Image courtesy of Azelis

GDP growth is a modern fixation, introduced at the end of the Second World War (WW2). Ancient dynasties, kingdoms, empires and the first republics all sought to accumulate territory and wealth, but countries today frame their central policies for above x % annual growth and large GDPs in PPP (purchasing power parity) terms, which are believed to be the recipe for development and prosperity.  But in the “tepid twenties,” to use the words of IMF head Kristalina Georgieva describing the current decade, global growth is laggard, expected to stay quite flat at 2.8% to 2030. This historically weak figure mixes bleaker prospects in the Western hemisphere with rampant growth in the East: China is to be steady at 3.5%, ASEAN to continue its run of near-constant growth above 5% over past 20 years, and India, leapfrogging both, has a turbocharged growth at 7.5%. 

Jump ahead another 25 years and the world looks quite different, with the E7 (Emerging 7) economies dominating the world’s top 10 ranking, whereas the G7 countries take lower positions, according to IMF projections. With China (1st), India (2nd), and Indonesia (4th after the US), at the top, the balance of power is shifting decisively towards Asia by 2050. That could rewrite the rules of the world, including the standing of institutions like the IMF, created at the end of WW2 to organize a GDP-driven world order. After all, GDP is more than an economic yardstick; it is also a measure of power. 

For the scope of this report, we will stick to understanding the basis of growth and its drivers - because it informs the focus of the chemical industry for today and tomorrow.

After a miserable 2023 and no clear recovery in sight, the short-term scenario for the chemical industry is weighed down by wars, a thickening so-called “economic iron curtain” between the US and China, and persistent inflation. The chemical industry must look further into the future  for growth projections and follow these carefully. ASEAN, the political and economic union that comprises 10 of the 11 nations located in Southeast Asia, scored a couple of wins on the investment front recently: In 2022, foreign direct investment (FDI) in ASEAN reached an all-time high at US$224 billion. ASEAN has also beaten China as the number one destination for manufacturing investment coming from OECD countries, according to fDI Markets, as investors use the region as a hedge to the tit-for-tat tariff measures imposed between China and the US. According to BCG, ASEAN could reap up to US$600 billion a year in additional manufacturing output.

Predictably, the chemical sector has also shifted to Asia, with net outflows normally directed to Western Europe going to Asia Pacific in the past three years. The Southeast Asian chemical industry is forecasted to grow from US$239 billion in 2022 to US$448 billion by 2030, noted the Minister of Investment, Trade and Industry of Malaysia.

ASEAN is emerging as a prominent FDI destination both because it is in the middle of APAC, indirectly benefiting from that rising Asian-centric consumer and manufacturing hub, and for its own merits as a rising growth engine: As a bloc, ASEAN is expected to rise from fifth to the fourth largest economy in the world by 2030. Singapore, one of the Four Asian tigers (alongside Hong Kong, South Korea, and Taiwan) is a magnet for FDI investment, especially in high-tech and R&D-heavy sectors. Meanwhile, the so-called “tiger cubs,” the developing economies of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam (known also as the Emerging 5), have the strongest growth outlook to 2030 among major regional groupings. The Philippines and Vietnam will be making the biggest jumps, predicted to become the 19th and 20th largest economies globally by 2050. 

Behind these performances sits something as fundamental as it gets: demographics.

Ask anyone why they invest in Southeast Asia (and we did) and they will give the same simple answer - that it has one of the most attractive demographics. At the most basic level, ASEAN represents 8.4% of the world’s population. Its 671.7 million people make it the third-most populous region and, by default, a key market for the chemical industry. But there is more to it. French philosopher Auguste Comte put it beautifully, if a bit vaguely: “Population is destiny.” Demographic economists have a crueler way of looking at the same idea, seeing the people inhabiting a country in productivity-versus-liability metrics. This article will take a similarly desensitized approach: Southeast Asia has a window of demographic premium that will be propelling its growth. 

ASEAN countries are to yield a demographic “dividend” for the next two to three decades, which accounts to a big extent for its projected economic boom over that same period. While many of the developed economies in Europe, Japan, and soon China are facing an aging demographic, and the global South, primarily Africa, has explosive fertility rates and rapidly growing populations, ASEAN is in a (temporary) sweet-spot, with a high and growing working-age human capital and low numbers of dependables, or people of non-working age, namely children and the elderly. 

There is a direct correlation between the rise of the middle classes with an increase in demand for commodity and specialty chemicals production and trade. As an example, in low-income households, smaller quantities of products like cooking oils are bought, but as disposable incomes increase, order volume rises with purchasing power; that has an impact on the producers, but also on transporters like ISO tanks, since bigger volumes call for the use of ISO tanks over the smaller forms of packaging. The whole supply chain changes. Younger generations are also found by marketing analysts to be more eco-conscious. The chemical sector has taken note of this. “One megatrend, increasingly more prominent with Southeast Asia’s young demographic, is eco-consciousness. Consumers want more sustainable products, on top of that, seeking products that are highly functional and appealing,” said Ramon Brentan, VP for Scent, Greater Asia, at IFF. 

