The Economy before the Pandemic – Focus on SE Asia
To write a chapter on Global GDP trends would be ambitious. What I am doing instead is focusing on SE Asia. An area where I have spent much of the past 7 years.
- Asia accounts for 42 percent of global GDP in purchasing power parity;
- this number was expected to rise to more than 50 percent by 2040
- Its share of global consumption grew from 23 percent in 2000 to 28 percent in 2017, and was expected to increase to nearly 40 percent by 2040.
- Asian corporations now account for 43 percent of the world’s largest 5,000 companies (G5000), contributing $19 trillion in revenue to the world economy every year.
- Asia was the destination for $1 of every $2 in new investment in the past decade;
- 43 percent of the world’s top 5,000 firms by revenue are headquartered in the region.
Throughout much of 2019 there were indicators of an economic slowdown across Asia. Referencing a Bloomberg report from July 2019, it was reported that gross domestic product in export-reliant Singapore shrank an annualized 3.4% in the second quarter from the previous three months, the biggest decline since 2012. China trade figures showed exports fell 1.3% year on year to June 2019. Imports shrank 7.3%.
Like South Korea’s economy -- which already contracted in the first quarter -- Singapore is often held up as a bellwether for global demand given its heavy reliance on foreign trade.
Factory activity was also shrinking in 2019 across Asia and talk of a technical recession was already in the air amidst continued U.S.-China trade tensions and a cooling technology boom (particularly in semiconductors).
By the end of 2019, the IMF was estimating that China’s growth was expected to moderate to 6.1. In India, growth decelerated sharply in 2019. In the IMF was saying that the ASEAN-5 countries (Indonesia, Malaysia, Philippines, Singapore, and Thailand), had been losing momentum in the first half of 2019, due to weakening external demand.
Fast forward to January 2020, McKinsey published a report called Corporate Asia: A capital paradox. I will quote extensively from this report which is freely available online. In this report, McKinsey explains that the influx of capital to Asia has not resulted in higher economic profit. In fact, Asia accounts for half of the deterioration in global economic profits from $726 billion to an economic loss of $34 billion from 2005-07 to 2015-17.
Asian companies may be scaling rapidly as capital floods in, but firms have been unable to deploy this capital in a manner that has translated into economic profits. Although Asian firms outperform on growth in invested capital, they have underperformed when turning it into “economic profit,” (EP) a measure of a firm’s profit after the cost of capital is subtracted. Corporate Asia is also underperforming other regions on average returns.
Corporate Asia turned an EP of $152 billion into an economic loss of $207 billion. Indeed, Asia accounts for almost half the global decline in economic profit between 2005–07 and 2015–17. North American firms, by contrast, were largely able to sustain their economic profitability, achieving a total of $245 billion, similar to $276 billion ten years ago.
Globally, ROIC declined by 3.2 percentage points from 11.0 to 7.8 percent between 2005–07 and 2015–17. While in Asia, ROIC declined by 2.7 percentage points from 9.7 to 7.0 percent over the same period. The fall in the ROIC of Chinese firms was even more substantial at 4.6 percentage points, from 11.4 to 6.8 percent. For other Asian firms, ROIC declined by 1.7 percentage points, from 9.1 to 7.4 percent.
Behind the averages in Asia, there were some pockets of significant value creation in major countries and in varied sectors. For example:
- Japan’s capital goods sector creates the most value in Asia with a performance comparable to its counterparts in North America and Europe.
- Financial services are highly profitable in China and in Australia.
- Technology-driven sectors, especially IT, create a great deal of value in China, Japan, and South Korea, and are improving as a source of value creation in India.
- Southeast Asia’s energy and materials sector generates substantial value despite the sector’s overall underperformance globally.
Countries have a competitive edge in different sectors. Japan and South Korea, for instance, lead in high-tech manufacturing, China has a host of dynamic new internet companies, and India gains most of its economic profit from its IT services firms. The breadth of the corporate ecosystem also varies. In Southeast Asia’s energy sector, for instance, EP is being generated by only a handful of vertically integrated companies.