Tech boom vs oil crisis: Asia’s new economic reality is a warning for the world

By Stephanie Yang, CNN

Taipei, Taiwan (CNN) — In South Korea, a global energy supply crunch has hit hard. Officials have advised energy conservation, cut growth forecasts and warned of fallout from high inflation and 17-year lows 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 underscores how, in Asia, there are now two economic realities.

The historic oil shock caused by the war in Iran is accelerating a divergence of economic fortunes across the region. One is driven by tech giants and the promises of artificial intelligence. The other is darkened by fuel scarcity and rising prices that threaten a humanitarian crisis.

As the disproportionate impact of oil shortages in Asia widens the divide, economists warn that the phenomenon has significant ramifications for monetary policy, political stability, and future economic growth across the continent – and other parts of the world that rely on it for trade.

“Yes, 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,” said Benson Wu, a Korea and China economist at Bank of America Merrill Lynch. “I think that is something really troubling many observers.”

The disparity is indicative of growing inequality, exacerbated first by the Covid-19 pandemic, and now the conflict in the Middle East. Shipping via the Strait of Hormuz, through which one-fifth of the world’s crude oil normally flows, has dried up over the past two months, 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. Advanced, tech-heavy economies in East Asia like Japan, South Korea and Taiwan have bigger fuel reserves to draw on, as well as the cash to pay higher prices to secure more stocks.

Meanwhile, 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.

“These are regions that, number one, they are not sharing that much of the good things coming from the current AI or tech story. And number two, they are potentially experiencing more shock from the inflationary pressures coming from the Middle East conflict,” said Wu. “That is something we need to watch very closely.”

Widening divide

Semiconductors were already powering everything from smartphones to cars to home appliances, earning the industry a reputation as “the new oil.” Now the AI boom is turbocharging demand.

A UN Trade and Development report projected that the global AI market will grow to $4.8 trillion by 2033 — a 25-fold increase from 2023. Morgan Stanley estimated that spending on AI infrastructure could exceed $3 trillion in the next two years.

The economic effects are most apparent in the chipmaking capitals of the world.

Taiwan’s first-quarter GDP growth notched a 39-year high of 13.69%, as its equity market overtook Canada’s to become the world’s sixth-largest. The gains are largely attributable to the chip-making behemoth Taiwan Semiconductor Manufacturing Company (TSMC), which accounts for more than 40% of the Taiwan Stock Exchange.

Seoul’s stock market has also surpassed London’s and Canada’s to become the world’s seventh-largest in recent weeks. South Korea’s two biggest corporations, chipmakers Samsung Electronics and SK Hynix, have reported record profits in the first three months of this year, and Samsung’s market capitalization has risen above $1 trillion.

AI is energy-intensive, and most high-tech hubs in Asia need to import fuel and raw materials. However, the vast amount of money in the industry has eased concerns about their abilities to secure supplies.

“Semiconductor companies will be able to pass on these additional costs to the end customers,” said Jason Lui, head of Asia-Pacific equity at French bank BNP Paribas. “The supply demand for semiconductors is very skewed, so having the product is more important, and they have very strong pricing power.”

Simon Woo, Asia-Pacific tech research coordinator at Bank of America, said as long as major US tech companies continue investing in AI, Asian chipmakers and suppliers should flourish as well. He added that as those stocks have overperformed, investors are no longer satisfied with the returns that traditional sectors may offer.

“When you look at the AI-related companies, if you say 10% growth, 20% growth, investors say, ‘Oh my God, too low,’” he said. “In the AI era, at least you have to hear 50%, 100% growth.”

‘K-shaped’ economy

While the AI frenzy continues, the most vulnerable populations in Asia face dire consequences from the war in the Middle East.

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 stark contrast has become known as the “K-shaped economy.” The term refers to a steepening deviation between upper and lower economic classes, popularized after the Covid-19 pandemic disproportionately hit underprivileged groups. Economists said the war in Iran is having a similar effect.

“The poor get hit harder during these downturns, and they don’t share equally in the upturn,” said Jayant Menon, a visiting senior fellow with the ISEAS – Yusof Ishak Institute in Singapore. “That inequality accumulates and in some ways, is self-fulfilling.”

How far the gap widens depends on government action, as well as how long the Strait of Hormuz remains occupied by US and Iranian military forces. The rush to build out AI may also aggravate the shortfall, if manufacturing and data centers siphon energy away from other sectors.

Even within economies that have benefited from the AI boom, the resulting riches have been unevenly spread. In South Korea, tens of thousands of Samsung workers are threatening to strike amid broader discontent over lagging pay. As consumer activity has weakened, the central bank has warned about the growing misalignment between real sentiment and headline GDP growth.

The “K-shape” phenomenon has also caught the attention of Taiwanese officials this year, said Kristy Hsu, director of the Taiwan ASEAN Studies Center at the Chung-hua Institution for Economic Research.

She said the semiconductor industry only accounts for about 4% of Taiwan’s workforce, but the salary for entry-level workers can be as much as five times that of their peers. Too much attention on one sector may also deprive others of resources like electricity, which would further exacerbate the issue, she added.

“For the general public and especially the AI semiconductor industry, they all talk about this bright future,” she said. “But for economists and think-tankers like us, we do consider this a very severe risk facing Taiwan.”

Economic fallout

The combination of the AI boom and the energy crisis poses a unique challenge for governments on how to reconcile an increasingly fractured economy.

Deepening income inequality not only heightens the risk of social and political unrest; it also threatens long-term economic stability, because a narrowing concentration of wealth erodes spending power among the majority population that drives economic activity.

Economists said the perception of steady growth has masked underlying structural issues that can easily compound.

“This is really a new issue,” said Hsu. “Taiwan cannot afford to not have TSMC or all this high tech, but this widening gap for different groups, different households and different sectors, needs to be addressed.”

Meanwhile, central banks must find a balance between boosting growth and combating inflation, while uneven monetary policy among countries could trigger greater regional inequality.

“Do you set interest rates according to 8% GDP growth, because one sector is driving this? Or do you set monetary policy for the other 80% of the economy that is not growing?” said Frederic Neumann, chief Asia economist at HSBC.

Overreliance on one industry makes economies betting on high-tech development vulnerable to market corrections, if AI development falters, or if worsening commodities shortages eventually hinder production of electronic components.

However, Neumann warned that a continued rise in inequality also would have unprecedented economic implications.

“The risk is that the K-shaped recovery will stay a K forever, that there is no reconvergence,” Neumann said.

While the ramifications are currently most evident in Asia, Neumann said that as manufacturing and consumer sentiment decline, that is likely to spill over into other economies that rely on the region for trade.

The US, which is more insulated from fuel price shocks as the world’s largest producer of crude oil and natural gas, is already experiencing a similar bifurcation. Investment in AI boosted growth in the first quarter, even as gas prices rose to four-year highs and consumer spending slowed.

“These social trends of rising income inequality and the K-shaped recovery in Asia will ultimately transmit themselves to the US,” Neumann said. “It is both a hit to US growth and a hit to US inflation, and that means that it reinforces the K for the US economy as well.”

John Liu contributed reporting.

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