With an economy of $4 trillion and a population of 670 million, the ten Southeast Asian nations (ASEAN*) are expected to grow about 5% this year. That is by far the highest growth rate of any similar regional trading blocs, and more than three times faster than the world’s most advanced economies.

Indonesia is ASEAN’s largest economy. It accounts for 35% of the group’s GDP and for nearly half of its population.

Remarkably, over the last two years Indonesia’s economic growth has been stabilized around an annual growth rate of 5%, while holding the core inflation near the mid-point of its official policy target of 1.5% to 3.5%.

Public sector accounts are also well within their respective policy ranges. The budget deficit at 2.3% of GDP is below its legal limit of 3%, and the debt burden is just a shade below 40% of GDP.

Trade accounts are roughly balanced, with economic growth last year entirely driven by domestic demand.

Those are good fundamentals for a strongly growing developing economy. They will allow supportive policies to underpin activity in the months ahead.

Easier money and more ASEAN trade

Monetary policy has plenty of room to ease. With an inflation rate of 2.4% last month, the real (i.e., inflation adjusted) monetary policy rate of 3 percent is unnecessarily restrictive. The nominal rate can be safely lowered by 50 basis points to bring the monetary stance closer to its neutral level.

That could then create a policy mix of a stable fiscal posture and a more accommodative monetary policy. Under those conditions inflation can be held down while providing a reasonable stimulus to interest-sensitive demand components like household consumption and business investments.

Another support to economic activity should come from an effort to significantly increase intra-ASEAN trade. Member countries do only 25% of their trans-border commerce within the trading bloc. That is much too low, compared with 63% of intra-EU trade.

ASEAN, therefore, has a long way to go to step up trade integration in an organization that will celebrate its 58th anniversary on August 8. And this is the time to begin such a major systemic change in response to the world trade fragmenting along the rapidly evolving security fault lines.

Indonesia should be spearheading that process after a tough bargaining round to establish new trading rules with the U.S. Jakarta eventually got away with a U.S. trade tariff of 19%. That outcome could have been much worse since Indonesia is buying 3.5 times less than what it sells to the U.S. Understandably, that’s what infuriated Washington.

The message is clear because that trade imbalance cannot continue. Indonesia either has to buy much more from the U.S., or it must look for other markets to sell its exports. China and ASEAN are the best and the safest alternatives.

China can help

China is Indonesia’s largest trade partner, with bilateral business transactions in the first five months of this year increasing 12% from the year earlier. A 15.3% increase in Chinese exports during that period led to Jakarta’s $22.4 billion deficit. Still, Indonesia managed to get an 8% increase in its sales to China.

The most important thing here is that Indonesia has a broad range of products that China needs, such as oil and gas, metals, rubber, textiles and a wide array of consumer products.

China is also ASEAN’s main trade partner. Beijing’s Southeast Asian neighbors account for nearly one-fifth of its total foreign trade. Increasing difficulties in trade relations with E.U. and the U.S., will most probably lead China and ASEAN to strengthen their business ties, based on existing ASEAN Plus trade platforms and an almost finalized Code of Conduct in the South China Sea.

China will drive this process by expanding trade and investments in East Asia, the Eurasian community, Africa and Latin America. That is expected to diversify China’s markets and to protect its economic growth at a time of rising concerns about structural barriers to the country’s economic development.

One can see those somewhat exaggerated concerns in IMF’s recent forecast revisions of China’s 2025 growth. Earlier this year, an “optimistic” estimate put China’s growth for 2025 at 4%. Subsequently, the latest estimate raised that growth rate to 4.8%. With China’s actual GDP growth of 5.3% in the first half of this year, that implies that its economic growth in the second half of 2025 would have to decline to 4.2%.

There is absolutely nothing among China’s current growth determinants to suggest such an outcome. With a deflationary bias across a wide range of cost and price indicators, China has plenty of room for an effective and sustained monetary stimulus and regulatory changes to its welfare system to release more personal disposable income. And China is doing all that in a measured and prudent fashion.

China’s economy is now on course to a 5.0% -- 5.5% growth rate, with trade dynamics that will keep ASEAN as the world’s fastest growing regional trading bloc.

_________

*Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Viet Nam