- 5 months ago
Join Tehmina Kaoosji in conversation with the Director of Client Capabilities at McKinsey & Company, Southeast Asia, as they review the Southeast Asia 2025 Economic First Quarter Report.
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00:00Hello and welcome to Niagara Spotlight with Nita Meena Kausjee.
00:10Niagara Spotlight takes us through the week in economic analysis and future affairs.
00:14Now this week on analysis, our spotlight is Southeast Asia's Q1 2025 economic review.
00:20So, as the global economy enters a new era of turbulence, rising protectionism,
00:24volatile markets and cautious capital slows, Southeast Asia finds itself at a crossroads.
00:29The region's once accelerating economies are now shifting gears from expansion to endurance.
00:35On this week's Niagara Spotlight, we break down the real numbers, real risks and real
00:40resilience behind the Southeast Asia Q1 2025 slowdown, guided by some exclusive insights
00:45from McKinsey's latest regional economic review. In brief, Malaysia's GDP dipped 4.4 percent from
00:524.9 percent. Philippines, lowest inflation in five years, but FDI fell to its lowest level
00:57since Q3 2023. Vietnam powered ahead with export-led growth and registered FDI surge
01:0434.7 year on year. Thailand cut interest rates twice. Indonesia's slide to 4.9 percent growth
01:11reckons its ambitious 8 percent target under new leadership. Meanwhile, Singapore's official
01:162025 GDP forecast was revised down by 2 percent. So, what's behind the recalibration? And what does
01:23the data really tell us about the region's next economic chapter? And why are such consumption
01:29patterns diverging despite stable inflation? Let's also look at where the new sources of
01:34resilience are emerging. Joining me now online is Kamaru Zaman Kamaruddin, Director of Khaian
01:40Capabilities McKinsey & Company Southeast Asia, to unpack how six major Southeast Asian economies are
01:45navigating global macro-volatility, balancing weaker exports, industrial slowdowns against pockets of
01:52strength like digital consumption and policy pivots. Very good morning to you, Kamar. How are you doing
01:57today? Thanks for joining us. Very good morning, Tamira. Thanks for having me on board. How are you?
02:03Very well indeed. So, let's log straight into looking at the wider Southeast Asia macro picture, Kamar.
02:09Now, McKinsey, of course, recently published your quarterly economic review of Southeast Asia for Q1
02:142025. What are some of the key takeaways you can share with us?
02:20Yeah, sure. So, we published our first quarter 2025 report in June this year, and we saw three key
02:28takeaways. So, one, there was a soft start to 2025. Second, we saw resilience. And third, we saw smart
02:38policy pivots. So, essentially, the start to 2025 was a soft one. Most Southeast Asian economies saw
02:47moderation in terms of GDP growth, which is impacted by external challenges such as trade tensions and
02:54policy uncertainties. Philippines was an exception. It grew faster by 0.1%. And overall, Vietnam still led
03:03performance, although it recorded its lowest growth in three quarters. Despite the soft start,
03:11resilience was also part of the story. So, domestic demand helped firm, especially in the Philippines and
03:18Vietnam, which effectively helped to buffer against the impact of external global uncertainties.
03:25Inflation remained largely contained. So, staying within target range across most markets. And third
03:34observation, we also saw smart policy pivots. So, essentially, here, policymakers moved early. Central
03:41banks in Indonesia, Thailand, and the Philippines all cut rates. And Singapore, as well, eased its monetary
03:48policy twice. So, currencies rebounded after early weakness. So, the zinc dollar, Malaysian ringgit, and the
03:55Philippines peso all gain against the US dollar. So, I think, just to recap, Southeast Asia kicked off
04:032025 on a softer note, but yet it remains versatile and resilient. Fundamentals are sound, and there were
04:11support from smart policy pivots. Absolutely. I think that's very well expressed and observed as well,
04:17with those main slowdown factors being a lot of discussion around trade tensions, policy uncertainty. So,
04:24lots of headwinds which have eroded a little bit of investor confidence. But moving along, of course,
04:29you have described the region as resilient. What gives you confidence in this outlook, though?
04:37Yeah. So, I think here, allow me to first share a brief context, right? Global headwinds has been
04:45ongoing for a while. And so, despite that, the region's growth still continue to accelerate and pretty
04:54much held up until early this year, which is, you know, first quarter, where we see a bit of softening
05:00across the region. So, essentially, what gives us confidence in Southeast Asia's resilience stems from a
05:09couple of factors. One, we see that most economic indicators are still holding up, especially domestic
05:17cushions. So, in the case of Philippines, for example, it grew faster in Q1, driven by very robust
05:25household consumption and remittances. In Vietnam, domestic demand continue to remain firm. Second,
05:32there is still room for policy support if needed, right? So, inflation is contained, which has allowed
05:38for and will further allow central banks to act if it needs to, to prop up the economy. Currencies are
05:45strong, which indicates that markets are confident and trust the region's policy and fundamentals.
