- The worst is behind us but it's now time to do the hard yards. As relief measures taper and the credit impulse wanes, the true economic costs of COVID-19 will emerge.
- We expect Asia-Pacific to shrink by -2% in 2020 and rebound by about 7% next year leaving the region almost 5% below the pre-COVID trend by end 2021.
- China's recovery continues but is not yet self-sustaining. India's path to a new normal will be blighted by permanent economic damage. Japan's post-Abenomics future will hinge on household confidence.
- China's potentially harder turn toward self-reliance, in response to geopolitical tensions, would move the economy closer to our downside medium-term growth scenario.
The pandemic is not over but the worst of its economic impact has passed. New waves of infection are, in most cases, resulting in lower fatality rates. Governments are adopting more targeted strategies for flattening COVID curves, with less recourse to nationwide lockdowns. Households are spending again on services as well as goods. COVID-19 is proving hard to beat but prospects have brightened for a widely available vaccine by mid-2021 (S&P Global Ratings' baseline assumption). In the meantime, people are moving and spending more, testament to a world becoming accustomed to COVID-19. Trade growth has bottomed. The recovery is underway.
The hard work now begins. As relief measures taper, we will find out how much economic damage has been wrought. Fading temporary tax cuts, wage subsidies, loan moratoriums, and other measures will force banks, businesses, and households to make hard decisions. Furloughed jobs may become permanent job losses. Businesses only getting by due to grace periods on servicing debt may be forced to close up shop. Banks will have to assess whether to restructure or foreclose on questionable loans. The true deterioration across balance sheets will become apparent even as economies reopen.
Jobs will shape the recovery. The scale of reported job losses across countries varies due to statistical quirks, support policies, and the unique features of each market. Still, we know that COVID-19 strikes at jobs-rich sectors of the economy and that positions are easily lost and hard to regain. We expect employment to return to pre-COVID trends only by 2022, at the earliest, in most cases. This will put a lid on wages, drag on consumer spending, and keep inflation low across the region. With fiscal policies and financial conditions likely to tighten, central banks have no option but to keep policies exceptionally easy.
Strategic choices in the U.S.-China relationship are crystallizing with profound implications for productivity in the long term. China's new "dual circulation" policy may represent a harder turn toward self-reliance in industries where China sees risks of global supply chain disruptions. Such industries range from software and semiconductors to energy and agriculture. Our analysis suggests that a more self-reliant China could mean an average growth rate closer to 3.5% through 2030 compared with the 4.6% in our base case (see "China Credit Spotlight: The Great Game and An Inescapable Slowdown," published Aug. 29, 2019). The result of the U.S. election may affect the tone of this relationship but have a muted impact on what really matters from an economics perspective—we have said since 2018 that this is technology not trade.
Our forecast for Asia-Pacific growth is -2.0% in 2020 and 6.9% in 2021. We revise down 2020 from -1.3% as an upgrade in China is offset by the large downgrade in India and moderate downgrades elsewhere. We revise up 2021 as more of the recovery is delayed until next year. We now expect Asia-Pacific's economic activity--the level of real GDP--to be about 5% below our pre-COVID forecasts by the end of 2021--excluding China, that gap widens to over 7%.
Risks to Asia-Pacific growth are more balanced than at mid-year but still on the downside. Countries are managing the economic impact of COVID-19 and prospects for an early vaccine have improved. Still, the pandemic is proving hard to beat and can still impose material economic costs when cases resurge. The U.S.-China relationship remains a downside risk, mainly for the medium term, with only a remote likelihood of a far-reaching post-U.S. election rapprochement. The prospects for trend growth beyond COVID-19 are deteriorating as major countries--including China and India--threaten to turn more inward.
In the rest of this article, we focus on four themes: trade, jobs, real interest rates, and the credit impulse before providing an update for each economy.
