Indonesia and Malaysia recorded strong economic growth in 2022
Malaysia's economy ended 2022 on a strong note, with gross domestic product growing 7% year-on-year in the fourth quarter. For the whole year, growth was 8.7 percent. Indonesia's economy grew more slowly at 5.3 per cent, but that was still the fastest pace in nine years. Following equally strong economic growth in the Philippines, the outlook for key Southeast Asian markets in 2023 looks bright. But why is 2022 such a banner year for many of the region's economies? Can this performance be sustained over time?
The distorting effects of the COVID-19 pandemic are partly responsible for what we are seeing now. Between 2020 and 2021, the region's economies will either slow sharply or contract: so it would not be surprising to see rapid growth for some time after the pandemic, as economic activity returns to its original levels. The year 2022 was unique in that many countries eased travel restrictions, releasing pent-up demand and stimulating service sector activity and consumption. This level of spending is unlikely to become a consistent feature of economic growth as savings dwindle and people return to normal spending habits.
When we dig into the data, the strong 2022 numbers for Malaysia and Indonesia are indeed driven in part by consumer spending. In Malaysia, private consumption grew by 7.4% in the fourth quarter of 2022. In Indonesia, household consumption grew 4.9% year on year, led by transport (9.4%) and restaurants and hotels (6.6%). Apparently, people are going out again and spending money on meals, travel and other pastimes, which is boosting the economy. A similar recovery in consumption helped propel the Philippines to 7.6 per cent growth last year.
The main difference is that, in addition to recovering consumer demand, Malaysia and Indonesia have benefited from a surge in commodity exports. Malaysia had a surplus of 51.7 billion ringgit ($11.9 billion) in its tradable goods account at the end of 2022. The same is true of Indonesia, whose exports last year reached $292 billion, thanks to surging global demand for coal and palm oil. Exports in 2019, the last full year before the pandemic, totaled just $168 billion. Indonesia will end 2022 with a surplus of about $54.5 billion in tradable goods.
Strong commodity exports in 2022 helped boost the economy, while also insulating Indonesia and Malaysia from the inflation and currency devaluations that have hit much of the world and the region. In 2022, headline inflation will average just 3.3 per cent in Malaysia and 5.5 per cent in Indonesia. The political and economic structures of both countries allow them to cushion consumers from the worst shocks of rising prices, particularly those related to energy.
Indonesia eventually relented and reduced fuel subsidies in the second half of the year, fuelling inflation. But as a comparison, inflation in the Philippines, a net energy importer, hit 8.1 percent in December. Despite strong economic growth, the Philippines is more vulnerable to inflationary pressures and less able to control the prices of key commodities than Indonesia or Malaysia.
There is no doubt that most Southeast Asian countries will avoid recession in 2023, with strong growth in the major economies. One of the main drivers across the board is the recovery in consumer demand, but they are experiencing very different effects from international trade and inflation. High commodity prices have led to unexpected export surpluses in Indonesia and Malaysia, while exacerbating inflationary pressures in the Philippines.
With commodity prices cooling, we should not expect exports to contribute as much to Malaysia's or Indonesia's GDP in 2023 as they do now, or imports to drag the Philippines as much. Growth is likely to shift more towards consumption and investment, and probably not as fast. Of particular importance is whether consumer spending stays at current levels or falls, and by how much. All of this highlights that while all three economies are growing rapidly in 2022, they are not growing in the same way, which has important implications for their direction in 2023.