Investment dynamics are critical to economic growth prospects
If a higher share of total output is devoted to investment, the productive capacity of the economy will expand and that will help speed up its growth rate. Of course, this is so long as the investment is not wasteful (for example, pouring money into constructing condos which no one wants to buy). Unfortunately, except for China and India, this investment share of output has not regained the high levels that prevailed before the 1997 Asian financial crisis. That is a major reason why Southeast Asian economies have failed to replicate the booming growth rates that they enjoyed before 1997.
The most volatile segment of an economy is investment spending, so any surprise to expectations of economic growth would tend to come from how investment behaves. We believe that there is a good chance that a new investment cycle in the Asian region could emerge, which would produce better economic prospects than currently expected.
This is not to discount the downside risks that clearly do exist. But remember how there had been concerns last year that higher interest rates, geopolitical frictions or other risks would hammer 2023’s prospects — and how these were then offset by positive drivers which had been underestimated. Similarly, we think that the region will again show resilience, this time as a result of a pick-up in investment. If this investment rebound can last for a few years, as we believe possible, the result will be a higher investment share of economic output that produces an acceleration in economic growth over the next few years.
