Liao Shuping, Xiong Qiyue and Cao Hongyu also contributed to this article.
In 2023, demand growth in different Asian economies showed structural divergence. China's economic growth has benefited from expansion in consumption. In 2023, the impact of the epidemic subsided and China's consumer market recovered rapidly, with final consumption expenditure contributing 82.5% to its real GDP growth, becoming the main driver of economic growth; net exports of goods and services were a drag on China's economic growth due to shrinking external demand. Japan's economic recovery was mainly driven by external demand. Affected by the low base effect and the rapid growth of cross-border tourism demand, Japan's net exports of goods and services grew rapidly in 2023, driving real GDP growth by 1 percentage point and being the main contributor to Japan's economic recovery. Among them, the contribution rates to real GDP growth in the third and fourth quarters reached 117.7% and 149.0% respectively; in contrast, Japan's domestic demand recovery has been weak, with a negative contribution to GDP growth in some quarters, and private consumption, which accounts for nearly half of Japan's GDP, has been sluggish, growing by 0.6% for the year, a decline of 1.6 percentage points from 2022, and contributing only 0.4 percentage points to GDP growth. Consumption and external demand successively supported South Korea's economic growth. In the first half of 2023, South Korea's consumer market expanded rapidly, driving the rapid growth of South Korea's real GDP; in the second half of the year, South Korea's domestic consumption expenditure growth slowed, domestic demand showed a weak trend, private consumption expenditure grew at a rate of less than 0.5% YoY, the fourth quarter gross fixed capital formation amount turned negative YoY growth, external demand relay consumption became the main driver of South Korea's economic growth. In October 2023, South Korea's monthly export growth rate ended 12 consecutive months of negative growth and turned positive growth. India's economic growth is mainly supported by domestic demand. Both consumption and investment were strong in India in 2023, with investment activity in particular maintaining a faster growth momentum. Under the condition of relatively abundant labor force, capital is a scarce factor endowment for India's economic development. Increasing investment, especially FDI attraction, has become an important strategy for India's economic development. India's capital formation grew at an over double-digit rate YoY in the fourth quarter of 2023. In contrast, the drag effect of external demand on India's growth increased, with the size of India's trade deficit widening by Rs 2.1 trillion in 2023.
Consumer market boom in Southeast Asia is high. In 2023, the economic growth of Southeast Asian economies was mainly supported by consumer activity. Consumer confidence remained strong, and inbound tourism spending by international tourists picked up significantly. Consumption in the ASEAN-6 contributed positively to real GDP growth throughout the year. With the easing of the tight international financial environment, the contribution of investment to Southeast Asia's economic growth has gradually increased, with Indonesia, Thailand, Malaysia and Vietnam absorbing significant growth in foreign direct investment, and the scale of FDI in some countries hitting record highs. External demand was a drag on economic growth in Southeast Asia. In 2023, the contribution of net exports to real GDP growth in other Southeast Asian economies, except Thailand and Singapore, remained negative. In the second half of the year, as the export growth of countries stabilized and picked up, the drag on GDP growth gradually narrowed. Energy-exporting economies have been dragged down by crude oil production cuts. The implementation of voluntary crude oil production cuts by the Saudi Arabia-led OPEC organization in April 2023 had a large negative impact on regional economic growth. As the largest economy in the Middle East and one of the world's leading energy exporters, Saudi Arabia's real GDP growth rate fell sharply from 7.5% in 2022 to -0.8% in 2023, with net exports falling by 39.1%. The share of crude oil in Saudi exports and the contribution of crude oil production to Saudi GDP both declined significantly in 2023.
