One year ago, it was the Asian economies like China, Japan, and Indonesia that had seemingly controlled COVID and were leading the global growth rebound. The perception then was the East would help restart the system and eventually the West would come back online.
Through the second half of 2020, this was largely how the global recovery played out. However, starting in April 2021 in India, a second wave of COVID swept through Southeast Asia. As this resurgent wave moved from country to country, it initiated a second series of lockdowns for businesses and caused a steep drop in private consumption and investment. This has led the IMF to downgrade GDP growth forecasts across the region.
The highly infectious Delta variant combined with low vaccination rates have left many Asian governments with few effective tools for fighting the virus apart from lockdowns. Although necessary for controlling the spread, these lockdowns have had an acute impact on the region’s manufacturing base. In July, factory production in the region shrank at the fastest pace since the pandemic first swept across the region in mid 2020. Since then, the ASEAN Manufacturing Purchasing Managers’ Index (PMI) has remained below its benchmark reading of 50, meaning the region has seen at least 2 months of contractions in its manufacturing sector.
The impact of these factory lockdowns have not been limited to South East Asia. Across Asia intricate supply chains have been disrupted and shipping costs have surged. Following a COVID outbreak, China’s Ningbo-Zhoushan container port, the world’s third largest, halted all services at its newest and busiest container terminal for two weeks in August. The number of ships passing through Ningbo fell to less than 60 during the shutdown from an average of 200, causing additional congestion at alternate ports as well. Since July container rates have nearly doubled in price with routes such as Shanghai to Los Angeles now costing nearly $11,000 for a standard 40 foot box– up from an average price of $1,600 in 2019.
The effect has been especially pronounced for global car manufacturers which rely on low-cost production bases throughout Thailand, Vietnam, and Malaysia to produce key vehicle parts such as semiconductors. In late August, Toyota, the world’s largest car manufacturer by volume, said that it would cut its September production by 40% due to this chip crunch. Nissan, another major car manufacturer, said it would close its Tennessee production plant for two weeks because of a shortage of chips from Malaysia.
Under the current rules governing Malaysia’s lockdown, at least 80% of workers must have received a second vaccination to resume full production. As a result, manufacturers such as Intel, Micron Technology and Plexus, are rushing to roll out vaccines to their workers in the region. In spite of these efforts, only around a third of the country’s electronics workers have been fully vaccinated as of late August. Nevertheless, the lockdowns have been working to slow COVID and case numbers are trending in the region’s favor.
For the past 18 months the GeoEconomics Center has been warning of ‘fractured growth.’ which is now playing out. Asia led the recovery, the US came online roaring, but what will happen to the US and Europe in the months ahead? As ASEAN’s economies recover, the key question to watch is: will supply chain contagion once again follow the virus? During the IMF’s meeting in October will all these nations be downgraded?
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
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