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Asia-PacificMarch 25 2022

Economists' insights on Asia's recovery path

As Asian governments ease lockdown measures and reopen borders, a group of regional economists share their thoughts with Kimberley Long on how the region has been affected over the past two years and which sectors are in the most need of additional support for recovery. 
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Economists' insights on Asia's recovery path

After two years of the Covid-19 pandemic, countries across Asia are starting to ease their most stringent restrictions and reopen their borders to international travellers. However, the pandemic has left a mark on the region’s economy and some sectors are in need of support to recover. The Banker has polled a group of economists to understand where the biggest impact has been and what is needed to bring Asia back to full health. 

Panel 

  • Taimur Baig, chief economist, DBS 
  • Frederic Neumann, co-head of Asian research, HSBC
  • Trinh Nguyen, senior economist, emerging Asia, corporate and investment banking, Asia-Pacific, Natixis
  • Albert Park, chief economist, Asian Development Bank 
  • Vishrut Rana, economist, Asia-Pacific, S&P Global Ratings

Q: How is Asia faring as the region moves through the pandemic? Are there any particular areas of concern?

Taimur Baig: It has been a trial like no other, with the travel and tourism sectors – major sources of livelihood in the region – facing severe decline in business, just as domestic demand has been affected by episodic mobility restrictions. Large support from the public sector has been a valuable lifeline, although such measures have caused government debt ratios to jump. The region’s role as the key source of manufactured goods for the world has helped, with goods exports rising robustly, providing a much-needed cushion to an otherwise grim backdrop. A key concern is the permanent loss in output due to the scarring caused by the pandemic to businesses and investments. Many countries in Asia will not see per-capita real income go back to pre-pandemic levels until the middle of the decade, sapping their economic momentum to a large extent.

Frederic Neumann: Asia has come through the pandemic with impressive resilience. In part, the region was supported by soaring global demand for things like electronics, toys and furniture, which helped households through lockdowns across the world. Booming trade thus helped support not just growth, but also employment in Asia’s highly export-reliant economies. In part, Asia was also able to rely on its strong fiscal positions to cushion the impact of the pandemic on local investment and consumption, with swelling deficits and rising debt leaving little mark on wider financial stability. Still, for all its resilience, the region will need to address some of the scars the pandemic is bound to leave behind, including a rise in income and wealth inequality, disrupted education for millions and decimated savings among its most vulnerable. The resilient performance of Asian economies thus hides the devastating impact the pandemic has wrought on lives and livelihoods across the region. 

Trinh Nguyen: The easing of restrictions in Asia excluding China has helped with private sector consumption and investment, especially in south-east Asia. Thailand opened its economy for international tourism in February and Vietnam plans to do so in mid-March. And they aren’t the only ones. Most of south-east Asia has normalised not just domestic activities but also international borders, which should help with tourism given that they make up a high share of gross domestic product (GDP). Meanwhile, fiscal policy has been supportive. India has a huge allocation of capital expenditure, especially roads, railways and logistic infrastructure. South Korea and the Philippines have expansionary budgets, and both have presidential elections in 2022. Malaysia too is upping its spending. Meanwhile, China is front-loading spending to offset slowing private sector demand. 

The easing of restrictions in Asia excluding China has helped with private sector consumption and investment, especially in south-east Asia

Trinh Nguyen

Vishrut Rana: Private demand is recovering gradually in Asia-Pacific, which has been a soft spot for Asian economies over the pandemic. Recent pandemic escalations are having noticeably more modest impacts on economic activity, which is positive for the growth outlook. One risk to the outlook stems from energy prices potentially persisting at high levels or rising further. Most economies in the region are net energy importers, and consumers in the whole region could face higher energy costs. Another risk is from potentially weaker consumer confidence and external demand as a result of Russia-Ukraine developments.

Albert Park: Developing Asia’s recovery is expected to continue this year after 6.9% growth last year, but several risks loom large. It would be premature to say we’re near the end of the pandemic, as the possible emergence of more deadly Covid-19 variants remains a threat. The forthcoming monetary tightening in the US is another concern because it could trigger financial market volatility, capital outflows and currency depreciations, and raise financial stability risks in the region. Finally, the conflict between Russia and Ukraine has pushed elevated energy prices even higher, adding to inflationary pressures while also increasing uncertainty about the global recovery. 

Q: How has trade held up? Have there been any significant shifts in supply chains or the products in demand?  

