Asia’s economic outlook for 2023

• The global economy has gone through some rough patches recently. How is Asia performing?

Jang Ping Thia: It is under-appreciated how resilient Asia on the whole has been in the past three years. East and south-east Asian economies have benefited from being integrated into global production chains, and goods demand during the Covid-19 pandemic supported these economies even as services languished. Many have learned deep lessons from the Asian financial crisis in the late 1990s and maintained prudent macro policies. 

South Asia was affected by the pandemic, but remittances cushioned the impact. That region was probably more affected by higher fuel and commodity prices depleting reserves, and some would require International Monetary Fund support. All said, Asian emerging and developing economies are expected to grow 5.2% in 2023, and it is still the fastest-growing region in the world.

Tao Wang: With the global slowdown, Asian economies have also been affected. In the fourth quarter of 2022, we saw a contraction in Taiwan and Hong Kong, and significant slowdown in most other Asian economies including Singapore, Malaysia, Thailand, Vietnam and South Korea. Many Asian economies are exposed to global demand and their exports have weakened a lot, recently. 

The more domestic-oriented economies, such as India and Indonesia, are more resilient. So far this year, we have seen China and Hong Kong reopening and economic activities recovering. We expect growth in both economies to rebound strongly. We also expect Thailand to benefit from the continued recovery of tourism. 

Yoshiki Takeda: We expect to see growth in Asia rise. Last year was a sluggish one for growth, in no small part due to China’s slower than expected gross domestic product (GDP) growth of 3% in 2022, which was below the global average for the first time in more than 40 years. This year, we expect growth in China to accelerate as domestic travel and economic activities are both rapidly improving, and it has a high level of infrastructure investment.

India continues to maintain its rapid economic growth and remains one of the fastest-growing major global economies, driven by resilient domestic demand, strong private sector investment and the healthy balance sheets of many Indian companies.

Outside of these regional giants, we are seeing strong investment activities in the electronic vehicles supply chain in Indonesia, and the semiconductor industry in Korea and Taiwan. All in all, despite external headwinds, we are expecting better economic conditions in the Asia region this year.

Sitao Xu: Broadly speaking, Asia is rebounding off the back of China’s reopening and its own dynamics. Unlike many developed countries, inflation in general was not a concern for most of them, except India.    

Helen Qiao: Despite pressure from frail external demand, Asian economies held up reasonably well due to domestic demand strength. Consumption has been doing well with the backdrop of post-lockdown normalisation of economic activities. Investment based on domestic demand will likely see further rebound.

• China’s lifting of pandemic restrictions has been seen as a cause for optimism. Has this materialised? 

Ms Qiao: Yes, we would think so. We have seen a strong rebound in China already this year, after Covid infections peaked in December 2022. This includes a notable pickup in consumption, especially in consumption of services, from the beginning of January through to the Lunar New Year (LNY) period. In addition, the production side also seems to have done better than expected, with the construction project resumption rate recovering to 86% by the fourth week after the LNY, compared with 80% last year.

Mr Takeda: Yes, it is materialising. Looking at human movement data, a reliable indicator of a resumption of post-lockdown economic activity, traffic congestion in China’s major cities and subway ridership are already above 2019 levels. Spending at travel destinations is still below 2019 levels as capacity and staffing constraints remain in many commercial areas.

However, we expect consumption to recover over a prolonged period, as has been seen in many developed countries. During the Covid-19 pandemic Chinese household savings have increased, which was also seen in many developed countries and supports a bounce-back in consumer spending.

Mr Thia: Domestically, China’s services industries are recovering as fast as you would expect. Restaurants are full and traffic is back. In other areas, China’s reopening perhaps falls short of what people were expecting. For example, while flights have increased, tourism has not yet fully recovered in early 2023. Furthermore, structural challenges are still there. The optimism is more tempered after some weeks of reopening, but is intact. 

Before the pandemic, outbound Chinese tourists spent $250bn per year. Even if a fraction returns in 2023, it will still be a big boost for many economies. There will also be more policy adjustments to deal with the structural issues. The Chinese consumers and demand have not gone away. We have to be patient in the adjustment to the economy.

Ms Wang: When China first lifted restrictions in December, the country was hit by a big wave of Covid cases and people were cautious in going out and about. Economic activities weakened. However, since early this year and especially after the LNY in late January, there has been a notable rebound in people movement and offline economic activities. Subway passenger turnover and urban traffic congestion have been above 2019 levels, and property sales in 30 large cities have been significantly higher than the 2022 level in recent weeks. 

