Macro & Investment Insights

Asia supply chains: a potential shock to growth

  • 12 May 2020
  • 5 min read

Key points

  • Small, open economies such as Singapore, Vietnam and Malaysia are the most exposed to final demand from the US, Europe and China. This makes them the most vulnerable to the coronavirus growth interruption. Thailand and Hong Kong have the largest exposure to tourism (as a % of GDP) and face the risk of a wipe-out of tourism revenue for some time.
  • China is a main contributor to Asia’s supply chains for complex products. Production shutdowns in China would therefore have a tangible economic impact on its supply-chain partners, both upstream and downstream.
  • Combining the supply and demand exposures, we assess an external shock equivalent to that of the global financial crisis would subtract regional growth by 2.7 percentage points (ppt), while a worse-than-GFC shock could see Asia’s growth cut by 4.2ppt, similar to the total revisions made to our growth forecast since the start of COVID-19.
  • The short-lived production shutdown in China means that the supply shock for the region will be dwarfed by demand disruptions. We expect the latter to add to disinflationary pressure in Asia that allows central banks to continue to ease policies this year.

Who is vulnerable to falling external demand?

In less than five months since the outbreak was identified, the novel coronavirus has spread to more than 200 countries and territories, inflected over four million people, disrupted financial markets and left the global economy reeling. While some countries have managed the public health aspect of the crisis better than others, no one is immune from its economic fallout in today’s interconnected and interdependent global economy.

Asia fits the above description well. Despite having successfully contained the virus (at least the first wave), many Asian countries are now confronting the grim reality of vanishing export orders from developed markets and disrupted supply-chains from China. These are two important risks facing Asian economies this year – we explain and quantify them in this analysis.

Tourism is hit hard by the pandemic

While China was the first country infected by COVID-19, the virus has now spread across the developed world. The anticipated contraction in the US, Eurozone and Chinese economies over the first half of this year is set to weigh acutely on Asia through trade of goods and services.

Trade in services is relatively easy to quantify by using tourism, which accounts for the lion’s share of total services trade. Exhibit 1 shows that Thailand and Hong Kong are the 2 most vulnerable to reduced tourism flows with annual tourism receipts accounting for 13% and 11% of GDP respectively. Malaysia, Singapore and Vietnam also have a sizeable tourism sector, worth 5-6% of GDP, while larger economies such as China, Japan and India are least exposed.

Tracing the source of tourists, Hong Kong stands out with almost 80% of its visitors from Mainland China. The latest data shows that the number of Chinese visitors plummeted by 99% year-on-year (yoy) in March, with the outlook unlikely to improve any time soon. The same goes for Japan, Korea, Thailand and Vietnam, all of which receive 30-40% of their visitors from China – a flow that is now at risk of complete wipe out as China continues its travel ban. India and Indonesia are the only countries in the region with more visitors from the US and Europe than China, but the loss of tourism revenue is likely to be equally severe for these economies in the light of the travel restrictions in those countries.

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