South East Asia, a quarterly forecast for the region prepared specifically for the finance profession.

Produced by Cebr, ICAEW's partner and acknowledged experts in global economic forecasting, it provides a unique perspective on the prospects for South East Asia over the coming years. We focus on the largest economies of the Association of South East Asian Nations (ASEAN) – namely Indonesia, Malaysia, the Philippines, Singapore and Thailand.

The past year was a turbulent time for the world economy. The eurozone saga dragged on, the Arab Spring swept further across the Middle East, extreme weather pushed up global food prices and worries about the US fiscal cliff unsettled  markets.

The latter has been settled for the time being, but fiscal consolidation in the US still faces major political and economic challenges. In Western economies the structural problems of population ageing and rising fiscal entitlements are endangering the solvency of nations that were believed to be risk-free borrowers just a few years ago. Combined with unconventional monetary policy designed to cushion the aftershocks of the financial crisis, trust in the G7 nations as custodians of global political and economic stability is being eroded.

Amid these developments, the global balance of power is shifting east at a fast pace. But 2012 has also exposed fractures in the seemingly inexorable rise of Asian giants, India and China. Disappointing growth and doubts about whether high growth rates can be sustained are one aspect of this.

Another is that the political stability of both countries was damaged; in India scandals and policy U-turns exposed some ineptitude in the political class, while in China the legitimacy and control of the Communist Party was being undermined by a growing number of public protests and a technology-driven rise in the freedom of expression. ASEAN did well economically against this background, which is expected to continue to remain difficult in 2013.

This report concludes that a similarly strong performance can be maintained over the forecast horizon if the global economy gathers momentum despite the challenges facing various quarters. As a motor of world growth, much depends on China.

But the next section shows that this dependence is a two-way street with ASEAN. ASEAN supports Chinese exports as eurozone and Japan trail off The rise of China has made a large contribution to the economic success of South East Asia over the past decade. Although there is direct competition on some labour-intensive goods, manufacturing in countries such as Malaysia and Thailand has long moved up the value chain. Semiconductor makers, for instance, provide
high-value-added components for assembly in China.

Now that China itself increasingly produces sophisticated products, countries with lower labour costs – especially Vietnam – are benefiting from a shift in labour-intensive manufacturing as many factories relocate away from China's coastal regions. Meanwhile, the immense hunger for raw materials driven by China's investment in physical infrastructure and productive capacity has pushed up raw materials prices, providing a boost to ASEAN export earnings.

Trade goes both ways, however. Figure 1 illustrates the growing importance of ASEAN as a buyer of Chinese products. Rising incomes and consumer spending have boosted purchasing power across the region, allowing households to buy more and more Chinese-made products ranging from clothing to consumer durables such as air-conditioning units and iPads.

As a result, measured on a 12-month rolling basis, the share of Chinese exports going to ASEAN has been rising steadily, going from 6.5% at the beginning of the 2000s to hit the 10% mark in December 2012. As overall exports have risen steeply, this rise in trade share has meant a 12-fold increase in the nominal dollar value of trade since 2000.

This picture contrasts with a falling share for traditional economic heavyweights, Japan and the eurozone. In early 2000, Japan was still the most important customer of China behind the US, but its export share has fallen from 16.5% then to below that of ASEAN, with 7.4% at the end of 2012. The eurozone has been falling back in terms of its Chinese export share since the financial crisis.

A recession expected to last well into next year or even beyond means that it's becoming a less important trading partner. NAFTA, the free trade area comprising Canada, Mexico and the US, has been better able to maintain its purchases from China, but as emerging markets' hunger for consumer goods swells, it too will see a falling share of China's foreign sales.

Taken together, the key industrialised nations accounted for 61.4% of Chinese exports in early 2000; this had fallen to 53.6% at the end of last year, with a clear downward trajectory.

Figure 1: Chinese exports to selected regions as a share of total Chinese exports, 12-month rolling basis

Source: General Administration of Customs of the People's Republic of China

Exports to ASEAN have not only risen, the region has more than compensated for the fall in exports to Europe. Figure 2 demonstrates that ASEAN purchased $34bn more Chinese goods in 2012 than in 2011, compared with a fall of $22bn for the EU and near stagnation for Japan.

The ASEAN increase has been as big as that of NAFTA but, since the base is lower, it has represented a 20.2% annual rise, compared with just 9.1% for North American buyers. As economies mature, services generally become a larger part of the economy. Although what is produced locally – think haircuts – increased economic development often results in the purchase of services from specialised providers abroad, a topic we turn to next.

Figure 2: Chinese exports in 2011 and 2012 and change over this period, $bn

Source: General Administration of Customs of the People's Republic of China

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