Asia needs stamina

If the recovery isn’t too slow, perseverance is needed - and extra stimulus

9 October 2020 Frederic Neumann, Co-Head of Asian Economic Research

    Asia, like much of the rest of the world, seems to be picking itself up again from the coronavirus pandemic. But in many countries, including India, Indonesia and the Philippines, infection rates remain high while lost incomes and an uncertain future are causing hardship.

    After the huge plunge in demand, the initial snap-back in activity was bound to look impressive. What matters now is whether the advances can be sustained. Many places have achieved a degree of stability from which further gains will be made, but those gains will prove harder.

    We believe the recovery in mass consumption will be gradual at best. Asians spend their income, not savings, and incomes decline during periods of economic stress. And confidence reflects the continued fear of infection.

    Tourism accounts for 12 per cent of GDP in Thailand but international leisure trips have collapsed almost entirely. Taiwan, Hong Kong and Singapore also require the revival of travel for a sustained recovery. Even so, the collapse in tourism has so far not led to a material deterioration in Asia’s current accounts: the revenue loss is more than offset by the collapse in imports.

    Investment fell everywhere except in Korea and Taiwan over the first half of 2020. How quickly will it revive? Mainland China’s experience shows that public investment will need to take the lead because the private sector is slower.

    But economies with fiscal leeway can push ahead with major infrastructure projects once activity normalises: these include the Philippines, Thailand, Korea, Taiwan, Japan and Australia. By contrast, in Indonesia, India and Malaysia, such outlays may materialise only more gradually amid borrowing constraints or concerns about elevated public debt.

    Private investment may be quicker to revive in property. Mainland China – first into the pandemic and first out – saw a double-digit rise in housing construction in the year to August. Confidence in the sector is also high in Thailand, Taiwan and Korea.

    Forecasts are currently even more fraught with uncertainty than usual. Much hinges on the virus and vaccines. Yet even with relatively swift containment, consumption and private investment, spending across Asia looks set to recover only gradually. A slow revival in confidence among households and firms affects their saving, investment and hiring decisions. External demand, too, may not recovery quickly.

    However, mainland China’s economy has roared back, led by construction. Exports have also fared well and car sales are up solidly, despite the private sector lagging. But government support remains as crucial during the recovery as in the depth of the pandemic.

    Still, HSBC is forecasting GDP growth of 7.5 per cent for mainland China next year, which should support a 4.3 per cent recovery in Hong Kong, even if that doesn’t quite make up for losses in the previous two years.

    Taiwan has come through the pandemic strongly and should grow 1 per cent this year and 3 per cent in 2021. In Japan the pandemic followed a tax hike that had left the economy reeling and we forecast a 5.5 per cent GDP fall in 2020. Next year’s recovery will be only gradual, though the new prime minister offers hope for re-invigorated reforms.

    First published 23 September 2020

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