Mr Park: Asia’s recent trade performance has been strong. After bottoming out following the first wave of the Covid-19 pandemic in mid-2020, Asia’s merchandise trade recovered fast. Trade volume growth accelerated at double-digit rates, reaching 19.8% (year-on-year, three-month moving average) by June 2021 before settling down to 8.4% in November. In the first 11 months of 2021, Asia’s trade grew by 14.2%, while global trade grew by 10.7%. The rebound in Asia’s trade growth was underpinned by the release of pent-up demand supported by macroeconomic stimulus programmes and economic recovery around the globe, along with gradual progress in vaccine rollout in the region. 

Mr Rana: International trade has held up well in Asia. The pandemic saw a significant uptick in trade values and volume growth, which was very slow in the run-up to 2020. Electronics demand increased very strongly and, more broadly, durable goods spending globally increased and trade activity is now at favourable levels. As mobility restrictions ease globally, people are gradually shifting some spending back into services and Asian exporters are now facing slowing demand volume growth.

Mr Neumann: The global shift of households spending away from services and towards goods has boosted trade across the region. Asian economies excel in producing the goods the world demanded over the past couple of years, from electronics to toys, and from furniture to kitchen appliances. Meanwhile, unlike other parts of the world, relatively effective pandemic control policies allowed Asian factories to maintain operations with fewer disruptions. Asia thus emerged as the ‘supplier of last resort’ of manufacturing goods for the world during the pandemic. The pandemic has therefore reinforced Asian supply chains, rather than shifted production elsewhere as many had feared. 

Mr Baig: There have been no major changes yet in the supply chain with respect to geography, but producers have been forced to recalibrate to areas of demand like personal protective equipment and consumer electronics. Overall, trade has held up well. Global trade volume, led by Asia, grew by more than 10% in 2021 and is likely to expand by another 4% to 6% this year.

Ms Nguyen: The concentration risks in China, and also rising geopolitical tensions between China and the US, has shifted supply chains to favour India and south-east Asia, but especially India. That said, India’s ability to absorb this is contingent on its policy to make it favourable to build manufacturing there as well as beefing up its infrastructure, from roads and railways to easing labour regulations and foreign direct investment restrictions. The good news is that India understands this and is putting a lot of capital into building infrastructure, as highlighted in the fiscal year 2023 budget but also longer-term plans. 

Q: Is rising inflation putting pressure on the region? What is being done to counter this? 

Mr Park: Inflation in developing Asia has been relatively more manageable than elsewhere in the world. Regional inflation actually fell to 2.6% in 2021, from 3.2% in 2020. And while inflation did rise over the course of 2021, reaching 3.1% in December, this is still well below inflation rates in other parts of the world, including the US (4.3% average in 2021, 7.5% in January 2022), Latin America and the Caribbean (9.3% average, 9.7% in December), and sub-Saharan Africa (10.7% average, 10.1% in December). 

Inflation developments are at different stages across Asia-Pacific, but are broadly more moderate compared with increases seen globally

Vishrut Rana

Mr Rana: Inflation developments are at different stages across Asia-Pacific, but are broadly more moderate compared with increases seen globally. Central banks in New Zealand and South Korea were the first in the region to begin monetary policy normalisation, taking into account rising domestic inflationary pressures. In contrast, in India inflation reached the top of the central bank’s target range but the bank has not raised interest rates for now in an effort to support the economic recovery. In Australia inflation is gradually ticking higher, but policy rates remain on hold for now. In the rest of the region, core inflation remains low and is only rising gradually as domestic demand recovers. As a result, central banks have little pressure to tighten monetary policy, but they will be closely watching policy rate developments in the US and how they affect capital flow pressures in the region.

Ms Nguyen: Inflation is indeed rising in the region, although not everywhere; it is actually slowing in China as domestic demand slows there. Elsewhere in Asia, inflation is on the rise due to higher commodity prices and stronger demand. The Ukraine-Russia conflict will only push commodity prices higher, stoking price pressures. Inflation is still contained right now as it is within central banks’ targets, allowing them to refrain from hiking rates, except for South Korea. But the region as a whole is a net importer of commodities, except for Australia, Indonesia, Malaysia and Brunei. Net importers will not only incur higher importing costs but also face higher domestic prices, as households and corporates have higher input costs. 

Mr Neumann: Compared with other parts of the world, Asia is facing less acute price pressures. While raw material costs have climbed and pinched profit margins in the region’s main manufacturing economies, labour costs have remained more stable and broader consumer price inflation has stayed relatively subdued. The comparatively benign inflation outlook reflects the region’s more calibrated fiscal policy over the past couple of years, avoiding excessive demand pressures at times of more constrained supply. In addition, effective pandemic management policies in key markets helped avoid major, prolonged production disruptions. A key challenge, however, is the relentless climb in energy prices, with many of Asia’s economies ranking among the biggest net oil importers in the world. 

