EIU released today its Asia Outlook 2024, which examines the key trends that will shape the economic, political and policy landscapes across the region in the year ahead.
EIU forecasts that regional economic growth in Asia will soften to 3.9%, from an estimated 4% in 2023, with tighter monetary and fiscal policy acting as an impediment to faster expansion. That said, despite a slowing China and regional geopolitical tensions, Asia’s contribution to global economic growth will rise.
Despite a slowing China, Asia will keep driving global growth
Asia’s contribution to global economic growth will rise. We believe that Asia will contribute to 60% of expansion in global real GDP in 2024. This will match the estimated contribution in 2023 and is higher than the pre-pandemic level. This reflects diminished contributions from the North American and European economies, where growth will be sedate in 2024, and the small scale of emerging markets in Latin America, as well as the Middle East and Africa. Despite China’s slowing economy and regional geopolitical tensions, global growth opportunities will be concentrated in Asia.
China’s economy will remain difficult to ignore from a growth perspective. Within Asia, China is expected to contribute two percentage points of regional growth (or slightly more than half the total) in 2024. The contribution represents a dip from the historical average, but still remains substantive. By contrast, India is projected to make a 0.6 percentage point or a 15% contribution—the second highest for a single market—with South-east Asia (led by Indonesia) offering slightly less support. The contributions for these markets are not rising significantly against the historical trend, despite widening investor interest in their manufacturing potential and consumer markets.
Smaller emerging markets in the region provide the best opportunities to tap into catch-up growth. Bangladesh, Indonesia, Vietnam, Malaysia and, to some extent, the Philippines are projected to grow faster in the medium term, drawing closer to the level of GDP per head in developed Asian economies such as Japan, Singapore and South Korea. India, on the other hand, because of weaker than historical average growth, is projected to diverge away from the catch-up trend.
South-east Asia is an emerging green industry power, within limits
Diversification of global value chains away from China has been a significant catalyst in raising the profile of South-east Asia. Members of the Association for South-East Asian Nations (ASEAN) seem poised to play an increasingly pivotal role as manufacturing hubs. The green industry is one area of exciting potential, given global investor interest in finding regions besides China that can efficiently produce solar panels, lithium batteries and electric vehicles (EVs) that are crucial to the energy transition. The EU, for example, has legislated that a single market cannot account for more than 65% of supply across eight strategic net-zero technologies.
South-east Asia’s cost advantages make it a natural alternative to Chinese green products. According to the International Energy Association, the cost of producing solar panels within the ASEAN bloc is only about 4% higher than in China. In the EU, it is nearly 50% higher. Vietnam, Malaysia and Thailand stand out as the ASEAN countries most likely to benefit, given their existing production bases in areas such as solar panels.
Areas that will gain momentum also include battery making and EV parts. The EU’s launch of an anti-subsidy investigation into Chinese EVs and components will encourage European automotive firms to source from alternative suppliers. ASEAN economies are already competing aggressively with each other to attract investment in EV manufacturing, with Thailand providing incentives for both consumption and production and Indonesia hoping to develop its own supply chain by leveraging access to local raw materials used in batteries. The Philippines, Vietnam and Myanmar could also benefit, owing to an existing industrial base and corresponding supply chains, much of it shaped by Japanese and South Korean automotive firms.
ASEAN hopes of developing their green industries are not without challenges, however. It will face competition in terms of low-cost manufacturing from India, which is offering incentives of its own through its Production Linked Incentive Scheme. Despite their much higher cost bases, advanced markets are also keen to develop their own capacities to enhance their economic security. EU members such as Hungary and Poland are emerging lithium battery makers with the ambition to grow further The US Inflation Reduction Act offers significant financial incentives for green industry investment and links market access to production localization.
These suggest that trade and regulatory actions will be a risk for ASEAN and not just China. In mid-2024 higher US tariffs on some South-east Asian-based solar panel producers will come into force, after a 2022 investigation judged them to be relying on Chinese components that would be subject to tariffs if shipped from China. The EU has shown, in its probe into Chinese EVs, that it is willing to take measures of its own and, in its broader environmental regulation, could also curtail opportunities for South-east Asia. Exports from coal-reliant economies such as Indonesia and Vietnam could face higher costs owing to border carbon tariffs, for example.
South-east Asia will make important inroads in developing its green manufacturing base in 2024 but competing with Chinese products will be a long journey. China’s dominance of the industry, which came in the case of solar panels despite long-standing punitive duties levied by the EU and US, will be hard to dislodge. The main barriers for South-east Asia include a lack of local technology and brands, leaving them reliant on investment from producers in China, Japan and South Korea. This means that even while ASEAN governments exercise broad neutrality in international affairs, ASEAN exports will not be immune to geopolitical tensions.
US will struggle to keep its focus on the Indo-Pacific
The war in Ukraine has not impinged on US foreign policy objectives in Asia. After Russia’s 2022 invasion of Ukraine, the ability of the US to focus on its Indo-Pacific strategy—its blueprint for competing with China in Asia—was questioned. In reality, there was no meaningful impact on US diplomatic and military resourcing in Asia, and competition with China stepped up in several areas. The Indo-Pacific Economic Framework, while imperfect, was launched to provide a channel for economic engagement in the region.
US engagement was also more actively sought by Asian governments for geopolitical concerns. Russian aggression against a smaller neighbors accentuated concerns about China taking similar actions in Asia, driving a number of countries closer to the US. Relations with Vietnam were formally upgraded; the Philippines agreed to an expansion of local US military bases; ties with India became closer; the AUKUS security agreement with Australia and the UK moved forward; and the US started top-level summits with Pacific island nations.
Developments in the Middle East will again raise questions about the US ability to focus on China and Asia in 2024. Besides supporting Ukraine, it now faces the risk of embroilment in a war between Israel and Hamas that could easily escalate into a regional conflict. The supplementary budget requested in October highlighted how the US could struggle to balance foreign policy priorities: although proposed funding for Ukraine and Israel ran to US$61.4bn and US$14.3bn respectively, that earmarked for the entire Indo-Pacific region was just US$2bn.
The US is not at immediate risk of becoming overstretched. The US military presence is well established in Asia (it operates about 40 defense sites in the region) and, in contrast with elsewhere, there is no crisis requiring an injection of funding. The bipartisan consensus that has formed around China representing the primary challenge to US national security suggests that political support for an Indo-Pacific strategy is firm. The US Department of Defense has described China as its main long-term “pacing challenge,” on which it is making procurement and basing decisions.
Still, in an environment of geopolitical contestation and more frequent conflict, the US faces difficult choices. As highlighted by the supplementary budget, short-term priorities often get in the way of long-term strategic goals. Support for Israeli or European security has a stronger, more visceral hold on US domestic politics than the status of Taiwan or disputed islets in the South China Sea. Competing pressures will limit the ability of the US to expand its resourcing in the Indo-Pacific in the way needed to deliver on the ambition of the Indo-Pacific strategy. Over time, this will weaken the US’s ability to deter China.
Asia’s embrace of the US position in the region will also be subject to more qualification in 2024. Although the region was keen for US support at the onset of the Ukraine war, the US’s position on any expanded conflict in the Middle East would probably prove more contentious. In addition, the risk of US foreign policy moving in a more isolationist or unpredictable direction under a change in administration, following the presidential election next year, will create wariness among allies of relying excessively on it to manage challenges in Asia. Although the US bucked expectations to expand its influence in Asia in 2023, it will find it harder next year.
Ed. Article photo courtesy of EIU Asia Outlook 2024.