The Malaysian economy closed 2022 on a strong note, with the fourth quarter GDP posting year-over-year growth of 7 percent. Growth for the entire year was 8.7 percent. Indonesia’s economy grew more slowly at 5.3 percent, but it was still the fastest rate in nine years. Coming on the heels of similarly robust economic growth in the Philippines, 2023 looks bright for major Southeast Asian markets. But why was 2022 such a banner year for many of the region’s economies? And can this performance be sustained over the long term?
The distorting effect of the COVID-19 pandemic accounts for some of what we’re seeing. Economies across the region either slowed down a lot or contracted between 2020 and 2021; so it’s not that surprising to see fast growth in the immediate post-pandemic period as economic activity catches up to where it was. 2022 is also unique in that many countries relaxed travel restrictions, unleashing pent-up demand that stimulated service sector activity and consumption. This level of spending is unlikely to be a consistent feature of economic growth as savings are drawn down and people return to their normal consumption habits.
When we drill down into the data, the strong 2022 figures for both Malaysia and Indonesia are indeed driven in part by consumer spending. In Malaysia, private consumption was up 7.4 percent in the fourth quarter of 2022. In Indonesia, household consumption rose 4.9 percent for the year, with the largest increases in transportation (9.4 percent) and restaurants and hotels (6.6 percent). Clearly, people are going out again and spending money on meals, travel, and other diversions and this has given a boost to the economy. A similar revival in consumption helped propel growth in the Philippines to 7.6 percent last year.
The major difference is that, in addition to renewed consumer demand, Malaysia and Indonesia also benefited from surging commodity exports. At the end of 2022, Malaysia’s tradable goods account had a MYR 51.7 billion surplus ($11.9 billion). Same story in Indonesia, where exports reached $292 billion last year as global demand for coal and palm oil spiked. Total exports in 2019, the last full year before the pandemic, were only $168 billion. Indonesia closed out 2022 with a surplus in tradable goods of around $54.5 billion.
Strong commodity exports in 2022 helped bolster the economy while also insulating Indonesia and Malaysia from the same level of inflation and currency depreciation that hit many parts of the world and the region. For 2022, headline inflation in Malaysia averaged just 3.3 percent, and in Indonesia 5.5 percent. The political and economic structures of both countries allowed them to buffer consumers somewhat from the worst upward price shocks, especially those related to energy.
Indonesia did eventually give in and decrease fuel subsidies in the latter half of the year which helped accelerate inflation. But as a point of comparison the Philippines, which is a net energy importer, saw inflation hit 8.1 percent in December. Despite strong economic growth, the Philippines is more vulnerable to inflationary pressures and has less ability to control the price of staple goods than either Indonesia or Malaysia.
There seems little doubt that most of Southeast Asia will avoid recession in 2023, with major economies riding a wave of strong growth. One of the main drivers across the board has been a revival in consumer demand, but they are experiencing the impacts of international trade and inflation quite differently. High commodity prices led to windfall export surpluses in Indonesia and Malaysia while worsening inflationary pressures in the Philippines.
With commodity prices cooling we shouldn’t expect exports to contribute as much to Malaysian or Indonesian GDP in 2023, or imports to be as much of a drag on the Philippines. Growth will probably rebalance more toward consumption and investment, and will likely not be as fast. It will be particularly important to see whether consumer spending is sustained at current levels or falls, and by how much. All of this underscores that even though these three economies grew rapidly in 2022, they did not all grow in the same way and that has important implications for where they might be headed in 2023.