Resilience Of Trade--The Upside Surprise Of 2020
What trade recession? The short-term fallout from a worsening U.S.-China relationship and COVID-19 has been limited. Asia-Pacific's export growth has bottomed (see chart 2). The demand for goods, especially electronics, has met resilient supply chains providing a key support for open economies in the region. Some economies (Taiwan) have benefitted much more than others (Japan).
China and the U.S., the two trade war protagonists, are supporting Asia's trade for now. Shipments to China, measured in U.S. dollars, have recovered COVID-19 losses and have steadied, while those to the U.S. have staged a remarkable rebound since April. Exports to the rest of the world, including Europe and intra-Asian trade, have bottomed but remain far weaker.
For now, demand for consumer and office technology is driving Asia's exports, marking a very different cycle from the 2017-2018 upturn which saw a broad-based expansion in exports, including capital goods. For trade to become a sustained driver for Asia's growth, firms will have to step up their investments, increasing demand for machinery and equipment. Given the deterioration in corporate-sector balance sheets, this may be a long time coming.
The falling-out between the U.S. and China has not yet led to any large shifts the latter's share of Asia-Pacific exports. China's shares in computers and telecom equipment dipped after the imposition of U.S. tariffs in early 2019 but have since stabilized. China's share in electrical machinery, which includes many tech components, has risen.
Keep in mind that today's trade patterns reflect existing supply chains--which may look different in five years. The strategic choices made by China in response to higher geopolitical uncertainty will contribute to that future supply-chain landscape. "Dual circulation," which has emerged as a key concept ahead of next year's five-year plan, may be aimed at reducing China's own supply chain risk by increasing self-reliance in a range of industries from semiconductors and robots to energy and agriculture. If dual circulation results in less technology transfer into China, via imports or investment, and a less efficient allocation of capital and labor, we expect its productivity growth to continue slowing. The more self-reliant that China becomes, the slower its economy will grow, at least over the next decade.
A Two-Step Quick-Slow Jobs Recovery
Trade and manufacturing will contribute to Asia-Pacific's growth but a self-sustaining recovery will require a service sector rebound. Of Asia-Pacific's 1.63 billion workers, about 270 million or 17% of the total worked in manufacturing, based on International Labor Organization estimates for 2019. This is a large number but it is only 7 million jobs higher than a decade ago. About 18% of the total, or 300 million people, worked in the hospitality and retail sectors, an increase of more than 60 million jobs over the past decade. Other services account for more than 440 million jobs. Only when the service sector normalizes will the region get back to full employment.
There is good news. Employment has bounced more than expected in many economies as businesses recall some workers after a wave of layoffs during lockdowns. Many of these layoffs will turn out to be permanent, however, as some sectors live with suppressed demand and some firms exit altogether. Tapering unemployment benefits in some economies, for example Australia, will also encourage more people to start looking for work. Together, these factors will mean that unemployment rates may edge higher and fall only gradually through 2023.
Little Room For Real Policy Rates To Fall Further
Real credit costs in Asia-Pacific are unlikely to fall much more after aggressive monetary and credit policy easing earlier in 2020. The anchor for the cost of credit is the real policy rate, measured using each central bank's target rate and subtracting an estimate of expected inflation. Across the region, nominal policy rates have either hit a near "zero lower bound" or a level that central banks seem reluctant to push below. At the same time, underlying inflationary pressures are falling as demand remains suppressed. These two forces will prevent real policy rates from falling further.
Central banks are not out of ammunition but they will have to rely on less traditional tools, quantities more than prices. This means more balance sheet action, including ongoing asset purchases (even in emerging markets) and enhanced lending facilities to support credit to the real economy. Unfortunately, central banks will be sailing into the stiff headwind of a weakening credit impulse.
