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    Asian Development Outlook (ADO) September 2024
    Asian Development Outlook (ADO) September 2024
    Asian Development Outlook (ADO) September 2024
    Ebook508 pages5 hours

    Asian Development Outlook (ADO) September 2024

    By Asian Development Bank

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    Growth in Asia and the Pacific remains robust amid strong domestic demand and continued recovery in exports. Technology exporters are particularly benefiting from higher global semiconductor sales driven by the artificial intelligence boom. Inflation in the region is expected to ease further, supported by the lagged effects of previous monetary policy tightening and declining global food and energy prices. However, risks loom, including potential increases in protectionism depending on the outcome of the United States presidential election, escalating geopolitical tensions, further weakness in the property market in the People’s Republic of China, and adverse weather and climatic conditions.
    LanguageEnglish
    PublisherAsian Development Bank
    Release dateSep 1, 2024
    ISBN9789292709082
    Asian Development Outlook (ADO) September 2024

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      Asian Development Outlook (ADO) September 2024 - Asian Development Bank

      1

      SOLID GROWTH AS INFLATION EASES, YET RISKS LOOM

      SOLID GROWTH AS INFLATION EASES, YET RISKS LOOM

      Growth in developing Asia remained strong during the first half of 2024, supported by domestic demand and continued recovery in exports. High-income technology exporters benefited from rising global semiconductor sales driven by strong demand for artificial intelligence products. Regional financial markets remained resilient amid episodes of global volatility. Meanwhile, inflation continued to decline, driven by the lagged effects of tight monetary policy and easing global food prices. This creates the conditions for more central banks in the region to lower policy rates to support economic activity.

      The growth outlook for developing Asia has been revised slightly upward to 5.0% for 2024 from 4.9% in April. This reflects stronger-than-expected growth in East Asia, the Caucasus and Central Asia, and the Pacific. The 2025 growth projection remains at 4.9%. Inflation in the region is forecast at 2.8% for 2024, down from 3.2% in April, due to currency appreciation in the Caucasus and Central Asia and slower-than-expected bottoming out of food prices in the People’s Republic of China (PRC). The inflation forecast for 2025 is revised down marginally to 2.9%, compared to 3.0% in April.

      Downside risks persist. Rising protectionism, depending on the outcome of the presidential election in the United States, could lead to negative real and financial spillovers in developing Asia. Other risks to the outlook relate to escalating geopolitical tensions, a deterioration in the PRC’s property market, and adverse weather conditions.

      This section was written by Abdul Abiad, John Beirne (lead), Shiela Camingue-Romance, David Keith De Padua, Jaqueson K. Galimberti, Jules Hugot, Matteo Lanzafame (colead), Nedelyn Magtibay-Ramos, Madhavi Pundit, Melanie Grace Quintos, Pilipinas Quising, and Mai Lin Villaruel of the Economic Research and Development Impact Department, ADB, Manila.

      Growth Momentum Continued on Stronger Exports

      Developing Asia’s growth momentum remained robust overall during the first half of 2024, despite sluggish domestic consumption in the People’s Republic of China (PRC) (Figure 1.1.1, panel A). Robust global demand for electronics continued to support exports in the region. In the PRC, growth remained strong, despite deceleration in domestic consumption during the first half (H1) of 2024. Lingering weakness in the property sector, which affected consumer sentiment, retail sales, and household spending, was partially offset by higher investment, supported by stimulatory monetary and fiscal policies. India’s gross domestic product (GDP) expanded 7.2% in H1 2024, due in part to a surge in government spending and private consumption. Though slower compared to H2 2023, India’s expansion remained solid, reaffirming South Asia as the fastest-growing subregion. Economic activity in high-income technology-exporting economies also expanded solidly, except for Hong Kong, China, where overall activity declined in the first half even as net exports surged. Exports also accounted for a substantial share of H1 2024 growth in the Republic of Korea. In Taipei,China, firms raised their capital outlay plans on solid export momentum. Large Association of Southeast Asian Nation (ASEAN) economies remained resilient, supported by strong private consumption and investment, particularly in electronics and automobilerelated sectors, and public infrastructure projects. Growth expanded rapidly in Malaysia as net exports became less negative, while growth in H1 2024 in Indonesia held steady as lower investment was balanced by election-related boosts to consumption.

