Delta Variant Should Not Derail Southeast Asia’s Economic Recovery

New variants of the coronavirus are producing the worst outbreaks in many countries in Asia, especially Southeast Asia.  Not only is the Delta variant more virulent than previous ones, its high transmissibility is raising concerns that it will spawn new variants that may eventually compromise the efficacy of current vaccines. This has led some to wonder if the Delta variant marks a new beginning, rather than the beginning of the end of the pandemic.

These uncertainties have led to concerns that nascent economic recoveries in the region may be derailed. The jury is out, however, and conflicting signs are emerging from forecasters.  In August, HSBC reduced full-year growth estimates significantly for all major Southeast Asian economies except Singapore. The ADB, however, increased its growth outlook for the ASEAN region for 2021 from 5.1 per cent to 5.2 per cent in its July revision of its April forecasts.

As a vindication of ADB’s optimism, strong second quarter year-on-year growth was reported, after either negative or flat growth in the first quarter of 2021.  The countries with the deepest recessions or the sharpest drops in the second quarter of 2020 recorded the strongest rebound in the corresponding quarter of 2021 (the gains came off the low bases of 2020).  Malaysia registered growth at 16.1 per cent, the Philippines at 11.8 per cent, and Singapore at 14.8 per cent. Thailand is the exception with modest growth of 7.5 per cent as it struggles with a tourism downturn and, like Malaysia, domestic political turmoil. Indonesia’s recession was mild as it resisted a general lockdown, and therefore the rebound was also relatively timid at 7.1 per cent.  Vietnam avoided a recession and is expected to grow by 6.6 per cent in the second quarter. 

While these growth rates suggest that the Delta variant has not derailed recovery, the situation is evolving and conditions can change quickly. The concern is that the worst of the economic impacts are still in train, and more data is required before a trend can be confirmed. It is also telling that most countries have recently downgraded their growth forecasts for 2021.

With forecasts mixed and data still limited, it is useful to look more closely at the factors affecting economic outcomes during the pandemic. While the health impacts of Delta are devastating on the unvaccinated, the economic impacts depend primarily on how governments respond with policy. In the short run, this relates to social distancing measures as well as stimulus packages implemented. 

So far, the response from governments with domestic mobility restrictions has been less draconian compared to the initial outbreaks in early 2020. Cross-border movement of people remains highly restricted. It was only when the infection rate threatened to overwhelm the health system in Malaysia did the authorities succumb and introduce a general lockdown.  Even then, there was reduced enforcement and compliance, due to lockdown fatigue and greater adaptability by businesses, due to learning by doing. Google Mobility data confirm that movement in the retail and recreation sector fell by around 50 per cent in August 2021 compared to 80 per cent during the first lockdown in May 2020. Other countries in the region have resisted general lockdowns and employed targeted social distancing measures, thereby limiting its negative economic impact.

So far, the response from governments with domestic mobility restrictions has been less draconian compared to the initial outbreaks in early 2020.

In terms of stimulus measures, countries like Singapore and Malaysia have continued spending unprecedented shares of their GDP to support growth. As of June 2021, Southeast Asian countries had authorised spending of US$730 billion or 7.8 per cent of regional GDP, twice the amount from a year ago when lockdowns started. Over time, new sources of funding have become available to countries where domestic resources are limited. Cambodia, Indonesia, Lao PDR, Myanmar, the Philippines and Thailand have borrowed a total of US$15.6 billion from multilateral development banks. Problems with disbursement and logistical challenges have also improved with time, increasing the impact of proposed programmes through more rapid translation into increased consumer spending.  Finally, accommodative monetary policies have kept real interest rates low and eased the burden on debtors.

Southeast Asia is heavily dependent on trade and other international flows, so the strong rebound in the US, Europe and China has helped sustain growth.  It also highlights how the Delta variant has impacted Southeast Asia more than other regions due to lower vaccination rates.  As of mid-August, most Southeast Asian countries had fully vaccinated no more than 17 per cent (Lao PDR) of their populations, except for Singapore (72 per cent), Cambodia (43 per cent) and Malaysia (32 per cent). Supply is also a constraint in countries where concerns over the Delta variant has reduced vaccine hesitancy.

While the Delta outbreak is evolving and has increased risk and uncertainty, indications are that it will not derail or significantly delay Southeast Asia’s economic recovery. Although the Delta variant will not send regional economies near the bottom that was hit in the second quarter of 2020, the output lost to the pandemic is unlikely to be recouped in 2021. If the Delta variant prolongs the pandemic significantly, then long-term scarring rather than short-term fluctuations in growth will be its greater legacy, leaving behind stubborn increases in unemployment, poverty and inequality. Whether or not it prolongs the pandemic appreciably will depend on how long it takes to address the inefficiencies and inequities in the production and distribution of vaccines globally.

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