Mr Baig: Even though rising fuel and food prices are a source of concern, overall inflation pressure in the region is not nearly as severe as it is in the US or Europe. With the economic recovery lacklustre, wage demand and inflation expectations have remained largely muted. Central banks in this part of the world are not feeling as much pressure to normalise policy as their US counterparts. 

Q: Has the pandemic set back developing Asia? What can be done to bring it back to an equal footing? 

Mr Park: Economic recovery is still incomplete in the region. After developing Asia experienced its first contraction in six decades in 2020, even the strong 6.9% growth outcome last year was not enough to get things back to ‘normal’. The region’s GDP level last year was 4.3% below its pre-pandemic trend, i.e. the level where GDP would have been if Covid-19 had not happened. The extent of pandemic setbacks varies substantially in the region. East Asia avoided contraction in 2020 and grew rapidly in 2021 on buoyant external demand, leaving GDP just 1% below its pre-pandemic trend. Expansion in central Asia, supported by higher commodity prices, left the economy 5% below its pre-pandemic trend. In south Asia, the gap of 8% despite strong growth last year reflects the sharp contraction in India in 2020. 

Mr Baig: The pandemic has set back the whole world, and Asia is no exception. As the pandemic fades, the emergency focus of saving lives and livelihoods will make way for dealing with large public debt burdens, changing nature of jobs and travel, climate change and inequality. Also, countries have to be strategic to pursue their long-term interests, be it by embracing global trade more ardently or by pursuing regional partnerships to increase economic and financial resiliency. 

Mr Rana: Developing Asia faced significant economic costs from the pandemic as a result of lockdowns and the substantial blow to the region’s informal sectors. The pandemic resulted in a period of lost growth, which will not be recovered. However, the growth trajectory for developing Asia remains favourable. Potential growth in the region remains unchanged from the pandemic because the key growth drivers – technology, a growing and upskilling workforce, and broader economic stability – remain in place. As a result, with time the developing Asian economies are likely to resume their normal vibrancy, when policy-makers, firms and households can gradually repair their balance sheets.

Ms Nguyen: China has been trying to expand market access by joining trade agreements to counter the geopolitical headwinds. South-east Asia is doing the same, with Vietnam expanding trade links and Thailand looking to diversify sources beyond China. India is trying to make up for its underperformance in trade through more supportive policy. The key policies are to normalise activities to help domestic consumption and investment, and expand access to global markets as well as improve competitiveness for capital flows, especially in targeted sectors.

Mr Neumann: The pandemic has left some lasting scars. Despite the resilient performance of many economies over the past two years, disruption to lives and livelihoods was severe. Especially among the region’s poorer economies, with more constrained fiscal resources, many students have seen their education severely disrupted and many households had to resort to their hard-won savings to survive. A period of catch-up thus looms for Asia’s economies, not in terms of headline growth, perhaps, but for those who will strive to restore their lives and carefully laid plans. The aggregate effect of this is that consumer spending could remain a little more restrained over the coming years. 

Q: What aspects of Asia’s economy will set the pace for the post-pandemic world?

Mr Rana: The region’s trade focus will continue to set the pace globally because goods demand will remain strong. High-growth developing economies will remain key growth areas for investors and global economic activity, while the high-income economies will retain their focus on high-value-added manufacturing and technology.

Mr Neumann: As Asia’s economies emerge from the pandemic, exports will likely fade in importance. As world demand shifts away from goods and back towards services, the risk of a ‘trade hangover’ looms, an at least temporary dip in the region’s shipments. That leaves local demand as the more important driver. In particular, investment is bound to strengthen, with governments refocusing on infrastructure and companies rolling out ambitious capital expenditure plans. The need for greater investment has been powerfully revealed by the pandemic, because it has left even Asia’s vaunted manufacturing sector at times struggling to keep up with global demand. 

Mr Baig: Asia hosts the most people in the world; it is also the home of the greatest number of young people in this world. This youthful dynamism, exceptions notwithstanding, should fuel a move towards a tech-friendly society that is adaptive to the changes taking place. Asia is blessed by ample capital, an already-established set of deep trade linkages and a rapidly expanding entrepreneurial class. Many challenges lie ahead, but Asia has the wherewithal to face them.

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Read more about:  Asia-Pacific , Global economies , Policy
Kimberley Long is the Asia editor at The Banker. She joined from Euromoney, where she spent four years as transaction services editor. She has a BA in English Language and Literature from the University of Liverpool, and an MA in Print Journalism from the University of Sheffield. Between degrees she spent a year teaching English in Japan as part of the JET Programme.
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