Credit Impulse Wanes As Relief Measures Taper
A waning credit impulse will drag on growth over the coming quarters. The credit impulse--defined as the change in the flow of credit as a share of GDP--surged in many economies in the early stages of COVID-19 (see chart 8). Note we use trend output so this does not reflect plunging GDP. A surging credit impulse reflected timely policy measures, including new central bank lending facilities designed to get funding to the real economy. Much of this credit was plugging holes in corporate cash flow, keeping the lights on and staff employed during shutdowns. Now, credit impulses are waning for good and bad reasons. The good reason is firms are reopening in many sectors and the cash-flow holes are shrinking. The bad news is that some firms are exiting their business after a sustained period of stress while lenders are starting to discriminate between borrowers more as moratoriums, forbearance, and relief measures taper. We expect a weaker credit impulse to water down investment by firms, at least through 2021. This is an important factor in our growth forecasts in many economies, including Australia and China.
A Tour Through Asia-Pacific
See below a brief overview of our assumptions and forecasts of growth, inflation, and macroeconomic policies for individual economies across the region.
Australia: Still At -4% For 2020
We maintain our GDP forecast at -4.0% in 2020 but revise lower to 4.2% in 2021 (from 5.3%). While the COVID outbreak in Australia's second most populous state, Victoria, hit third-quarter activity, early evidence is suggesting that consumer activity is bouncing back quickly in places where the pandemic is contained, helped by robust policy support. Our downward revision for next year reflects our expectation that tapering relief measures could slow but not stall the pace of the recovery. Business failures and fragile confidence will drag on hiring, meaning that a rising proportion of job losses are permanent. We expect the broad unemployment rate, including underemployment, to remain in the mid- to high-teens through 2021 at least. In turn, this should keep inflation below or close to the bottom end of the central bank's target range until at least 2022.
We assume a gradual tapering over the next two years in fiscal support, including wage subsidies and transfers to households. To offset fiscal drag, the Reserve Bank of Australia (RBA) will likely keep its policy rate at its effective lower bound of 0.25% through 2022 and, if needed, show more flexibility in its target for the three-year yield which is currently 0.25%. Like the U.S. Federal Reserve, the RBA is likely to take an expansive view of employment and refrain from tightening until employment is approaching the pre-COVID trend or inflation threatens the upper band of the target range. Risks to the outlook are more balanced but still on the downside. The key domestic risk is greater corporate sector damage that weighs on hiring and job creation.
China: 2020 Growth Revised Up To 2.1% On Strong Second Quarter
We revise this year's growth to 2.1% (from 1.2%) and revise down next year's GDP forecast to 6.9% (from 7.4%). The recovery is for real but it remains unbalanced and is not yet self-sustaining. Consumers are downbeat, shaken by an income shock in early 2020 and a sluggish labor market, and this is reflected in retail sales which have only just risen above last year's levels. As more of the service sector is turned back on, hiring should recover and consumption will pick-up but we expect this to be gradual. The drivers of the recovery--infrastructure investment, property, and trade--will not supply enough jobs to provide a sustainable boost to demand. Private investment remains soft and this will also weigh on long-term growth prospects.
Underlying inflation--excluding volatile food and energy prices--remains low at less than 1%, a testament to soft private demand. As jobs return, both cost-push (wages) and demand-pull pressures should gradually lift core inflation back above 1%. Producer prices will remain volatile as stimulus supports, and then drains, demand in heavy industrial sectors including coal and steel.
We expect a substantial fiscal tightening in 2021 assuming that a self-sustaining recovery in private demand takes hold. Together with low core inflation, which is keeping real interest rates elevated, the central bank will have to keep policy rates at current levels at least through 2021. Macroprudential measures, especially lending standards, may also need to remain loose to prevent a premature and sustained tightening in financial conditions, especially for firms that increased their leverage during the early stages of the COVID recovery.
Hong Kong: A Deeper Contraction In 2020 At -7.2%
We expect a sharper -7.2% drop in output this year compared with -4.7% previously. Weak travel activity should weigh on service exports over the first half of 2021, but some normalization from exceptionally depressed conditions should shepherd in a GDP rebound to 5.3% in 2021; this is slightly higher than our prior forecast of 4.9% but off a much lower base. Trade is recovering faster than other parts of the economy supported by gradual recovery of manufacturing in mainland China. Employment remains very weak although job losses have now paused. Long-term policy uncertainty has risen and we expect this to hold back capital expenditure.