      Figure 1.1.1 Contributions to Gross Domestic Product Growth

      ASEAN = Association of Southeast Asian Nations, GDP = gross domestic product, H = half-year, PRC = People’s Republic of China.

      Notes: Economies included are those that have quarterly GDP figures with demand-side breakdown, which account for about 90% of developing Asia. Components do not add up to total due to statistical discrepancy and the chain-linking method of GDP estimation and reporting. The regional average is calculated using GDP purchasing power parity shares as weights. All data are in calendar years and in non-seasonally adjusted terms. High-income technology exporters include Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. ASEAN-4 includes Indonesia, Malaysia, Philippines, and Thailand.

      Source: Haver Analytics; CEIC Data Company.

      Industrial activity remained robust in H1 2024, due to solid expansion in the PRC and other technology exporters, while services improved significantly in many economies. In the PRC, the manufacturing sector posted solid growth—particularly high-tech products, new-energy vehicles, and electronics— supported by increased production capacities and targeted government policy support (Figure 1.1.1, panel B). Meanwhile, industrial growth in India slowed somewhat, as rising input prices reduced margins in the manufacturing sector, offsetting gains in mining and construction. Industrial performance in ASEAN-4 (Indonesia, Malaysia, the Philippines, and Thailand) economies was likewise robust, with Malaysia and the Philippines benefiting from substantial gains in machinery, metallic products, and electronics, along with increased construction activity. Meanwhile, Thailand’s industrial sector, which had been hampered by persistent challenges in automobile production, returned to growth in H1 2024 owing to solid increases in mining and electricity and gas. Industrial growth was solid in the Republic of Korea and Taipei,China as well, while in Singapore, industry was mostly negative in the first half because of weakness in the biomedical manufacturing and precision engineering sectors. These trends are mirrored in industrial production growth figures, with Thailand and Singapore in negative territory through June (Figure 1.1.2). Meanwhile, services growth remained strong overall in the first half of 2024 compared to the second half of 2023, as increased domestic activity continued to boost finance, information and technology, retail, and tourism-related sectors. Services in Singapore increased the most in H1 2024, largely due to a concert-driven boost to retail and tourism sectors in the first quarter (Q1) 2024.

      Figure 1.1.2 Industrial Production Index, Selected Economies

      Source: CEIC Data Company.

      Purchasing managers’ indexes (PMI) remained in expansion territory for most regional economies. Most economies recorded PMI readings above 50 in August 2024, with 3 experiencing solid manufacturing expansion for 8 straight months since January 2024 (Table 1.1.1). In Indonesia and the PRC, the index dropped to below 50 in July, while in Malaysia it stayed below the threshold during most of the year. Figure 1.1.3 shows the distance of Standard and Poor’s (S&P) PMI, a survey-based indicator of business conditions, from the 50 threshold and the weighted contribution to overall distance of different components. This provides a more refined breakdown of changes in the PMI. PRC’s Caixin General Manufacturing PMI dropped from 51.8 in June to 49.8 in July, its first decline in 9 months, due to weaker manufacturing output (orange bar) and reduced new orders (yellow bar). Although this covers only smaller private businesses and exporters, the reading aligns with National Bureau of Statistics (NBS) Manufacturing PMI, which covers a broader range of enterprises, such as state-owned enterprises and larger companies. While the Caixin PMI returned to above 50 in August, NBS manufacturing PMI still lingered below 50 as seasonal factors, lower orders, and challenges in the real estate sector continued to weigh on production activities of a wider range of manufacturers. In Indonesia and Malaysia, sluggish demand was the principal factor pushing firms to scale down production. Conversely, India’s PMI declined slightly in August, from 58.1 in July, but remained above 50 indicating continued growth. August PMI also dropped fractionally in high-income technology exporters, Thailand, and Viet Nam, but remained above 50, on softer upticks in new orders, output, and improved suppliers’ delivery times (green bar), which has turned positive since April 2024. Services PMI in the PRC and India remained strong, driven by higher demand for services such as travel and recreation and supported by solid economic growth and easing inflation, while in the Philippines, it slid below 50 in July as poor weather conditions affected services operations in many areas.

