Children of the 1970s remember the misery of “stagflation,” the stultifying phenomenon of high inflation and economic stagnation. The economy limped along with barely discernible growth, while prices soared, robbing hardworking people of their savings and their futures. The U.S. government flailed in its attempt to curb price increases, resorting to gimmicks like President Nixon’s wage and price freeze and President Ford’s campaign to have everyone wear “WIN” buttons, signaling their determination to “Whip Inflation Now,” even without a discernible plan. Today, with inflation at a 40-year high, consumers are once again feeling the pain. And that pain could affect their willingness to spend on your products. Businesses need a plan to ride out what could be a long cycle of spiraling costs and decreasing demand, and that plan should include ASEAN outsourcing.
A snapshot of today’s Western inflation
The U.S. Bureau of Labor Statistics reported in June that the overall rate of inflation was 9.1 percent annually, but several categories of goods far exceeded that level. The price of fuel oil increased a staggering 98.6 percent and gasoline went up 60 percent. Eating at home is suddenly 12.2 percent more expensive while dining out costs 7.7 percent more. As for manufactured items, apparel costs rose 5.2 percent, and the cost of a new vehicle went up 11.2 percent if you could even find one.
The Eurozone is not doing much better, with a current average of 8.8 percent inflation. States to the east, in proximity to the Russo-Ukraine War, are experiencing the worst levels, as high as 20 percent. That conflict continues unabated and is unaffected by sanctions on the aggressor, so whatever inflationary pressure the war is adding will not be relieved any time soon.
Although there have been no official proclamations, analysts are hinting that the economies of the West are already in recession. Traditionally, economic slumps in the West have benefited Asian manufacturing, as the demand for lower-priced goods increases. But recent conditions—already high demand, disrupted supply chains, and Covid lockdowns—raise questions about how well Asian manufacturing can weather a Western slowdown.
ASEAN economies remain healthy despite the early effects of inflation
In the aggregate, the ASEAN region has been spared Western-style inflation, though data certainly show a warming trend. The average inflation rate in ASEAN countries increased from 0.9 percent in January 2021 to 3.1 percent in December 2021 and then to 4.7 percent in April 2022. Yet, while that average is relatively benign, four ASEAN states have seen dramatically sharp spikes in their rates of inflation: Indonesia recorded 149 percent, Singapore 161 percent, Laos 206 percent, and Thailand 267 percent. (Note these are not the inflation rates, but the increases in the inflation rate.) In Malaysia, the rate of inflation went down, while rates remained steady in the Philippines and Vietnam.
In the ASEAN region, central banks have not to this point adjusted their monetary policy to curb inflation. But those countries may be hurt by tightening in the United States and the West. The ASEAN states rely heavily on foreign direct investment (FDI) to build the infrastructure to grow their economies. Sudden austerity in the West could dry up those sources of capital and hinder expansion.
Still, analysts predict GDP growth for the region. In Vietnam, for example, the loosening of Covid restrictions is expected to boost tourism, a vital sector of the economy. They foresee growth in new orders and higher staffing levels for manufacturing. In late May, Deputy Prime Minister Le Van Thanh said that GDP growth may not reach the government’s target of 6.0–6.5 percent for this year, but that may just be a case of “under promising” to “overdeliver.” Some leading economists are calling for growth as high as 6.9 percent.
Meanwhile, in Cambodia exports rose 34.5 percent year on year from January–May. This country, too, will get a boost in tourist dollars post-Covid and is set to benefit from the removal of U.S. import tariffs on its solar panels. Analysts see growth as high as five percent this year and 6.1 percent in 2023.
Why outsource to the ASEAN region in 2022?
When manufacturers face runaway inflation in commodities, they have two choices: ride it out or reduce operating costs. Business leaders know that commodity pricing is cyclical, and the cost of staples will come back down. “How soon?” is the question. On the other hand, proactive companies can relieve some of the pressure on their bottom line by outsourcing. The ASEAN region offers plentiful skilled, low-cost labor along with abundant natural resources. But ASEAN states are also building modern facilities with cutting-edge automation that should help keep costs low for years to come. The energy outlook is also favorable, as many ASEAN states have committed to renewable energy sources and infrastructure.
At Genimex, we’ve helped many clients reduce costs while maintaining quality by migrating their supply chain to the ASEAN region, particularly Vietnam. We can help you determine whether such a move could help your company strike back against rampant inflation.
