DOMESTIC non-oil exports - and hence the manufacturing sector - are expected to remain subdued over the coming year, leaving the economy reliant on the services sector, according to ICAEW's latest Economic Insight: South East Asia report, which also posits that Singapore's economic growth is unlikely to hit 3.3 per cent until 2018.
Stronger government investment and solid spending by households are expected to support service sector activities but services related to oil and re-exports will be vulnerable to continued weakness in regional trade, noted the report.
One significant factor which has had significant impact on growth in South-east Asia is China's economic slowdown.
"As ASEAN and global economies continue to struggle with the challenging backdrop, it is natural to question to what extent the rise of China and the commodity super-cycle were mistaken for structurally robust growth in some countries," said Tom Rogers, ICAEW economic adviser and associate director, Oxford Economics.
The report also noted that disinflationary forces are growing. In terms of headline consumer price inflation, there are negative readings currently in Thailand and Singapore, while inflation is also at low levels in Vietnam and the Philippines.
That said, at least part of the weakness in consumer prices is due to falling energy costs - measures excluding energy costs generally remain positive across the region.
It is notably developments in factory gate prices (wholesale prices) that are the main current area of concern. Wholesale prices are falling sharply in most of the ASEAN-6 economies, with year-on-year declines in manufacturing wholesale prices of more than 5 per cent in Singapore and the Philippines.
"The key risk is not a temporary dip in some price levels but a broader-based negative interaction of a number of variables that could lead to sustained weak economic performance," noted the report.
The threat of such a deflationary spiral unfolding is likely to be especially large in highly-leveraged economies: falling prices and asset values may create large negative balance sheet effects whereby indebted firms and individuals respond to rises in their real debt burden/falls in their net worth by increasing saving and reducing spending. This again risks giving rise to negative second-round effects on demand and asset prices.
Compounding the risks to the outlook from disinflationary forces are high levels of personal and corporate debt in some Asian economies. In Singapore and Malaysia, debt/income ratios are close to or above 150 per cent.
Singapore's pace of consumer spending has slowed compared to its long-term average, echoing the trend towards slower growth across the ASEAN-6 economies. This suggests that while financial crisis conditions are not present, the high debt-to-income ratios may already be hampering the country's growth potential.
That said Singapore, the Philippines, and Thailand have fiscal space to support growth while across the region efforts to improve the business environment and the efficiency of government spending is also aiding confidence.
Said Mr Rogers: "The best performers in the ASEAN-6 will be economies where growth is underpinned by strong domestic fundamentals and where there is room for policy support.
"In this respect, we believe that Indonesia, the Philippines, and Vietnam have the best growth prospects among the ASEAN-6 countries, reflecting healthy domestic factors such as low debt, macro-stability and wage competitiveness. These factors will help them continue to gain market share in low-cost industries."
This article was first published on March 15, 2016.
Get The Business Times for more stories.