      Table 1.1.1 Purchasing Managers’ Index, Selected Asian Economies

      … = not available, PMI = purchasing managers’ index, PRC = People’s Republic of China, Q = quarter.

      Notes: Pink to red indicates deterioration (< 50) and white to green indicates improvement (> 50). Series for the Philippines, Singapore, and Sri Lanka are not seasonally adjusted.

      Source: CEIC Data Company; Philippine Institute for Supply Management; Singapore Institute of Purchasing and Materials Management.

      Figure 1.1.3 S&P Manufacturing PMI, by Components, Selected Developing Asia

      ASEAN = Association of Southeast Asian Nations; ASEAN-5 = Indonesia, Malaysia, Philippines, Singapore, and Thailand; PMI = purchasing managers’ index; S&P = Standard & Poor’s.

      Notes: Distance from threshold is calculated as the PMI Index or subindex minus 50, while the contributions are the distance multiplied by weight. Positive distance or readings above 50 indicate improvement, while negative distance or readings below 50 indicate deterioration. The series for Hong Kong, China; and Singapore refers to the whole economy. ASEAN-5 is the weighted average PMI for Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam. High Income Technology Exporters (HITE) is the weighted average PMI for Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China.

      Source: CEIC Data Company.

      Inflation continued to retreat across developing Asia (Figure 1.1.4). Headline inflation in January to July 2024 for the region, including and excluding PRC, continued to decline toward pre-pandemic levels (Figure 1.1.4, panel B), driven by the impact of past monetary tightening and easing global commodity price pressures. Energy inflation is now back at pre-pandemic levels, while food inflation is still slightly elevated relative to its pre-pandemic level, albeit also on a declining trend. Crude oil prices averaged around $83 per barrel in the 8 months to August 2024 and were broadly stable, apart from episodes of volatility. Meanwhile, rice prices remained elevated, despite decreasing by 12% from the 16-year peak of $669 per metric ton during the last week of January to $589 on 22 August 2024. Core inflation in the region, including and excluding the PRC, continued to ease on the back of lower prices of retail goods and services and is now lower than the pre-pandemic average. On the other hand, increased shipping volumes and congestion at the Mediterranean and Asian ports, related to the lingering conflict in the Red Sea, have amplified shipping costs and delays. These developments, however, have not significantly affected inflation in the region (Box 1.1.1).

      Figure 1.1.4 Contributions to Inflation, Developing Asia

      Notes: Core inflation excludes food and energy sectors. For some economies, core is estimated as the residual between overall inflation and the sum of food and non-alcoholic beverages and energy-related items. For lack of a more disaggregated breakdown, energy-related consumer prices for most economies include housing, water, and nonfuel transport. Regional averages are calculated using gross domestic product purchasing power parity shares as weights, and includes data for 22 economies. Data are as of July 2024.

      Sources: Asian Development Bank estimates using data from Haver Analytics; CEIC Data Company; official sources.

      Box 1.1.1 Shipping Rates Have Surged Again, But Inflation Is Unlikely to Follow Suit

      Shipping costs have been on the rise again in recent months. Since January 2024, global shipping has been under pressure due to the conflict in the Red Sea. This has forced ships to avoid the Suez Canal and the Bab El-Mandeb Strait and instead navigate around the Cape of Good Hope, increasing travel times and freight costs significantly. Meanwhile, lower water levels in the Panama Canal, which reduced the number of vessels allowed to pass through (see Box 1.1.2), also added upward pressure to shipping costs. A temporary increase in demand may be playing a role as well. With the outcome of the US presidential election uncertain through early November, it is possible that shipments are being brought forward to lock in supplies as a precaution against renewed United States–People’s Republic of China (US-PRC) trade frictions and higher tariffs.