05:52And I think the third point, which is important as well, is that investors are voting with capital,
05:59right? So, they are really walking the talk. And just to share an example, over 30 billion USD was
06:05committed into data center projects in just the first half of 2014 alone across Singapore, Malaysia,
06:13and Thailand. So, I think just to sum it up, we feel confident that Southeast Asia isn't just resilient,
06:20it is adapting and I think beyond that, building for the future as well. Absolutely. There's a real
06:26anchoring above the region as a financial FDI central hub amid all this global turbulence as well.
06:33Now, of course, we've mentioned and briefly touched on trade tensions, geopolitical issues,
06:37which are still ongoing, Kamar. Now, how exposed is Southeast Asia overall to this global volatility?
06:43Yeah, I think that's probably a question top of mind to many. So, Southeast Asia is directly exposed to
06:52global volatility, right? The region is made up of open economies that are deeply connected to global
07:01trade and supply chains. It will be impacted by US-China tensions, shifting trade flows amongst others.
07:08So, meaning what happens in big markets like the US, China, or even Europe, right, would have a direct
07:17impact here. So, if global demand slows, it will affect our exports. If supply chains are disrupted,
07:24factories in Vietnam, Thailand, Malaysia can feel it right away. And, in fact, on the topic of
07:30volatility, our latest McKinsey Global Economics Intelligence report also shows that trade disruption
07:37and policy shifts are, in fact, top concerns amongst global leaders. But I think in the midst of
07:43volatility, we are also encouraged that Southeast Asia is diversifying and would believe that it has a
07:51unique edge here. So, in terms of diversification, Southeast Asia is pursuing new engines of growth.
07:58So, let's take Malaysia as an example. So, we saw the recent push in AI and data centers. Beyond that,
08:07it is actively expanding trade partnerships. And as ASEAN leader for 2025, it is also actively
08:14enhancing regional cooperations. These are good signs. And beyond that, unique edge, what we meant
08:20by this is that Southeast Asia has a unique edge because, if we think about it, it is the only region
08:25where both American and Chinese tech ecosystems can actually operate side by side. So, you see companies
08:32like AWS and Google competing directly with Alibaba and Tencent in the same markets. You don't see this
08:39elsewhere. And that makes the region more than just a place that reacts to global trends. It's actually
08:46a live testing ground for innovation, right? So, meaning what works here could effectively shape the
08:51future of tech globally. And I think we see this as being something encouraging and exciting.
08:58So, the region is not just weathering volatility. It is also becoming more important on the global
09:04stage and essential as to how the world realigns itself. Absolutely. And this deep integration into
09:12global trade networks is actually going to serve us most likely extremely well over the next decade to
09:18come. Now, moving into regional currencies, it has been noted in the Kinsey report that they have all
09:24regional currencies have rebounded in Q1. What's behind this trend and what does it perhaps signal?
09:32Yeah, I think it's a good question. So, I think first and foremost, FX markets are often the
09:38bellwether of the economy. So, rebound in most regional currencies is effectively a positive signal
09:46for the region. In Q1, what we saw was that inflation stayed mostly within target,
09:52which reinforces macro stability in the region. And that gave room for central banks to take early
10:00actions and ease rates to stimulate economic growth, right? So, example, Singapore Central Bank
10:09eased twice. And as a result, SING dollar was one of the Asia's top performing currencies,
10:15which is a vote of investors' confidence in its fundamentals. Beyond that, currencies like
10:23the Malaysian ringgit, the Philippines peso also strengthened against the US dollar. So, overall,
10:31stronger currency is a positive sign. They are signalling investors' confidence in the region,
10:37and that Southeast Asia is effectively seen as a safe and steady investment zone.
10:44Exactly. And I think it also speaks of stabilising commodity prices together with modest inflation that
10:49has helped improve this outlook, especially the confidence of central banks as well. Thank you,
10:54Kumar. Now, looking across the region though, which sectors or industries are actually showing strength
11:00despite the macro headwinds that, of course, are going to be ongoing. Yeah. So, well, I think we
11:08already see that export-oriented sectors such as manufacturing took a hit. But what we are also
11:16seeing is that domestically-anchored, consumption-based, and digitally-enabled sectors are showing strength.
