Throughout 2020, Asia’s success in controlling Covid-19 has made it the champion of the global economy. As Europe and the United States were mired in deep recessions, much of Asia escaped with a shallower recession or even continued to grow.
But as Western economies prepare for vaccine-induced rebound which is expected to bring production back to its pre-pandemic scale by the end of this year, parts of Asia are still crippled by the coronavirus. As a result, although the region’s production is already above its pre-pandemic level, slower growth is expected in the coming months.
Launching its new regional outlook last week, the Asian Development Bank said the region’s economies were diverging and more waves of Covid-19 posed a major risk.
“New epidemics continue, in part due to new variants, and many Asian economies face challenges in procuring and administering vaccines,” said Yasuyuki Sawada, chief economist of the AfDB.
The AfDB has projected 5.6% growth in developing Asian economies in 2021, driven by the growth of 8.1% in China and 11 percent in India. But the lingering threat from the coronavirus means the risks to that outlook are skewed downward.
“Six months ago, or eight months ago, I would have said Asia was going to be ahead of the game because Asia can control Covid,” said Steve Cochrane, chief economist Apac at Moody’s Analytics in Singapore. .
But the picture has changed, with India suffers a severe wave of the virus, and still high cases in countries like Indonesia, the Philippines and Thailand. Thailand cannot reopen its crucial tourism industry.
More subtly, countries like Japan only control the virus with restrictions that keep parts of the economy in hibernation. “Some countries need vaccines to control Covid,” Cochrane said. “Others need it to open up to international travel and tourism.”
The promise of over 6% growth in the United States this year, following President Joe Biden’s fiscal stimulus, would normally make Asian exporters lick their lips.
The outlook, however, is more subdued than the record US growth generally suggests: Americans have already bought a lot of goods during the pandemic, while higher US interest rates would mean tighter financial conditions. in Asia.
“Adding a stimulus at this point, from a goods perspective, is a real test of whether the needs are insatiable,” said Freya Beamish, chief economist for Asia at Pantheon Macroeconomics. As the economy opens up, American consumers will likely pay for the services they were denied during the lockdown – like meals and hairstyles – rather than replacing their televisions again.
There will still be a fallout from the US stimulus, Beamish said, noting that service providers also needed equipment. “We believe people will find new products to buy and Asia will benefit.” But she added, “We believe that China will benefit proportionately less from the resumption of services than from the resumption of manufacturing.”
Whether the additional demand for goods in the United States is large or small, it is clearly positive. In contrast, higher US interest rates and a stronger dollar would threaten many emerging Asian economies with a repeat of the “taper tantrum” of 2013.
With increased financial integration and foreign currency borrowing, the pain of rising US interest rates quickly spread across the Pacific.
“A stronger dollar is no longer an outright blessing for Asia,” said Frederic Neumann, co-director of Asian economics at HSBC in Hong Kong. “It helps exports but tightens financial conditions.”
However, inflation is subdued in most emerging Asian countries and the ADB has said the risk of a US-induced shock to financial conditions “remains manageable for now.” He said economies such as Sri Lanka and Laos would be vulnerable if such a shock were to occur.
Coronavirus Business Update
How is the coronavirus wreaking havoc on markets, businesses, our daily lives and our workplaces? Stay informed with our coronavirus newsletter.
Some Asian economies are well positioned for the next few years, particularly Taiwan and South Korea, which are exposed to the semiconductor cycle. “Judging from the semiconductor shortages, it doesn’t look like the electronics cycle will end in the next two or three quarters. It helps them get through this difficult time, ”said Neumann.
But other Asian economies will find themselves in the less familiar position of relying on domestic demand for growth. One of the biggest question marks is China itself, where first quarter numbers suggest the economy has lost some momentum.
“Chinese domestic demand still has a way to go,” Cochrane said. “We currently forecast 8% growth in China in 2021, but that depends a lot on policymakers and how quickly they forgo the stimulus and introduce friction in areas like construction.”