I. Weak manufacturing industry and steadily recovering service industry
Asia's manufacturing sector expanded sluggishly in 2023 due to factors such as the downturn in the global economy and contraction in international trade activity. China's manufacturing PMI grew to above the 50% threshold in the first quarter of 2023, but fell below the threshold after the second quarter; Japan's manufacturing PMI rebounded gradually after falling to a low of 47.7% in February 2023, rising to a yearly high of 50.6% in May, before falling below the threshold again to 47.9% in December; The PMI index of South Korea and Vietnam showed a W-shaped trend throughout the year, with most months below the threshold; Compared to other economies, India's manufacturing activity was generally strong. Despite the volatility, the manufacturing PMI for the year was essentially at a high of over 55%. Horizontally, Asian manufacturing growth is better than that of the United States and Europe, with the average manufacturing PMI remaining in the expansion range of 50.7%. Since 2024, the Asian manufacturing industry has shown a recovery momentum, led by the rebound in global trade. According to data released by the China Federation of Logistics & Purchasing, the Asian manufacturing PMI stood at 50.8% in July 2024, staying above 50% for seven consecutive months. Among them, Vietnam's manufacturing PMI has climbed to 54.7%; South Korea's manufacturing PMI was also strong, staying above 51% for several consecutive months; India's manufacturing PMI continued to fluctuate at a high level of 56%-59%; China's manufacturing PMI change was relatively flat, remaining in the 49%-51% range overall.
Source: Wind.
Figure 1 Changes in manufacturing PMI index of major Asian economies
Asia's service industry recovered at a rapid pace, with solid growth momentum. In 2023, the first full year after the exit of the countries' anti-epidemic policies, the service industry in major Asian economies showed stronger recovery momentum. China's service industry PMI showed a trend of "high followed by low". After the abolition of anti-epidemic measures in early 2023, service industry activities rebounded rapidly. The service industry PMI once rose to 56.9%, and then gradually stabilized. It shrank to a certain extent at the end of 2023. China's service industry PMI has returned to expansionary range since 2024 (Figure 2). Japan's service industry PMI remained above the threshold throughout the year and remained at a high level through mid-2024. The significant increase in foreign tourists is an important factor supporting Japan's service industry. India's service industry PMI remained high, averaging more than 57% in 2023.
Source: Wind.
Figure 2 Changes in service industry PMI index of major Asian economies
II. International trade activities cooled down and FDI inflows slightly decreased
In 2023, Asia's imports and exports of goods declined more than the global level as a whole, trade in services maintained strong growth, and FDI inflows to developing countries in Asia declined significantly. In 2024, Asia's trade in goods rebounded, and the recovery of tourism led to sustained growth in trade in services.
1. Trade in goods “declined and then stabilized”, while growth in trade in services performed well
Imports and exports of goods in Asia contracted significantly and recovered in the second half of 2023. According to the UNCTAD, Asia's imports and exports of goods in 2023 amounted to USD 9.9 trillion and USD 9.2 trillion respectively, down 6.7% and 6.4% respectively from 2022 YoY. Weak global demand and falling commodity prices were the main reasons for the decline in the size of Asia's trade in goods. Global trade in office and communication equipment, textiles and apparel industries declined by 17%, 13% and 11% respectively in 2023, all of which were the main exports of Asian manufacturing countries. A decline in volatility of commodity price in 2023 has also weighed on exports from the energy and other commodity exporters in the Asian region.
Source: UNCTAD.
Figure 3 Movements in Asia's imports and exports of goods
The export growth rate of East Asian economies declined significantly, with most economies experiencing negative growth. In 2023, China's exports in USD terms grew at a rate of -4.6%, compared to 0.6% in RMB terms. In 2023, China's exports showed a trend of “strong at both ends and weak in the middle”, with good growth momentum at the beginning of the year, followed by contraction, with YoY growth in exports falling to -14.2% in July, and then being repaired month by month, with YoY growth recovering to 2.2% in December (Figure 4). South Korea's monthly exports have contracted YoY for 12 consecutive months since October 2022. For the full year of 2023, its exports fell 7.5%. Exports to China amounted to USD 124.8 billion, down 19.9% from 2022, the biggest drop in 40 years, and the trade balance with China posted a deficit of USD 18.1 billion, the first deficit since 1992. Exports to the United States hit a record USD 115.7 billion, making the United States the second-largest export market for South Korea. In 2023, Taiwan, China's exports fell by 9.5%, more sharply than other East Asian economies. The depreciation of JPY in 2023 has been positive for Japan's export growth, which reached a record high of JPY 100.9 trillion. Automobile exports amounted to JPY 17.3 trillion, an increase of 32.7%, becoming the main driving force supporting exports.