11:23And it actually helped to steady the ship. I can highlight a few sectors or industries here that are
11:30showing strength. Example, consumer and healthcare. So, consumer goods remain resilient, supported by
11:38continued consumption and the growing middle class. Healthcare is also robust with growing demand for
11:45medical services and an ageing population. Finance and digital services have remained strong. So,
11:53finance, insurance, e-commerce continue to grow. Tourism is another area, especially in Thailand and
12:01Vietnam, clearly benefiting from international tourism. Public infralight sectors holding up as
12:09government infrastructure spending remains steady. And in Q1 specifically, we saw an uptick in
12:15agriculture as well, driven by strong consumption and improved crop yields. So, I think even
12:22with the softer regional outlook, several sectors remain bright spots and which dance back to
12:30the point around the region's resilience and its ability to continue growing despite the external
12:37shocks. Absolutely. And also, for example, if you just zoom on in, this domestic demand and output as well,
12:45Indonesia, for example, really benefited because agricultural exports helped to
12:49offset their mining declines. In the Philippines, of course, service and consumption remaining a growth
12:54backbone. So, I think it's also speaking positively towards the larger sized Southeast Asian economies as
13:00well. Thanks for the insights so far, Kumar. Let's perhaps now segue into looking a little more closely at
13:07Malaysia. Now, Malaysia's GDP, of course, moderated in Q1 2025. Would you say this is part of a broader trend or
13:14something more domestically linked?
13:16Yeah. So, growth in Malaysia's Q1 2025 is moderated and this reflects both global and local factors at play.
13:30So, globally, there was a slowdown in terms of demand and obviously trade tensions that impacted growth across
13:39across export-dependent economies, particularly in sectors like electrical and electronics, commodities,
13:46for example, and that weighs down on manufacturing and also mining sectors in Malaysia.
13:53If we switch lands to locally, consumption growth moderated. So, despite strong labour market conditions
14:01and policy support such as the targeted subsidies, cash transfers, minimum wage revisions, it didn't have
14:10that much of an effect on consumption growth. But let me steer us to what's an even bigger story for
14:16Malaysia, right? It's actually in investments. So, investments, if you look at it, is significantly
14:21stronger than what we saw a year before. So, just highlighting a few examples, Microsoft is investing
14:292.2 billion USD. Google is investing 2 billion USD into Malaysia to build large-scale AI and cloud
14:36infrastructure. I think these are positive signs that could position the country as an emerging player
14:43in ASEAN's digital economy beyond just being an exports hub. Absolutely. Thank you for these insights.
14:51Now, also private consumption then in Malaysia, it showed modest growth, but exports were still weak.
14:57What could perhaps turn this around while of course remaining cognizant that we're having plenty of FDI coming in too?
15:05Yeah. So, the growth in Malaysia's consumption and exports both moderated in the first quarter.
15:13And there are three potential levers that can potentially help turn this around, right?
15:18So, there need to be, number one, stronger household sentiment and confidence. There need to be
15:25accelerated or rather an acceleration in terms of investments execution. And there need to be a
15:33diversified or rather diversification in terms of export markets. So, maybe let me just explain a bit
15:40further here. So, in Q1, there were policy support measures such as the civil sector pay hikes,
15:49minimum wage revisions. Perhaps we could consider fiscal support for the B40 group to also help
15:57further sustain consumption. And beyond this, which is also equally critical, right? We need to see real
16:05wage growth and better job matching, essentially, which are needed to boost spending further.
16:12Second point, there need to be a push to accelerate investment execution, especially in digital and
16:19infrastructure areas, which will have spillover potential in terms of boosting SMEs, in terms of
16:26creating new jobs as well. And to the last point around exports diversification,
16:32Malaysia could diversify beyond its reliance on China and the US. So, for example, by building deeper
16:41regional supply chain linkages across ASEAN region, right? So, that could be one example. So,
16:47those are three potential levers that can potentially help boost consumption as well as exports.
16:54And of course, trade policy clarity would certainly help in the immediate to medium term. But in the
17:00meanwhile, it does bode well for Malaysia to be also expanding our lens on non-traditional markets.
17:06Thanks, Kamar. Now, with Bank Negara easing rates, what impact can we expect on consumer confidence
17:11and business investment in Malaysia for the time to come?
17:16Yeah. So, Bank Negara recently adjusted rates and the easing of rates by Bank Negara could have a potential
17:24impact, positive impact, positive impact rather, right, on consumer confidence as well as business
17:31investment. So, it eases financing conditions and could stimulate borrowing and investments to prop up
17:39the economy. So, here we can look at it from two lens. One, the consumer lens and second, the business
17:49lens. So, for consumers, lower interest rates will reduce borrowing costs, which in turn could unlock
17:56major purchases such as homes. It could also help unlock consumer spending to boost consumption.