Work resumption also picked up pace recently after a slow start in late January. We expect continued gradual recovery of economic activities and consumption, and see the property market stabilising this year. We forecast GDP growth to average at 5.4% this year.

Mr Xu: China’s ending of pandemic restrictions is indeed a cause for optimism on several fronts. First of all, the decision was about putting the related economy as a top priority item on the policy-making agenda. Second, it has greatly alleviated investors’ concerns over leaders’ perceived capabilities of managing trade-offs. Third, consumers in China have moved on swiftly. Almost 90% of staff have returned to work after the LNY. Covid is being seen widely as yesterday’s news. This suggests that Chinese consumers have not been constrained by quarantine scars.   

• Geopolitical issues in the region and more broadly with the war in Ukraine are affecting sentiment. How are these reverberating in Asia? 

Mr Takeda: They are negatively affecting market sentiment in Asia. Due to the war in Ukraine, many are concerned about a similar scenario playing out in Asia. Despite these fears, it is unlikely that China will initiate a forced reunification with Taiwan.

We should accept that the risk is inherent, while also recognising that it is very unlikely that the situation will develop into war. Economic fundamentals, including economic development and corporate earnings, are by far the most important factor for the Asian stock markets following November 2022, after more economic support was announced in Japan and Covid-related restrictions were lifted.

Ms Wang: The war in Ukraine has not only heightened concern in the region, but also drove up energy prices and directly hurt Asian economies as most are large net energy importers. Higher energy prices pushed up inflation and added the need for some central bank tightening.

Asia is also worried about rising geopolitical tension in the region. Most Asian economies are highly open and embrace globalisation. They have tried to push forward regional integration with regional trade agreements. They generally do not want to be forced to choose a side.

Some Asian economies may benefit from the supply chain shift away from China in the next few years, as they get more foreign investment flows. However, decoupling and increased fragmentation may hurt Asia in general over the long term.

Mr Xu: It is almost impossible to predict the outcome of the war, but what should be watched from Asia are:

• To what extent such a protracted shock would result in greater risks of stagflation when central banks in the West are having a hard time taming inflation;
• To what extent the conflict would further change the calculus of national security, which will put more emphasis on supply chain resilience;
• Whether the war would reinforce pervasive mistrust between China and the US. This would put many regional economies in a difficult situation because China is the largest market for most of them.  

Mr Thia: Putting aside geopolitical issues for the moment, before the pandemic, borrowing costs were low, sovereign yields averaged around 3.7% for the developing economies in Asia. At the height of the pandemic, in April and May 2020, this shot up to 7.7%. With monetary easing in advanced economies, yields came down sharply to pre-pandemic levels. Average borrowing costs shot up again in 2022 because of war in Ukraine, to around 5.5%. 

For some economies, the volatility is even larger. While some have existing vulnerabilities, many are buffeted by shocks they did not create and these continue to reverberate. The end of the war in Ukraine or lowering of tensions, with lower prices, reduced risk premiums, and promoting more trade and investments will surely be helpful.

Ms Qiao: Investors are concerned about risks from higher commodity prices, especially in energy, sanctions and trade due to geopolitical challenges.

• What is the greatest potential driver for economic growth in Asia? 

Mr Thia: Asia is a big region. The growth drivers are there, but varied. For China, it will be the shift from investment-led growth towards more sustainable consumption growth. For other emerging economies, like India, Indonesia, Philippines, Bangladesh and Vietnam, the direction of travel is somewhat opposite — to mobilise resources towards infrastructure, investment and integration. This is not a thesis for seeking out the next China as a growth driver for Asia. Each economy will develop in its own way and integration remains the key. 

The commonality is the shift towards net zero. Increasingly, this is not a drag on growth but a growth driver in itself. Imagine: in three to four decades, all the factories and cities in Asia can potentially be powered by cheaper and cleaner renewable energy — more production, higher consumption, better quality of life. What a powerful growth driver this will be, and one that AIIB is all-out to support.

Ms Wang: Asia is a diverse region and cannot be easily generalised, but the great potential driver is domestic demand. For economies like India and Indonesia, the large domestic market — coupled with potential to increase productivity, cheap labour and government policies that have become more supportive of improving the business environment and attracting foreign investment — should lead to relatively high growth in the years ahead. They, as well as some of the smaller south-east Asian economies like Malaysia, Vietnam and Thailand, may also benefit from the ongoing supply chain shifts away from China. 