Exports from Southeast Asia's export-oriented economies were weak. As an important supplier of global consumer goods (electronic products, textiles) and intermediate components (electronic components), Southeast Asian countries that undertake the processing and assembly link in the global production chain have been greatly affected by the cooling of external demand, and their exports of goods have declined significantly. Indonesia and Malaysia both saw double-digit declines in exports, while the Philippines and Vietnam saw declines of 7.6% and 4.7%, respectively, and Thailand saw a 1% drop in exports.
Exports from major resource-exporting countries in Asia have fallen sharply under the combined effect of “OPEC+” continued production cuts and pressure on international energy and commodity prices. Most Asian countries that rely on oil and gas exports have seen sharp declines in export growth. Saudi Arabia, Qatar, Turkmenistan and Brunei have seen their exports fall by more than 20%.
Source: Wind.
Figure 4 YoY growth rate of exports of goods of major Asian economies
In sharp contrast to trade in goods, Asian trade in services has maintained rapid growth. Exports and imports of Asian trade in services grew by 6.6% and 10.2% respectively in 2023, according to UNCTAD. Among them, the growth momentum of trade in services in Central Asia was obvious. The export value of trade in services increased by 24.7% YoY. The export value of services in Southeast Asia, South Asia and West Asia also maintained rapid growth, with growth rates of 9.3%, 8.8% and 8.6% respectively. East Asia's trade in services exports were large, but the growth rate is relatively flat. Exports grew by 2.9% in 2023, down 2.3 percentage points from 2022.
Tourism led to the growth of trade in services, and transportation exports fell sharply. In 2023, the export of tourism services in Asia maintained a rapid growth trend, with an export growth rate of 59.3%, contributing 123% to the growth of trade in services exports, which was the main driving force for Asia's trade in services exports. Since mid-2022, the Asian service industry has begun a rapid recovery process. In 2023, the Asia-Pacific region attracted more than 230 million international tourists, up 155.1% from 2022. Tourism export revenue recovered to 78% of the per-epidemic level, a significant rise from 65% in 2022. After experiencing rapid growth in 2022, Asia's transport sector exports declined by 20.0% in 2023, mainly due to the contraction in international trade activities and the sharp decline in the prices of transport services such as international shipping.
Table 1 Trade in goods for global and Asian economies in 2023
Unit: billion dollars; %
Source: UNCTAD.
2. Cross-border direct investment declined, foreign greenfield investment projects grew rapidly
Global foreign direct investment (FDI) edged down 1.8% to USD 1.3 trillion in 2023, the second consecutive year of decline, but the rate of decline was narrower than in 2022 (Table 2), with FDI inflows to developing countries falling by 7% to USD 867 billion. Asia's total inflows were USD 677.63 billion, down 11.5% from 2022, and its share of global FDI inflows fell to 50.9%.
FDI inflows in Asia were under pressure, with declines in all regions except Southeast Asia, and with the sharpest declines in South and Central Asia. FDI inflows to East Asia fell by 13.8% in 2023. Among them, FDI inflows to Chinese Mainland, Taiwan, China, Japan and South Korea decreased by 13.7%, 43.9%, 37.3% and 39.4% respectively. FDI inflows in Southeast Asia remained stable, increasing slightly by 1.4% YoY. Vietnam, the Philippines, Singapore and Cambodia attracted FDI growth of 3.4%, 4.6%, 13.2% and 10.6%, respectively. Indonesia, Malaysia and Thailand experienced sharp declines in FDI flows, falling 14.8%, 48.9% and 59.0% respectively. FDI flows in West Asia decreased by 13.8% YoY. FDI in UAE, Lebanon and Kuwait grew faster, with growth rates of 35.0%, 24.3% and 178.8% respectively. FDI flows attracted by Saudi Arabia and Turkey contracted significantly, with declines of 56.1% and 22.4% respectively. And FDI in Qatar showed negative growth. The scale of FDI inflows in South Asia contracted sharply, down 37.5% YoY, with India attracting FDI down 43.0% and Pakistan attracting FDI up 24.4%. Central Asia also saw a significant contraction in FDI flows, with Kazakhstan's FDI falling by 50.7%.