18:03For businesses, cheaper credit can facilitate expansion and investment in new projects such as
18:11investment in new plant, investments in technology, which will then have a knock-on effect in terms of
18:19supporting a pickup in production as well as growth. So, in short, easing of rates could drive growth
18:27and if public and private investments ramp up in tandem, we could see growth momentum return in the
18:34second half of 2025 this year. Absolutely. And also, with both consumer confidence and business
18:42investment, there comes the offsetting of any kind of external headwinds and providing at least that
18:46short-term cushion while we realign overall as a nation. Shifting our focus now to Singapore. Now,
18:53Singapore's economy contracted but currency was actually one of the best performers. How would you
18:58explain this duality? Yeah, so, Singapore's contraction in Q1 or rather a growth moderation, right, if we compare
19:09Q1 on a year-on-year basis was primarily due to weaker external demand and that impacted manufacturing output,
19:19especially in sectors that are sensitive to global demand fluctuations such as biomedicals being one.
19:27Yet, the Singapore dollar was one of Asia's strongest currencies. It rebounded against the US dollar by
19:34end of the quarter. And the strength in its currency reflects a combination of factors. One, it reflects
19:42investors' confidence in Singapore's economic fundamentals and its status as a global financial hub.
19:51Second, it is also a positive investor perception of Singapore's policy stability and reliable regulatory
20:00framework. And a third, it's also a recognition of Singapore's proactive monetary policies and its strong financial
20:08reserves. So, this is overall a positive testament to Singapore's economy. Despite the external headwinds,
20:18investors remain confident in Singapore, which in turn helped to maintain the R&C stability that we saw.
20:26And perhaps some notes to take for regional monetary policies as well. Moving into Thailand then.
20:33Thailand's economy though shrank quite sharply in Q1. Now, is this just tourism underperformance or what
20:40deeper issues might there be at play? Yeah, so, Thailand's economy has been the
20:48lowest performing economy in the region for a couple of quarters. And in Q1, we saw growth moderated from
20:573.3% in the fourth quarter, 2024, to 3.1% in the first quarter this year. And there were two key
21:06contributing factors here. One, slow consumption. And two, we saw, or rather, manufacturing performance
21:15continued to continue to be tepid. So, in terms of consumption, consumption growth basically slowed
21:23across all spending categories. Consumer confidence is low, household debt is high nearing 90% of GDP.
21:33And this obviously limits spending capacity and numbing the impact of stimulus measures.
21:39Second point around tepid manufacturing performance. Thailand's manufacturing sector
21:46contracted for a long time before finally turning a corner in Q2, 2024. But even since then,
21:55growth has been tepid. So, if we look at Q1, 2025, manufacturing grew by 0.6%.
22:03Auto sector, which is a key sector for the country, has been a drag. Production dropped for 21
22:07consecutive sectors. And beyond that, there are also reports that 100 factories are closing down
22:13every month since 2021 due to cheaper Chinese imports and slower consumption. So, mine, there are
22:24growing calls for Thailand to reform its manufacturing sector and shift towards high-value-added industries.
22:32And on the upside, Thailand has long-term advantages in areas such as renewable energy, EV production,
22:40among others, which is backed by foreign investment and local manufacturing capacity. So, perhaps with
22:45stronger execution and coupled with recovery in key sectors like tourism, Thailand may be positioned for
22:54improved growth in the second half of this year.
22:56And very much so, the emerging picture is that it is structural drag, not just seasonal tourism dips
23:03contributing to this overall current slowdown for them. Now, moving across to Vietnam then, Kamar.
23:09Vietnam is, though, often seen as a standout performer in the region. Is that still the case for 2025?
23:14And what is actually fueling this specific resilience for them?
23:18Yeah, absolutely. Vietnam remains one of the strongest and most resilient economies in the region, even though growth
23:29moderated slightly in early 2025. So, what's keeping Vietnam ahead are three powerful drivers.
23:37So, one, it's FDI. Second, it's manufacturing strength. And third, domestic demand. So, FDI continues to flow
23:49steadily into Vietnam. Global companies are increasingly seeing it as an alternative to China, especially in
23:56electronics, semiconductor, textile, and green tech, among others. Vietnam has got a young workforce,
24:03investor-friendly policies and strong logistics infrastructure to make it a go-to investment decision.