For China itself, domestic demand should also be the key driver of growth. We expect China to continue to move up the value chain in the manufacturing sector and carry out reforms to offset some demographic challenges, and see growth running around 5% in the next couple of years and averaging 4–4.5% this decade.

Ms Qiao: We believe the most important driver for growth in the region is still in consumption. The growing middle class in the region will release their pent-up demand, supported by the excess savings they accumulated since the pandemic began. In particular, in China, we estimate there was Rmb5.9tn ($861.85bn) of excess savings from 2022 held by households. And within that, we expect close to Rmb1tn will be spent before the end of 2023, pushing up retail sales by two percentage points to 9.5% for this year.

Mr Xu: Relatively favourable demographics (e.g. in India and the Philippines) will be a driver for growth, while China, whose population began to dip last year, could undertake some reforms in the labour market to mitigate the impact of the ageing population.

Most governments in this region are pro-business and in general take a more open-minded stance towards trade. The Regional Comprehensive Economic Partnership is likely to bring about greater efficiency and regional economic integration. 

Mr Takeda: Energy transition is a big topic in Asia. Of course, China is vying for pole position in the electric vehicle (EV) and solar power generation supply chain, but it is also investing heavily in wind power, hydrogen and energy storage. The transformation of its energy mix from fossil-fuel based technologies to cleaner ones will not happen overnight, but remains a substantial engine for growth. Asia is also rich in valuable commodities.

Indonesia is a global centre for nickel production and elsewhere liquid natural gas is in abundance. Both are key resources in the drive towards clean energy.

Another driver for the region is that the world is becoming increasingly multipolar. US economic hegemony is not as strong as it was. This is not only a result of political tension, but also the necessity of supply chain redesign, which requires deeper consumer understanding and less complex transport arrangements. Furthermore, Asia has a massive population, which will attract more investment globally.

• Are there any trends emerging in the region which may have an impact on its economic performance in the near term? 

Mr Thia: Three related issues will impact near-term economic performance. Firstly, the rise and the uncertainty around interest rates will continue to weigh down economic performance. There will be some spillover effects to currencies, too.

Secondly, the high debt levels in certain economies. The lower interest rate environment in the past decade led to imbalances – higher debt levels, higher asset prices. Can these be brought down to safer levels without a large negative impact on growth?

Thirdly, how the advanced economies deal with these similar issues would also have an impact on Asia in the near term. Not to understate the risks here, but what is different now compared to the past is really the improved macroeconomic management in many Asian economies.

Mr Xu: In the near term, Asia could ride out the next wave of central bank tightening (mainly in the developed world), but different economies are coping with a hawkish Federal Reserve in a different manner.

Ms Wang: In the short term, the tightening of the Fed and European Central Bank monetary policy in the face of stubborn inflation will lead to slower exports from Asia, as well as some rate hikes there, leading to lower growth. Meanwhile, the reopening of China should bring some offset for many Asian economies, though perhaps not enough to offset the negative effect from a slowing global economy for most Asian economies. 

Over the next few years, the US drive to decouple from China could bring uncertainty to the region, although some economies may benefit from the supply chain shift away from China in the next few years. India, Indonesia, Malaysia and Vietnam have seen increased foreign direct investment inflows, especially in some manufacturing sectors. The global tech cycle, which is still in the downward leg, will continue to affect exports and growth of economies most exposed to this supply chain — that includes China, Taiwan region, South Korea and Vietnam.

Mr Takeda: Indonesia is finalising agreements with car manufacturers BYD in China and Tesla in the US to invest in EV production facilities. Indonesia is poised to become a regional powerhouse as an original equipment manufacturer and has signed more than a dozen deals worth billions for battery material production with global companies. Along with investment from global multinationals, local companies are also trying to transform their business by adopting cleaner technologies. This is part of the reason why Indonesia’s economic performance is so resilient.

Ms Qiao: Inflation and the central banks’ move to curb it will have implications in the near term. In Asia, excluding China, inflationary pressure has been building as domestic demand recovery unfolds. Regional central banks mostly responded to it by tightening financial conditions, especially through rate hikes, which could create some stiffer headwinds on growth, especially against the backdrop of recessions in the US and Europe later in the year.