      As a result of these supply and demand factors, the Drewry’s World Container Index, which tracks freight rates on eight major trade routes, rose from less than $1,700 per 40-foot equivalent unit at end-2023 to above $5,800 in July 2024 (box figure 1). While substantial, this increase is still smaller than the increase in shipping costs experienced during the pandemic, when they rose from $1,600 in May 2020 to a high of $10,100 in October 2021, and remained above $9,000 until March 2022.

      1 World Container Index

      Notes: Drewry World Container Index reports actual spot container freight rates for major east-west trade routes. The Index consists of eight route-specific indices representing individual shipping routes and a composite index. All indices are reported in US dollar per 40-foot container. Data is as of 22 August 2024.

      Source: Bloomberg.

      While significant, the spike in shipping costs is unlikely to renew price pressures globally or in developing Asia. This is due to several factors, some of which distinguish the current episode from the 2021–2022 surge in shipping rates:

      •    Shipping costs account for a small share of household final consumption. This share is just 0.11% in the US, 0.22% in the Euro area, and below 0.50% for most economies in Asia and the Pacific. Even for Asian economies where they matter the most—such as Singapore; Hong Kong, China; and the Pacific economies Fiji and Maldives—shipping costs only account for 0.47% to 1.25% of household consumption (box figure 2).

      2 Value of Shipping Services Embodied in Household Final Consumption, 2023

      Lao PDR = Lao People’s Democratic Republic.

      Note: Advanced economies refer to the weighted average of Australia, New Zealand, Japan, United Kingdom, Euro area, Canada, and the US.

      Source: Asian Development Bank calculations using ADB Multiregional Input-Output Tables (July 2024 version).

      •   While container freight rates increased this year, other shipping costs, particularly for bulkers and tankers, rose much less or even declined. Box figure 3 (green line) shows movements of the Baltic Dry Index (BDI), which tracks the cost of shipping dry bulk cargo—or commodities in loose, unpackaged form—on over 23 standard routes including the Suez Canal. After spiking briefly in January 2024, the BDI stood at around 1,800 as of end-August 2024, down 7% year to date and below its long-run average. Similar to the BDI, the Baltic Dirty Tanker Index and the Baltic Clean Tanker Index—covering, respectively, tankers transporting crude oil and refined products—also declined this year (see box figure 3, blue and orange lines).

      3 Baltic Exchange Dry and Tanker Indices

      Note: Data are as of 30 August 2024.

      Source: CEIC Data Company.

      •   The water level in the Panama Canal is now back to its historical average. In response, the Panama Canal Authority lifted restrictions on vessel traffic on 26 August, increasing the canal’s maximum draft to 50 feet and raising the number of vessels allowed to transit per day from 24 at the height of the drought to 36. This is expected to help ease the bottlenecks for shipping routes from Asia to the East Coast of North America.

      •   Stimulus-driven demand pressure in the US and Europe, which was a key contributor to inflationary pressures in 2021–2022, is now absent. Large stimulus measures, plus a shift in demand away from services and toward goods, raised demand substantially in the US and the EU in 2021–2022. In combination with various supply constraints, including port closures, this boosted demand-side price pressures. This can be seen in box figure 4, which shows surveybased measures of excess demand in the US and European Union. Excess demand pressures have subsided over the past 2 years as household transfer stimulus measures were withdrawn and rapid (albeit delayed) monetary policy tightening took hold. As the US economy continues to cool and growth in the EU remains modest, excess demand pressures of the kind in 2021–2022 are no longer present.

      4 Excess Demand, United States and European Union

      Q = quarter.

      Notes: Using data from business surveys, excess demand is constructed as the difference between the percentage of manufacturing firms saying that supply constraints limit their production (i.e., shortage of material or equipment) versus the share of firms saying it is insufficient demand. The Z-scores are expressed as the ratio of the difference between excess demand and series mean to standard deviation: i.e., Z score = {(excess demand – series mean)/ standard deviation}.

      Source: Asian Development Bank calculations using data from the US Census Bureau and the European Commission.

