Asia set for steadier growth

Region has resilience to overcome pandemic, bottlenecks and financial jitters

14 October 2021 Frederic Neumann, Co-Head of Asian Economics Research

Asia’s COVID-19 infections have at last stabilised. There could be renewed flare-ups – Singapore has seen record cases despite the vast majority of its population being fully vaccinated – and governments will take time before relaxing all restrictions, especially international travel, but the region is nudging towards a world where the virus no longer dominates everyday lives.

Three-quarters of the populations in most Asian countries should be fully vaccinated by the end of 2021. Second doses in Sri Lanka, Japan and Malaysia already match US levels, even if rates are under 30 per cent in Bangladesh, the Philippines, Vietnam and Indonesia.

COVID-19 gave Asia a boom in exports to disrupted countries, but demand for its manufactured items is now cooling as overseas buyers prefer local suppliers and turn from goods to services.

Supply-chain blockages have limited sales too, but the problem is logistics, not production bottlenecks. It will take time to work through the backlog of cargo but the fall in orders suggests factory activity in Asia might cool too.

As export growth begins to fizzle, domestic demand should, in principle, take on the slack. However, even in mainland China, manufacturing employment is contracting, potentially hitting incomes. Coupled with limited government help to households during the pandemic, this suggests consumer spending will recover only gradually.

Normalisation will depend partly on attitudes to risk: in some economies, vaccination rates of over 90 per cent may be needed before travel and social -distancing restrictions are relaxed.

The experience in mainland China – first in and first out of lockdowns – suggests households may be slow to resume spending. And although India’s economy has bounced back quickly, an initial snap-back is not a sustained boom.

Investment, especially in manufacturing, will be a more important driver than domestic demand, not least as companies work to overcome supply-chain bottlenecks. While foreign direct investment tumbled globally in 2020, inflows continued to climb in emerging Asia, reaching record highs in mainland China and India.

Can Asian banks accommodate a broader recovery in investment? Non-performing loans so far appear contained, outside of India, suggesting that banking systems have not been fundamentally impaired by the pandemic and credit growth can rise when demand picks up. Beijing’s efforts to cool property markets may however hit commodity exporters such as Indonesia and Australia.

More broadly, while some exporters may hope a slowdown in mainland China is offset by increased demand from the West, a substantial slowdown would also hit the US and Europe.

Meanwhile, the US Federal Reserve’s monetary policy could affect Asian economies. Hopefully the imminent tightening will not result in the volatility the Fed caused in 2013, but macroeconomic fundamentals are also far more robust now.

Most of Asia has avoided the surge in inflation seen in the west over the past year, though food prices remain a concern. That means most central bankers are in no hurry to hike interest rates. New Zealand is expected to follow South Korea in raising rates to cool their property markets, but elsewhere, fiscal support rather than monetary measures looks more likely if growth falters again.


First published 30th September 2021.

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