The correlations are at every level – demand for electronics, cars, housing, supporting infrastructure related to increased urbanization, consumer products from shampoos to luxury perfumes, and, of course, food is on the rise. Rui Fernandes Teixeira, vice president for sales, marketing & strategy at Bureau Veritas (Asia-Pacific & Middle East) summarized the key mega-trends driving the company’s growth in the testing and certification space in the region: Infrastructure development; the energy transition and the need to make power supply more affordable, reliable, and greener for the region; and urbanization, as agricultural economies turn into industrialized economies. 

At the same time, a young working population also translates to higher manufacturing and service productivity. The global share of manufacturing, especially in the heavy industries, has already shifted and continues to shift to Asia, where it finds lower production costs. Marcelo Tarkieltaub, regional director for Rockwell Automation in Southeast Asia believes Asia is on the path to becoming the world’s largest manufacturing center in the next 10 to 30 years. “Within this huge region, the ASEAN bloc fits nicely as an emerging economy, powered by a growing middle class and improving education standards. Together with India, Southeast Asia checks all the boxes as a key manufacturing powerhouse,” he completed.

BCG estimates that ASEAN could generate up to US$600 billion per year in additional manufacturing output; export outputs from the region are already outpacing the global average, at 5% annual growth against the 3% globaly. Nevertheless, ASEAN’total trade only accounts for 7.7% of global trade, writes the Jakarta Globe. ASEAN countries could leverage a lower-cost advantage compared to China, where manufacturing wages have doubled in the past decade, according to Roland Berger, a business management consultancy in Germany, but it cannot rely on that cost advantage alone. The same source mentions the productivity gap between many ASEAN countries and China remains a large one, which means the region would have to take the bitter bill of investments in upskilling and digitalization to compete on more than a cost basis. 

All that said, the relationship between demographics and growth is not a directly causal one. Nor are the mathematics of GDP a reflection of a country’s real prosperity. One cannot paper over the fact that growth is often unequally distributed, more so for such a diverse region as Southeast Asia. The richest 1% in both Indonesia and Thailand control over half of the countries’ wealth, noted Business Sweden. Inequality is widening in the region, and the urban-rural divide is starker. 

Rapid urbanization is putting pressure on the resources of large cities and potentially leading to higher levels of poverty and inequality, rather than elevated middle-classes. A further 70 million people are to move into cities by 2025 in the region, according to estimates by the ASEAN Secretariat. That creates a big infrastructure gap estimated by the Asian Development Bank to be between US$2.8 trillion and US$3.1 trillion for the 2016-2030 period. Infrastructure spending exceeds GDP growth in some of the countries. The right population mix is not a guaranteed precursor of growth without the right policy mix. Urban sprawls can lead to the spread of slums, growing inequality, urban congestion, and, in many cases, more poverty. 

Also, the region is highly fragmented, which makes the argument for its total or combined growth prospects more difficult, despite the success of ASEAN, the most prolific economic bloc after the EU: “Unlike the EU, ASEAN is not a single market, each country has its own rules and regulations. When there are existing FTAs in place, these can still be difficult to navigate,” mentioned Paul Nai, managing director for Southeast Asia at Lubrizol, a specialty chemicals producer supporting the additives and advanced materials businesses in APAC. 

ASEAN is certainly not a monolithic region and some of its countries are already aged. Singapore is on its way to becoming the country with the lowest fertility rate by 2050, writes the Diplomat. Singapore has the advantage of being a top destination for immigration to make up for a declining domestic workforce. Though it attracts both blue-collar and white-collar workers, most of the menial jobs in the country are done by immigrants, primarily from South Asia, while its older population continues to work to a very late age to be able to withstand the cost of living. In the last few years, Singapore has reviewed its immigration policy, introducing the Complementarity Assessment Framework (COMPASS); the number of work permit holders increased by 15% in the last two years, noted Airswift, a recruitment firm. 

The demographic dividend will eventually end, both because of declining birth rates and longer lifespans leading to higher numbers of retirees, with the over-65 population doubling or tripling in all Southeast Asian countries. It is the latecomers to globalization, such as Myanmar, Laos, or the Philippines, that will maintain a higher (above 2.0) birth rate in the coming decades. In Indonesia, the country’s dependency ratio (children under 15 and adults over 65 per 100 working-age adults) will start rising by the next elections in 2029. That raises some question marks for a country whose healthy GDP growth has been primarily rooted in household consumption, banking on growing domestic demand. 

One in four people in the region will be over 60 by 2050, according to Marketing Interactive. That does not necessarily mean a demand ceiling, however. The Japanese found a silver lining in the “silver” generation, a term to describe the over-60s as significant spenders and growth contributors. 

If there is anything that can learned from China’s draconian one-child policy, it is that demographics are not controllable: the Chinese experiment came biting back, resulting in a shrinking workforce. After this preamble, the next articles will work through the many other considerations that either override or are influenced by demographics.