Inflation has plummeted in recent months and substantial slack in the service sector and labor market is likely to maintain substantial downward pressures on wages and prices. A weaker Hong Kong dollar--through its peg to a depreciating U.S. dollar--has helped offset only some of these pressures. We forecast inflation to average about 1% for 2020 and climb gradually in 2021.
Policymakers are signaling that the substantial fiscal support launched this year will taper as domestic activity normalizes. For example, wage subsidies will phase out during the fourth quarter of 2020. This tapering will be offset, though only partially, by the Hong Kong Monetary Authority's decision to extended its loan repayment holiday for small businesses for an additional six months through April 2021. With nominal short-term rates unlikely to fall much further, lower inflation is pushing up real interest rates and tightening financial conditions.
India: Now At -9% For 2020
We revised our forecast for fiscal year 2020 to -9% earlier this month and expect a 10% rebound off an exceptionally low base in fiscal year 2021 (see "India's Economy Likely To Tank 9% Due To COVID," published Sept. 14, 2020). Difficulties in containing COVID-19 stalled the recovery and are inflicting substantial damage to the economy, including balance sheets and the labor market, which will dissipate slowly, if at all in some cases. A weak policy response, including a fiscal impulse--a measure of how much the budget is adding to or subtracting from demand--of about 1 percentage point of GDP, has done little to cushion the impact. The agricultural sector remains a relative bright spot but, overall, both consumption and investment are set to recover only gradually.
We expect policy support to remain limited, hampered by concerns of fiscal space and, for the central bank, stubbornly high inflation. We may see continued moderate progress on structural reform and this will be important for India to lift its post-COVID potential growth, which we have revised down to about 6.2% from 6.5%-7%.
Indonesia: Slightly Sharper Contraction Of 1.1% For 2020
We now expect growth of -1.1% for 2020, compared with our previous forecast of 0.7%, in part due to a weaker outturn in the second quarter. We lower 2021 to 6.3% from 6.7%, implying a shallower recovery as job losses are broadening. COVID-19 remains uncontained and testing rates remain low. Still, the government has refrained from strict lockdowns and mobility data suggest ongoing normalization. Overall, we expect domestic activity to recover during the third quarter of the year, helped by strengthening policy support. Fiscal measures amount to about 4.4% of GDP in 2020 while the central bank has cut its policy rate by 100 basis points and will buy about US$30 billion of government debt this year.
We expect muted inflationary pressures for the remainder of 2020 as declining spending and job losses reduce demand-pull and cost-push pressures. Looking into 2021, moderate currency depreciation and a demand recovery should keep average inflation close to the mid-point of Bank Indonesia's 2% to 4% target range.
We expect the extraordinary fiscal stimulus of 2020 to be unwound in 2021. The outlook for monetary policy has become more uncertain as Bank Indonesia has deployed new quantitative tools while its governance and mandate are being reconsidered. As long as depreciation pressures on the currency remain moderate, we anticipate policy will remain broadly steady.
Japan: Another Downward Revision For 2020, To -5.4%
We revise GDP growth down to -5.4% from -4.9%. For next year, our forecast is 3.2%, down from 3.4%. Chronically weak household confidence remains a persistent drag on the economy, notwithstanding Japan's relative success in containing COVID-19. Real private consumption has stagnated since 2014; in the first half of 2020, it fell 7% compared with the same period in 2019. Manufacturing has underperformed regional peers in the recovery thus far. This reflects some weakness in autos but also Japan's exposure to capital equipment rather than consumer products. Employment has fallen only moderately but temporary workers have borne the brunt of job losses. Even as they gradually return, the insecurity of these jobs will weigh on confidence.
We expect inflation to remain low and won't manage to approach 1%--a full 1 percentage point below the central bank's target--until 2023. Survey-based inflation expectations remain subdued and the probability of cost-push inflation from higher wages is remote.