24:10Manufacturing continues to be a strength and a core engine of the economy. So, even as exports face
24:17global headwinds, Vietnam's position in global supply chains is holding firm. So, high-tech manufacturing
24:24like smartphones, electronics, components continue to anchor its exports performance. And the country is
24:32gradually moving up the value chain, which could boost productivity and wages. Third point, domestic
24:38demand is also proving to be a shock absorber. So, a growing middle class, strong retail activity,
24:43and rising urbanization are helping consumer spending healthy. And Vietnam's internal market is also
24:49becoming more important to help cushion against a slower global trade. So, yes, growth has slowed a little,
24:56but Vietnam's fundamentals are still strong, and the momentum is still very much intact.
25:03Clear signs of resilience there. Moving across to now Indonesia. Indonesia shows a smaller than
25:09expected contraction though. How could this convert to its population size and resource wealth into then
25:15perhaps digital-led productivity gains to make up?
25:20Yeah. So, Indonesia's Q1s grow moderated smaller than expected, but the country's economic fundamentals
25:27and scale will give it significant long-term opportunity. And to fully unlock productivity gains,
25:35we have identified five potentials enabling capital, right, that Indonesia must invest in.
25:41One, physical. Second, human capital. Third, technological. Fourth, natural. And fifth, institutional capital.
25:52And maybe, let me explain the first three a bit further here. So, in terms of physical capital,
25:58I think Indonesia has to invest into providing better infrastructure, so better roads, ports, efficient cities,
26:05and logistics to move people and goods faster. In terms of human capital,
26:10there is a need to upskill workers to ensure that they are digitally literate and also, you know,
26:16having more hands-on training in new job skills to succeed in future economy. And in terms of
26:22technological capital, we should be helping SMEs and traditional companies go digital, use cloud,
26:29and adopt automation. So, we're already seeing signs of this. For example, Indonesia's mining sector is
26:36piloting AI. And there was also a recent announcement in Asia's first quantum AI data center in Indonesia.
26:45These point to both steps in tech capital, which is great, but scaling the five capitals simultaneously is
26:52what that will really enable Indonesia to transition from size to productivity and from potential to performance.
26:59And also the perhaps digital upgrades in mostly tradable sectors to be boosting resilience.
27:06Very quickly now, if we could run through your perspectives on Philippines being the only country to pose GDP growth in Q1,
27:12what has been driving that momentum?
27:16Yeah, so the Philippines was the only Southeast Asian economy to pose faster pace of GDP growth in quarter one.
27:22And this resilience was largely domestic-led. Household consumption remained strong, supported by
27:30continued overseas remittances, which rose here and there. And beyond that, a couple of other additional support factors.
27:36One, strength in manufacturing, especially food production, which contributes half of Philippines' manufacturing output.
27:43We saw a turnaround in agriculture. Beyond that, strengthening of the PESO and coupled with
27:49stable inflation, which reinforced purchasing power. And we also saw robust growth in digital
27:54economy sectors, such as e-commerce and fintech. So as long as domestic consumption holds and
28:02inflation stays under control, the Philippines should be well positioned to sustain momentum through the
28:07rest of 2025. And even beyond that, gradually shift towards more of a digitally-driven growth model.
28:15Thank you for that. And to just end out very quickly, Kamal,
28:18we'll fast forward to the next quarterly report. What indicators will McKinsey and you be looking at
28:23watching most closely across Southeast Asia?
28:28Yeah, so the next quarterly report will be an interesting one. So that period coincides with the
28:34US Liberation Day tariff announcements. I think first and foremost, we will be watching top-line growth
28:41signals, which will provide us with a good gauge in terms of where the region will be headed in the
28:46near term. And it could turn out to be a surprise quarter, right? Vietnam, Indonesia, the Philippines
28:54have already released their quarter two GDP results, while Singapore has released its advanced estimates.
28:59And all countries recorded GDP growth acceleration in quarter two, which is very positive,
29:05given the current climate. And beyond that, we will also be keenly watching on three other indicators.
29:11One, trade volume, especially exports, to understand the immediate impact of tariffs and global demand.
29:17Consumption as an indicator of domestic demand and consumer confidence, especially in consumer-driven
29:23countries such as Philippines, Indonesia, and Thailand. FDI flows as well, which will provide a gauge of
29:28investor confidence and emerging bets or priorities. So above all, we are looking for signs that Southeast Asia
29:36resilience is turning into momentum, not just buffering shocks, but also building new engines of growth.
29:43Thank you. Thank you very much, Kamar, for all your excellent insights. So clearly, it's looking like
29:47the path forward to Southeast Asia is looking at digital futures, resilient trade, as well as homegrown
29:52confidence. Well, I'm Tamina Khosji signing off for now. This has been Niagara Spotlight, and that's all we have
29:57time for today. We'll see you again next week with more economic analysis and insights. Here's to a productive week ahead.
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