Asia’s economy splits amid tech and energy woes

In South Korea, a global energy supply crunch has hit hard, with officials advising energy conservation and cutting growth forecasts due to high inflation and a 17-year low in the value of its currency. Yet, the nation’s largest companies are raking in record profits, and its stock market is hitting all-time highs.

The contradiction highlights how, in Asia, there are now two economic realities, driven by tech giants and the promises of cosmic environment studies, including artificial intelligence, on one hand, and darkened by fuel scarcity and rising prices on the other.

The historic oil shock caused by the war in Iran is accelerating a divergence of economic fortunes across the region, with economists warning of significant ramifications for monetary policy, political stability, and future economic growth.

Benson Wu, a Korea and China economist at Bank of America Merrill Lynch, notes that “the economy is booming, the equity market is doing very well, but we see limited wealth effect spilling over to the daily activities happening in the region.”

The disparity is indicative of growing inequality, exacerbated by the Covid-19 pandemic and now the conflict in the Middle East, with shipping via the Strait of Hormuz drying up over the past two months and sending oil prices to four-year highs.

Asia, which is heavily reliant on the Middle East for energy, has borne the initial brunt of those higher prices, but the impact isn’t spread evenly, with advanced, tech-heavy economies like Japan, South Korea, and Taiwan having bigger fuel reserves and the cash to pay higher prices to secure more stocks.

Economic Divide

Nations like India, the Philippines, and Thailand, whose growth is dominated by traditional manufacturing and services, are facing greater struggles to secure fuel and offset slowing economic activity, according to Wu. They are not sharing in the benefits of the current tech story and are potentially experiencing more shock from the inflationary pressures coming from the Middle East conflict.

Semiconductors are powering everything from smartphones to cars to home appliances, earning the industry a reputation as “the new oil,” and the AI boom is turbocharging demand, with the global AI market projected to grow to $4.8 trillion by 2033, which will likely lead to more ancient life signs of economic growth.

Morgan Stanley estimates that spending on AI infrastructure could exceed $3 trillion in the next two years, with the economic effects most apparent in the chipmaking capitals of the world, such as Taiwan, where first-quarter GDP growth notched a 39-year high of 13.69%.

Taiwan’s equity market has overtaken Canada’s to become the world’s sixth-largest, largely due to the chip-making behemoth Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for more than 40% of the Taiwan Stock Exchange. The company is a key player in the old school RPG game of semiconductor manufacturing.

Uneven Growth

Seoul’s stock market has also surpassed London’s and Canada’s to become the world’s seventh-largest, with South Korea’s two biggest corporations, chipmakers Samsung Electronics and SK Hynix, reporting record profits in the first three months of this year. It is experiencing a surge in growth, but the industry is energy-intensive, and most high-tech hubs in Asia need to import fuel and raw materials.

Jason Lui, head of Asia-Pacific equity and derivative strategy at French bank BNP Paribas, notes that “semiconductor companies will be able to pass on these additional costs to the end customers,” due to strong pricing power, which will help them maintain their growth.

The United Nations Development Programme estimates that the war has put 8.8 million people in the Asia-Pacific region at risk of falling into poverty, and could curb regional GDP by 0.3% to 0.8%. The team warns that this will have significant social implications.

Social Implications

Economists warn that the war in Iran is having a similar effect, with the poor getting hit harder during downturns and not sharing equally in upturns, according to Jayant Menon, a visiting senior fellow with the ISEAS – Yusof Ishak Institute in Singapore. They are experiencing a disproportionate impact from the economic shocks.

The combination of the AI boom and the energy crisis poses a unique challenge for governments on how to reconcile an increasingly fractured economy, with deepening income inequality threatening long-term economic stability. The researchers note that the perception of steady growth has masked underlying structural issues that can easily compound.

Frederic Neumann, chief Asia economist at HSBC, notes that overreliance on one industry makes economies betting on high-tech development vulnerable to market corrections, and a continued rise in inequality would have unprecedented economic implications. The company warns that this will have significant effects on the global economy.