South-East Asia is experiencing patchy growth due to the impact of COVID-19 and the Russia-Ukraine war, according to the latest ICAEW Economic Insight Forum Q2 forecast, which also finds that supply chain issues, rising inflation and commodity price influxes are plaguing businesses in the region.

However, despite the uneven economic recovery in the region as a whole, GDP in individual countries including Singapore, Indonesia, Malaysia, the Philippines and Vietnam has bounced back up to pre-pandemic levels. The exception is Thailand, which is still at 2% below pre-pandemic levels as its tourism industry struggled with travel and mobility restrictions.

The Economic Insight Forum noted that Vietnam was not particularly affected by the Delta variant wave of COVID-19 and hence did not experience the large lockdowns that impacted its economy as Malaysia and the Philippines did. Singapore, meanwhile, was able to take advantage of the increase in demand for consumer electronics globally, which helped to increase its growth by 7.6% last year.

Across the region, there is a marked lag in the recovery of the services sector in terms of accommodation, food and retail, although the reopening of borders and easing of travel restrictions is expected to provide an economic boost. However, China’s zero-COVID policy and rolling lockdowns had an impact on Thailand, a popular destination for Chinese tourists.

Other external headwinds include supply chain disruptions and weaker demand from China due to its lockdowns, as well as the economic impact of inflation and commodity prices resulting from the ongoing Russia-Ukraine war. Despite that, the view ahead is fairly optimistic, with the region forecast to grow by about 5.8%, an increase of 3.7% from last year. This can be attributed to the boost across the economies’ tourism sector from the opening of borders and loosening of measures.

“Even though the direct exposure of the Russia-Ukraine war on South-East Asia is limited, the region is impacted through inflation and monetary policy response on a global level,” says Mark Billington, ICAEW Managing Director International. “China’s zero-COVID policy has also triggered a domino effect in terms of negative impact to the region’s manufacturing, industrial and tourism sectors.”

A broader recovery for Singapore is expected despite a slower growth

Singapore’s growth of 7.6% last year was largely driven by the manufacturing and export sector, but that growth has since been moderated with a significant downward trend over the past few months. Its food and beverage service index has not returned to pre-COVID levels and is also still around 20% lower than it used to be.

However, a big uptick in retail sales and accommodation services in March was observed and with the easing of restrictions and containment measures, signs of a broader recovery for the services sector are expected. It might still be a long way to catch up, but factors including an increase in earnings and the stemming of inflation are expected to help support recovery.

Earnings have increased above 6% year on year in Q1, along with a fairly high personal savings ratio. Tight labour market conditions have resulted in the unemployment rate falling back to below pre-pandemic levels. These can help to strengthen household spending and domestic demand on the back of easing restrictions.

Despite inflation being historically high, it is expected to peak and start to drop off, as tightening measures are to be expected in Singapore from the Monetary Authority of Singapore.

Notwithstanding the slowdown in industrial production and weaker export volume due to the lockdowns in China, Singapore’s expected growth at 2.9% will be largely driven by the services sector. Even though it is down on last year’s very strong growth of 7.6%, this growth will be a lot more even among the sectors and result in a more broad-based recovery.

Billington says: “Without a doubt, these external headwinds will dampen growth, but will not derail it, as we expect to see recovery in the services sector as we learn to live with COVID.”

View the on-demand recording of the ICAEW Economic Insight Forum Q2 2022.