      •   Shipping costs did not increase for key routes toward Asia. Global shipping cost indexes mask important variations across economies. Most of the increase in shipping costs has been for shipments from Asia to the rest of the world (box figure 5), implying that inflationary pressures in the region from freight rate increases are likely to be minimal. This is compounded by the fact that energy and food prices—key drivers of regional inflationary pressure, as opposed to shipping costs—are expected to stabilize and moderate, respectively, during the remainder of 2024.

      5 World Container Index, by Trade Routes

      LA = Los Angeles, NY = New York, ROW = rest of the world. Notes: See box figure 1.

      Source: Bloomberg.

      This box was written by Abdul D. Abiad, Matteo Lanzafame, Shiela Romance of the Economic Research and Development Impact Department (ERDI), ADB, Jesson Pagaduan, and Michael Timbang, ERDI consultants.

      Box 1.1.2 Using Automatic Identification System Data to Track Shipping Disruptions from Asia: An Update

      The Automatic Identification System (AIS) is crucial in monitoring and managing global maritime trade. The AIS helps vessels communicate during navigation and was originally designed to prevent collisions. Vessels equipped with AIS send location and other information every 2 to 10 seconds, allowing real-time tracking of vessel movements and trade routes, making AIS valuable for monitoring disruptions in global maritime trade. The Global Movements Data, developed by the Asian Development Bank, processes and aggregates AIS data to monitor trade disruptions like the Panama Canal drought and the conflict in the Red Sea (ADB 2023, 2024). Indicators from the Global Movements Data include daily transit counts for major passageways, transit times for key trade routes, and port activity metrics.

      Disruptions in major global trade routes have been causing significant shifts in shipping patterns. The Panama Canal, a crucial trade route connecting the Atlantic and Pacific oceans, was the primary pathway for 57.5% of all container ship cargo from Asia to the United States East Coast in 2022 (Panama Canal Authority 2023). However, severe drought linked to the El Niño phenomenon had affected the canal since early 2023, affecting the canal’s daily operations. Similarly, the Suez Canal, a 193.3 kilometer artificial waterway in Egypt that connects the Mediterranean Sea to the Red Sea and on to the Indian Ocean, has experienced disruptions. This key trade route between Europe and Asia has seen a significant drop in daily transits due to the conflict in the Red Sea, which has also impacted the adjacent Bab El-Mandeb Strait (ADB 2023). Consequently, with both the Panama Canal and the Suez Canal facing operational challenges, ships have been increasingly rerouting through longer passages. For instance, vessels traveling from Asia to Europe or the United States are navigating around the Cape of Good Hope, significantly extending their journeys.

      Recent disruptions in key maritime trade routes highlight their varying impacts on global shipping stability. The aftermath of the November 2023 conflict in the Red Sea resulted in persistently low transit levels in both the Suez Canal and the Bab El-Mandeb Strait, with no recovery observed during the second quarter of 2024 (box figure 1, panels a and b). The Strait of Hormuz, a critical oil chokepoint between Oman and Iran, handles about 30% of the world’s oil trade. Despite recent geopolitical tensions and Iran’s suggestion in April 2024 of potentially closing the strait, daily transits have remained stable. The consistent ship traffic levels (box figure 1, panel c) mirror patterns from previous years, demonstrating the strait’s resilience and its importance as an economic lifeline for Iran, which likely explains the absence of significant disruptions so far. The Panama Canal had been severely impacted by drought, causing the Panama Canal Authority to reduce allowable transits throughout 2023. Despite improved water levels in 2024 and the lifting of transit limits, daily transits have only slightly increased and remain below pre-drought levels (box figure 1, panel d).

      1 Automatic Identification System-Based Daily Transits Along Major Passageways

      Note: Data are up to 31 August 2024.

      Sources: Asian Development Bank calculations using United Nations Global Platform for Official Statistics. 2024; AIS data.

