysian manufacturing in August.
IHS Markit's COVID-19 containment index showed the lowest levels of
restrictions since April, facilitating a rise in the headline PMI
to its highest since May. The headline IHS Markit Malaysia
Manufacturing Purchasing Managers' Index rose from 40.1 in July to
43.4 in August, albeit still indicating contractionary conditions
in the manufacturing sector.
The downturn in the Vietnamese manufacturing sector intensified
during August amid the worst outbreak of the COVID-19 virus in
Vietnam since the pandemic began. Restrictions leading to the
temporary closure of many factories, as lockdown measures and
limits on travel to try and contain the spread of the pandemic
resulted in accelerated declines in output, new orders, purchasing
and employment. The unprecedented spell of supply-chain disruption
continued amid transportation difficulties and pressure on capacity
at the country's ports. This, allied with raw material shortages,
placed upward pressure on input costs which continued to rise
sharply. The Vietnam Manufacturing Purchasing Managers' Index fell
to 40.2 in August, down from 45.1 in July and signalling the worst
deterioration in the health of the sector since April 2020.
In the Philippines, the re-introduction of Enhanced Quarantine
Measures in Metro Manilla forced factory and business closures in
one of the Philippines largest manufacturing regions in August.
Output and new orders fell sharply.
Even in Singapore, which has achieved one of the world's highest
COVID-19 vaccination rates, the headline PMI index moderated
considerably to 44.3 in August compared to July's more than eight
year high of 56.7, with the August figure being the lowest since
September 2020.
In Southeast Asia, rising new Covid waves in Vietnam, Malaysia,
Thailand, Indonesia and Philippines, all of which have significant
manufacturing hubs, are creating disruption to global manufacturing
supply chains.
In Vietnam, the impact of factory closures related to the
pandemic has become increasingly widespread during August, hitting
many industry sectors. Over 100 seafood processing factories were
closed in the southern Vietnam region during periods in August,
while over one-third of textile and garment factories in Vietnam
are also reported to have been temporarily closed in recent weeks
due to the pandemic. Adidas, Foot Locker and Nike are among the
many global firms that are reporting supply chain disruptions due
to COVID-19 related interruptions of manufacturing production in
Vietnam.
The disruption to Vietnamese industrial production is also
hitting global electronics manufacturing supply chains, due to
Vietnam's increasing importance as an electronics manufacturing hub
over the past decade.
Samsung Electronics has reported that in Vietnam, which is a key
electronics manufacturing hub for the firm, there were production
disruptions in certain places during the second quarter of 2021 due
to lockdowns that affected operations. However, the firm managed to
mitigate the disruptions by shifting production to other parts of
their global manufacturing supply chain.
Toyota has announced an estimated 40% drop in global auto
production in September due to the impact of global semiconductor
shortages as well as disruption to supply chains in Southeast Asian
manufacturing hubs, including Vietnam. Toyota temporarily halted
several auto assembly lines in Japan for periods during July and
August due to disruptions to supply of auto parts from Vietnam.
Multinationals in the electronics and auto sectors are also
reporting supply chain disruptions due to the impact of the
protracted lockdown and escalating COVID-19 pandemic in Malaysia,
which is an important global manufacturing hub for electronics.
Electronic and electrical products accounted for around 36% of
total Malaysian merchandise exports in July 2021, with Malaysia
being a significant production hub for key electronics components
such as semiconductors. In the auto sector, Nissan Motors and
General Motors have indicated that supply disruptions of auto
components from Malaysia have impacted on their auto production in
August.
The escalating pandemic is also creating disruption to
logistics, further intensifying delays to suppliers' delivery
times. In Vietnam, the strict lockdown measures in Ho Chi Minh City
have significantly increased container shipping delays during
August at Ho Chi Minh City Cat Lai port, Vietnam's largest port as
well as at the Hiep Phuoc terminal in Ho Chi Minh City.
ASEAN Economic Outlook
Relatively slow progress in COVID-19 vaccination rollout
programs in many countries in the ASEAN region have created
vulnerability to the recent COVID-19 Delta waves sweeping across
many nations worldwide. Amongst the considerable challenges faced
are low current vaccination rates, problems with accessing vaccine
supplies and also the very large size of the population in many
nations, notably in Indonesia, Philippines and Vietnam.
The exception is Singapore, which has already achieved one of
the highest vaccination rates in the world by August 2021. Malaysia
has also achieved significant progress with its first dose vaccine
rollout by August, although its daily new COVID-19 cases remained
at very high levels by late August. Other ASEAN nations with
relatively small populations by global standards, - notably Brunei,
Cambodia and Laos - may be able to rapidly vaccinate their
populations if they are able to embark on intensive vaccination
programs, due to the relatively low number of total vaccine doses
required for their populations.
Despite the favourable economic outlook for global economic
recovery in 2021, the speed at which different ASEAN nations emerge
from the pandemic is likely to vary considerably, depending on many
factors including the size of population, access to large supplies
of COVID-19 vaccines and ability to deploy large-scale immunization
programs. The effectiveness of different types of COVID-19 vaccines
is also an important issue that could affect the timing of recovery
from the pandemic. There are also other critical unknown factors,
including the duration of effectiveness of vaccinations for the
various key vaccines that are being deployed.
The central case economic scenario for 2021 continues to be
positive, with the world economy gradually emerging from the
pandemic, led by the US, EU, China and the UK. However, the ASEAN
region's economic rebound in 2021 has been significantly dampened
by new waves of Covid Delta, with further downside risks to the
near-term outlook due to the escalating Covid waves. Economic
growth momentum is expected to improve in 2022, as vaccination
programs reach a much higher share of the total population of the
more populous Southeast Asian nations.
Despite the economic rebound expected in 2022, most ASEAN
countries will face the medium-term challenge of fiscal
consolidation. This reflects the very high levels of government
expenditure during 2020-21 on fiscal stimulus measures related to
the pandemic, which has resulted in a significant increase in
government debt as a share of GDP across the ASEAN region.
Over the long-term, despite the severe recession caused by the
COVID-19 pandemic, the ASEAN region is expected to continue to be
one of the fastest growing regions of the world economy. Total
ASEAN GDP is forecast to more than double over the next decade,
increasing from USD 3 trillion in 2020 to USD 6.8 trillion by 2030.
Over the next decade, the ASEAN region will be one of the three
main growth engines of the APAC region, together with China and
India.
Rajiv Biswas, Asia Pacific Chief Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.