Asia snaps back

The region is seeing a strong and broad-based recovery

30 December 2020 Frederic Neumann, Co-Head of Asian Economic Research

    Despite optimism over vaccines, 2021 began with COVID-19 still ravaging parts of Asia. However, there are good reasons to believe this year will be far brighter, even if the scars from the recession show after the initial bounce in activity.

    Asia's relative success in containment reflects ongoing social distancing and lockdown requirements. But even where restrictions are now relatively mild, a significant drag on activity lingers with fear reducing mobility. In Thailand, Australia and New Zealand, for example, internal travel remains 20 per cent to 30 per cent below pre-pandemic levels while international travel controls have hit tourism and business activity.

    Vaccines will help to restore confidence but it will be months before large numbers of people can resume a degree of normalcy, let alone achieve herd-immunity.

    Some more-advanced Asian economies, including Australia and New Zealand, can expect a relatively early arrival of vaccines in 2021 along with South Korea, Taiwan, Singapore and possibly Malaysia. However, in India, the Philippines, Thailand and Vietnam, even if initial shipments arrive before March, broad-based inoculation may begin only in the second quarter, with logistical challenges delaying roll-out.

    After the 2008 financial crisis, manufacturing led the economic bounce. This time services seem likely to recover faster.

    However, while exports provided the primary initial growth impulse after previous recessions in many Asian economies, a sustained services-led recovery hinges on household spending. And that depends on income growth. But manufacturers are currently hiring only in mainland China, Taiwan, New Zealand and Australia. Elsewhere, job shedding continues.

    While in some markets, notably Australia, Hong Kong, Thailand, Japan and Singapore, higher saving during the pandemic reflected substantial household-income support programmes, in other countries, including mainland China – but also Sri Lanka, India, Indonesia and the Philippines – income support was relatively low and households may stay cautious rather than swiftly increase spending again.

    Asian exports rebounded quickly after last year’s initial collapse, partly because production was barely interrupted – mainland China returned to work in March – allowing the region to fill supply shortfalls elsewhere, including for pandemic-related products. A global shift in consumer spending from services to goods also benefitted Asian producers.

    However, as production outside Asia resumes, and if services lead the recovery, demand for Asian items – including electronics and semi-conductors – should slow.

    Slower growth in Asian exports could be partly offset by a strengthening global capital-expenditure cycle. This could especially help Japan. Further fiscal support should promote investment and stronger public infrastructure spending globally will benefit Asia, but central banks need to prevent monetary policy inflating asset values.

    We forecast GDP growth of 8.5 per cent in mainland China this year and 9.0 per cent in India but recoveries reflect the depths of last year’s declines. Perhaps more relevant is when we expect GDPs to return to pre-pandemic levels.

    Mainland China, Sri Lanka, Taiwan and Vietnam started 2021 at or above pre-COVID-19 levels of activity. By the end of this year most Asian economies should have made up all lost ground but India and Thailand will take until the first quarter of 2022 on our forecasts while Japan and the Philippines take longer still.

    First published 17 December 2020.

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