      Transit times and shipping costs remain elevated on certain routes. Ships traveling from Shanghai to Rotterdam typically use the Suez Canal or the Panama Canal. Ongoing disruptions in these canals have forced vessels to take longer alternative routes, leading to sustained shipping delays and elevated transit times (box figure 2, panel a). Similarly, transit times for ships traveling from Shanghai to New York or New Jersey, which usually rely on the Panama Canal for the quickest route, remain high as conditions in the Panama Canal have yet to return to pre-drought capacity (box figure, panel b). In contrast, the median transit time for ships traveling from Shanghai to Los Angeles has remained unchanged since 2023, as this route has not been affected by the Panama Canal restrictions or the conflict in the Red Sea. Further, the panels show that median transit times and routespecific shipping costs are correlated, indicating that shipping delays contribute to higher costs. However, the recent increase in shipping costs for the Shanghai to Los Angeles route occurred despite stable transit times. The high correlation of Drewry World Container Index across different routes suggests that global factors are at play. Increased global shipping demand, driven by purchasers advancing holiday shipments as a precautionary measure, has led to increased shipping rates across all routes.

      2 Median Transit Time and World Container Index, by Trading Routes,

      Note: Data is as of 31 August 2024.

      Sources: Asian Development Bank calculations using United Nations Global Platform for Official Statistics. 2024; Bloomberg.

      In addition to monitoring maritime passageways, major global ports are tracked using AIS data. A key example is the Port of Odesa in Ukraine, the country’s largest seaport and a major hub in the Black Sea region. The Russian invasion of Ukraine in February 2022 had an adverse impact on maritime operations at the port, as evidenced by the sharp decline in the daily count of unique ships in box figure 3 panel (a) in the figure. Although the overall number of ships has not yet returned to pre-invasion levels, the situation for cargo ships tells a different story (box figure 3, panel b). Recently, Ukraine has significantly increased its production and exports, which is reflected in the surge of cargo ships at the Port of Odesa in 2024, with numbers even surpassing pre-invasion levels. Given that Ukraine is one of the world’s largest producers and exporters of wheat, this increased activity at the port could have significant implications for the supply and price of wheat in developing Asia. As many economies in the region rely heavily on wheat imports, a boost in Ukraine’s export capacity could help stabilize or even lower wheat prices, enhancing food security and supporting inflation management across developing Asia.

      3 Daily Unique Count of Ships in the Port of Odesa

      Note: Data is up to 31 August 2024.

      Sources: Asian Development Bank calculations using United Nations Global Platform for Official Statistics. 2024; AIS data.

      References:

      ADB (Asian Development Bank). 2023. Methodological Framework for Unlocking Maritime Insights Using Automatic Identification System Data: A Special Supplement of Key Indicators for Asia and the Pacific 2023.

      ____. 2024. Using Automatic Identification System Data to Track Shipping Disruptions from Asia. Asian Development Outlook April 2024. Manila.

      Panama Canal Authority. 2023. Weekly Update on Transits through the Panama Canal.

      This box was written by Mahinthan Mariasingham of the Economic Research and Development Impact Department (ERDI), ADB, Cherryl Chico, Ed Kieran Reyes, and Zhaowen Wang, ERDI consultants.

      The disinflation process, however, has been uneven (Figure 1.1.5). By subregion, inflation in the Caucasus and Central Asia, and South Asia declined faster in January to July 2024 but that was offset by increases in the rest of the region, due largely to upward pressure from food prices. In South Asia, improved harvests and crop production contributed to easing food prices, bringing headline inflation down in July to almost a 5-year low in India and to a 2-year low in Pakistan. Food prices in Pakistan normalized and returned toward zero during May to July, driven by base effects and improved agricultural production. In the Caucasus and Central Asia, the decline in food prices took place in almost all economies in the subregion, except for Turkmenistan, in line with declines in global commodity prices. Meanwhile, rising food prices contributed to small increases in headline inflation in the PRC, Southeast Asia, and the Pacific. In the PRC, inflation reached 0.5% in July, as weather disruptions lifted food prices into positive territory for the first time in 13 months (Figure 1.1.5, panel C). Adverse weather conditions and supply constraints also affected local food production and kept food and energy prices elevated in Fiji and Tonga in the Pacific. Higher food prices, including those for vegetables and meat, in the Philippines, Thailand, and Viet Nam, also contributed to increases in average food inflation for Southeast Asia. Meanwhile, energy inflation increased in the Caucasus and Central Asia and some Pacific economies since the start of the year, and is now higher than pre-pandemic

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