The number and scale of greenfield investment attracted by Asian developing economies continued to grow. According to the UNCTAD, the size of greenfield investment flows into developing Asia increased by 44% YoY to USD 451 billion in 2023, and the number of investment projects increased by 22% YoY to 5,798. Manufacturing attracted more than half of the greenfield investment, with investment increasing 93% to USD 240 billion and the number of projects increasing 52% to 2,196, reflecting the fact that the Asian region is undertaking the transfer of processing and manufacturing links from around the world, and the region's manufacturing capacity will be further enhanced. Multinational enterprises' investment in the service industry in Asia has maintained a steady expansion trend, with the service industry attracting more than 60% of the greenfield investment projects in 2023. Notably, the scale of foreign investment in SDG-related sectors (renewable energy, transportation and telecommunication sectors, etc.) in Asian developing countries has increased, with the number of greenfield projects growing by 30% and the scale of investment increasing by 54%.
Table 2 International direct investment flows in Asian economies in 2023
Unit: 100 million dollars
Note: Some countries have negative data, so growth rates have not been calculated.
Source: UNCTAD World Investment Report 2024.
Outward foreign direct investment (ODI) performance was mixed across Asia, with Southeast Asia rising, East Asia slowing slightly, and South and West Asia falling back sharply. Global ODI declined slightly in 2023, by 1.5% year on year to USD 1.6 trillion, with Asia's performance broadly in line with the world, decreasing by 5.8% YoY, including a 6.4% YoY decrease in Asian developing economies, with country-specific performance diverging. The size of ODI in Southeast Asia rose 6.2% YoY in 2023, and Singapore was the largest economy in Southeast Asia in terms of ODI flows, rising 20.6% YoY to USD 63 billion in 2023, accounting for more than 70% of total ODI in Southeast Asia. East Asia is the region with the largest ODI in Asia. In 2023, ODI volume edged down 3.3% to USD 497.1 billion, accounting for nearly 75% of total ODI in Asia. Of these, Chinese Mainland, Hong Kong, China and Japan all exceeded USD 100 billion. In 2023, the ODI flows of Japan and Chinese Mainland ranked second and third in the world, respectively, after the US. Western Asia experienced a significant decline in ODI flows, with ODI declining by 30.6% YoY in 2023. Countries with large economies in the region experienced varying degrees of decline in ODI. Only Turkey achieved a positive growth of 22.4%, while Saudi Arabia, UAE, Oman and Kuwait declined by 40.3%, 10.1%, 83.4% and 54.5% respectively. South Asia also saw a significant contraction in ODI, with overall regional ODI flows down 15.17%, with Pakistan down 97.2% and India down 8.7% to USD 13.34 billion. The ODI flow in Central Asia has turned from negative to positive, but the overall scale was not high. Among them, the ODI flow in Kazakhstan was USD 913 million, accounting for more than 90% of the total ODI in the region.
【This article is AFCA Working Paper No. 2024-26/189】
Expert Biography
Chen Weidong, Director Fellow of Asian Financial Cooperation Association Think Tankers Committee, General Manager of the Research Institute, Bank of China. Dr. Chen joined the Bank in 1999, and was closely involved in the IPO of Bank of China Hong Kong Limited and the restructuring and IPO of the Bank. From 2005 to 2011, Dr. Chen was the Deputy General Manager of the Strategic Development, Bank of China. From 2011 to 2014, he served as the Vice President of Bank of China Liaoning Branch. From 2014 to 2019, Dr. Chen served as the Executive Deputy Director and the Director of the Institute of International Finance, Bank of China. Dr. Chen is also the Secretary General of the China International Finance Society since February 2015, and the chief editor of the journals of Studies of International Finance and International Finance since July 2014.He graduated from the International Economy Department, Renmin University of China with a Ph.D. in economics in 1997.
Liao Shuping, Xiong Qiyue and Cao Hongyu also contributed to this article.
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