ASEAN consumers are reining in spending. The rapid growth in consumption that marked 2023 should gradually slow down this year, amid softening confidence and tightening monetary policy. And more pressure points are emerging, including lower income growth. But S&P Global Ratings believes the region will remain the fastest-expanding consumer market in the world, thanks to its underlying growth momentum.

We expect consumer confidence to weaken over the next few months for member states of ASEAN, or the Association of Southeast Asian Nations. Key drivers will be relatively tight monetary policy, a slower global economy, and softening income growth. This article primarily focuses on the six biggest ASEAN markets: Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam.

Consumer confidence strengthened in late 2022 on economic re-opening and brisk post-pandemic recovery. Over the second half of 2023, confidence moved gradually lower as the post-pandemic recovery faded and interest rates rose. Consumer confidence in Thailand and Indonesia is moderating to trend levels, and has dipped below trend in the Philippines (see chart 1).

Chart 1

Slowing Wage Growth Is Weighing On Spending

Income growth in the region is slowing (see table 1). After adjusting for inflation, household incomes moderated in 2023 even though unemployment rates were contained--a trend that also weighs on household spending this year. Income growth dropped in Indonesia, Malaysia, and Vietnam in 2023, while incomes were subdued in Thailand. And elevated inflation kept a lid on real income growth in Singapore.

The manufacturing sector underperformed in 2023. Weaker demand for global goods led to lower international trade and manufacturing and played a role in suppressing incomes. Malaysia's manufacturing payroll reflects the weakness in this sector; its payroll growth slowed to 1.1% year over year in 2023 after adjusting for inflation.

We expect real household incomes to improve for ASEAN over 2024, thanks to lower inflation, resilient labor markets, and steady economic growth.

Resilient Employment And Wealth Effects Offer Support

Labor markets in ASEAN should remain tight, in line with the resilience shown globally. In particular, steady activity in the service sector will support continued demand for workers. Such tightness will likely prevent sharp pullbacks in retail activity that may otherwise occur because of weakening consumer confidence and household spending power. Unemployment rates remain at or below trend levels across ASEAN (see chart 2).

Chart 2

Household wealth effects are still broadly supportive for the consumer outlook. Residential property prices are a key measure, since household assets can influence broader consumer confidence.

Despite rising interest rates, housing price performance varies significantly in the region. Residential prices are rising briskly in the Philippines and Singapore and increasing moderately in Thailand and Indonesia. But house prices have eased in Malaysia over recent months and were volatile in Vietnam during 2023. Housing affordability remains a significant concern for households in ASEAN, particularly in and around major urban areas.

In recent months, the growth in retail sales volume has been subdued compared with trend rates. Economic activity in the fourth quarter weakened for a several economies in the region, and its momentum will slow further in 2024. Retail sales volumes are lower than pre-pandemic averages across most economies (see chart 3). In Singapore and Thailand retail sales activity is close to trend, but still quite subdued.

The consumer environment is likely to be slightly better than the retail sales data suggests. That's because consumer patterns have shifted a bit since the pandemic, and the baskets used to compute retail sales will not capture such shifts. Models may therefore under-estimate retail activity. But the retail sales data still provides a useful reference point on the consumption picture.

Chart 3

Private Consumption Won't Be In The Driving Seat This Time

Private consumption was a significant growth driver during 2023, but that is changing. We expect external demand to become less of a drag on growth this year and private consumption won't be as strong. Consumption growth outstripped overall economic growth in 2023 (see chart 4). In Vietnam, weakness in the real estate sector led to a significant pullback in domestic economic activity.

Overall, we believe growth across ASEAN should be more rounded in 2024.

Chart 4

Country Outlooks

Indonesia:  Consumers face modest real income growth and a relatively tight monetary policy. Inflation fell to 2.6% year over year in December, which is almost at the 2.5% midpoint of the central bank's 2024 target range. Contained inflation will help consumers particularly at lower household income levels, but it also reflects tight demand conditions in the economy. We expect some monetary policy easing later this year to boost consumer sentiment, which has moderated to trend levels.

Malaysia:   The country's externally oriented economy faced a challenging 2023 with weak growth in international trade and electronics output. Resilient consumption activity supported the economy, but the wider economic softness is now affecting consumers. Confidence and household incomes are weaker, and consumers are in a tougher spot heading into 2024.

We expect a modest recovery in the external outlook to help the overall economy. Household incomes should get some support from the tight labor markets. These factors will prevent the consumer outlook from deteriorating sharply. There is limited room for monetary policy easing even though inflation is low.

Philippines:   Consumers faced a challenging environment in 2023 as high inflation ate into purchasing power. The weak external environment meant limited support from the economy outside of domestic demand. Inflation has now eased, and we expect monetary policy to loosen this year--both factors should help to stabilize consumption and shore up consumer confidence. A recovery in consumer activity will take a few quarters to firm up. Meanwhile we expect consumer activity to grow 5.5% in 2024, below the pre-pandemic trend growth of over 6%.

Singapore:   Positive household income growth is favorable for the consumer outlook. Survey data from market research firm IPSOS suggests consumer confidence has held steady over the past few months. On the other hand, elevated inflation and tight monetary policy are weighing on consumer spending, and real retail sales activity was weak toward the end of 2023. Consumer activity in 2024 will depend on two key factors: the path of monetary policy and broader economic growth.

Inflationary pressures suggest the Monetary Authority of Singapore will ease policy settings only gradually. The central bank has steered the currency on an appreciating path. Consumer spending will be dampened while monetary policy settings are restrictive. The economy is highly externally oriented, and overall growth will depend on global trade, which we expect to improve modestly relative to 2023.

The goods and service tax rate increased to 9% in January 2024 from 8% earlier. On the other hand, the recently announced 2024 budget is consumer friendly with several measures to provide income support geared towards lower- and middle-income households. Measures include vouchers for use at designated small and midsize enterprises and supermarkets, cash handouts, and expense rebates for eligible households. This fiscal outlay will support consumers during the year.

Thailand:   Authorities have proposed fiscal stimulus during the year that aims to boost consumer spending. The consumer outlook will swing heavily on whether the fiscal stimulus is implemented or not. The planned stimulus is an electronic money handout of Thai baht (THB) 10,000 Thai baht, and most households would be eligible. The amount is substantial as the average monthly wage is about THB15,000. The handout may be used for retail spending. It will boost near-term consumption at the cost of fiscal space, but is unlikely to improve the economy's potential growth.

Authorities are still deliberating over whether the fiscal stimulus should be implemented and prospects for its passage have declined since the start of the year. In the absence of stimulus, the consumer outlook will be weak. Consumer confidence is gradually weakening, and payment data suggests household spending is noticeably slowing. The outlook for consumers may improve if tourism recovery is stronger than expected.

Vietnam:   Consumer activity is recovering following weak economic growth in 2023. Retail sales are improving, and retail rentals and vacancies have improved, according to commercial real estate broker Cushman and Wakefield. We expect the economic recovery to broaden in 2024, and that will in turn strengthen consumption.

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