We assume broad policy continuity under the new prime minister, confirmed in mid-September. Any additional fiscal impulse this year would likely be moderate, and followed by a large fiscal tightening in 2021. With inflation stubbornly low and fiscal policy set to tighten, the Bank of Japan should retain its current yield curve control policies at least through 2022, with the short-term rate at -0.1% and the 10-year bond yield target at zero.
Korea: A Smaller 2020 GDP Decline Of About -1%
We edge up our growth forecast to -0.9% in 2020 (from -1.5%) and slightly reduce the 2021 growth forecast to 3.6%. New moderate waves of the pandemic have stalled normalization, which was proceeding quickly, and consumers have pulled back a bit on spending. Still, relative to many other economies, the economic damage in Korea has been limited. Firms had begun rehiring some of the irregular workers let go earlier this year before momentum waned as the pandemic returned. Peak-to-trough, the number of jobs fell by 4% after seasonal adjustment. We estimate getting back to full employment by the end of 2022 will require annualized jobs growth of near 5%--this is ambitious and we expect persistent slack in the labor market. Manufacturing should lead the recovery, helped by trade, but investment may remain sluggish until later in 2021.
Lingering underemployment and the erosion in inflation expectations in recent years should keep a firm lid on inflationary pressures. We expect inflation to remain below the Bank of Korea's 2% target until at least the end of 2022.
Over 2021 and 2022, we expect moderate fiscal drag. Fiscal relief measures have been timely and targeted, including cash transfers to households, and while new measures have been proposed as infections returned, we assume a tapering of support. The Bank of Korea appears reluctant to further cut its main policy rate, despite low inflation, in part due to financial stability concerns. We assume that the base rate remains at 0.50% through 2022 with additional support, if needed, coming from new lending facilities (which currently cost 0.25%). The key domestic risk remains very low inflation, or deflation, which would increase real interest rates and tighten financial conditions.
Malaysia: Big 2020 Downward Revision, To -5%
We slash our forecast for full-year 2020 growth to -5% from -2% previously, in part due a weaker-than-expected second quarter. We revised our growth forecast for 2021 moderately higher to 8.4%, from 7.5%, due to stronger base effects. The deeper hit to the economy means more damage to micro, small and midsized enterprises, which will in turn lead to greater lasting loss of output. Recovery is now underway including in employment and, as in many other economies, manufacturing is bouncing back faster than services. New COVID-19 outbreaks have been small and contained so far.
Fiscal stimulus has supported demand this year and we assume a moderate tightening in 2021. Monetary policy will stay accommodative as substantial slack keeps core inflation low and steady. The banking system has a high proportion of loans under moratorium, and as these expire, additional loan-loss provisions could ensue. While banks remain resilient, this could tighten financial conditions.
Philippines: 2020 Forecast Is Slashed To Almost -10%
We revise our 2020 growth forecast to -9.5% (previously -3%) with minimal changes to subsequent years, implying a larger permanent loss in output. Renewed lockdowns from August in major metropolitan areas, including metro Manila, together with lingering household caution amid stubbornly high COVID-19 infection rates and limited fiscal policy support are suppressing consumer spending and resulting in widespread job losses. Assuming an eventual flattening of the COVID curve, especially in 2021, activity can begin to normalize. However, we expect permanent damage to corporate sector balance sheets and the labor market, which will leave GDP well short of where it would likely have been in the absence of COVID.
Inflation has not yet fallen as much as domestic demand, due in part to the temporary extra duties on oil imports. As a result, we have revised up our inflation outlook (see table 2).
We anticipate only two more rate cuts from the central bank this year before a fairly long pause. The only "upside surprise" so far has been the strength of the peso. This, however, is more a function of the improvement in the current account, due to a sharp dip in domestic demand.
Singapore: Growth Revised Lower, To -5.8%
We expect the economy to contract by 5.8% in 2020 (from -5%) and grow by 6.3% in 2021 (from 6.7%). Any future reopening of international borders is likely to be gradual and restrictions will remain a lingering drag on tourism and travel. Social distancing will dampen the services sector and delayed construction projects will likely resume only gradually. Goods trade, especially electronics and biomedical products, continue to be the brighter spots. With weakness concentrated in jobs-rich areas of the economy, we expect the labor market to remain soft for some time and for the unemployment rate to edge higher and start falling only in the second half of 2021.
Core consumer prices have plummeted into deflation and upward pressures may remain muted so long as the output gap persists. Even with the recovery now underway, we expect inflation to remain below 2% through 2023.
Fiscal support, including targeted support measures, wage subsidies, foreign worker waiver and rebates, and support for businesses, is likely to taper gradually. We expect at least one more downward re-centering of the Monetary Authority of Singapore's (MAS) nominal exchange rate band, if not in October then next April. A key domestic risk is a period of sustained deflation, which would elevate real interest rates and increase the debt service burden on corporates and households.
Taiwan: Upward Revision For 2020 Forecast, To 1.0%
We revise our growth forecast for 2020 to 1.0% (from 0.6%) and that for 2021 to 3.0% (from 3.2%). The economy continues to demonstrate resilience to the COVID-19 outbreak. Authorities were swift to contain total cases well below 600 without resorting to very stringent restrictions. Strong linkages with the global technology supply chain combined with reshoring of firms into the country will maintain robust growth in fixed investment. A steady increase in export orders to China will offset the demand weakness from other regions. Although consumer spending will be a major setback to growth this year, it is showing signs of a recovery.
We revise up our CPI forecast to -0.3% (from -0.5%) in 2020, as downward pressures ease in line with the recovery. That said, Taiwan is a low-inflation economy and expectations are likely to keep inflation slightly below 1% in 2021.
The government announced fiscal stimulus worth about 6% of GDP, including distribution of cash vouchers to households, and this is set to fade in 2021. Taiwan's central bank left rates unchanged at 1.125% following a 25 basis point cut in March. The bank is likely to keep interest rates unchanged, but could ease its policy stance further if the growth scenario unexpectedly weakens. While risks are overall balanced, political tensions in the Taiwan Strait could dampen FDI inflows and exports.
Thailand: We Cut Our 2020 Forecast, To -7.2%
We revise our GDP forecast to -7.2% for 2020, compared with our previous forecast of -5.1%. The big drag on growth is from the tourism sector, which remains completely reliant on limited domestic tourism. The sector will be subdued for several months more until global travel normalizes, based on our current assumption of a COVID vaccine by the first half of 2021. We expect tourism to rebound following that period, supporting GDP growth of 6.2% in 2021 and 4.4% in 2022.
However, the deep shock to the tourism sector has put severe strain on businesses and employees and this will leave scars on the sector. We expect this sectoral displacement to result in relatively large permanent losses in output in Thailand of 5.8%, compared with 3.2% for the region excluding India.
Fiscal stimulus has so far focused on indirect support including credit guarantees rather than on direct spending. Room for interest rate cuts is limited as the policy rate is at 0.5% with core inflation averaging about 0.3% this year, and the Bank of Thailand has signaled reluctance to cut further toward zero. Neutral rates have fallen due to structural factors and we expect policy rates to remain close to zero through the forecast horizon.
Vietnam: 2020 Growth Revised Up, To 1.9%
We expect GDP to expand 1.9% this year, up from 1.2% previously. The economy is well-positioned to enjoy some lift from improving global trade, especially electronics. Tourism will remain largely absent for the foreseeable future, but domestic mobility is normalizing faster than most other parts of the world. Overall, we expect Vietnam to be one of the leaders of the post-COVID recovery, able to close its output gap by 2022. We revise inflation forecasts higher, up to 2.5% in 2020 from 1.8% previously, in part due to moderately stronger-than-expected domestic demand.
We anticipate monetary policy will remain broadly unchanged. The State Bank of Vietnam has brought the dong back to around last year's levels, having only allowed a short period of depreciation at the peak of the crisis. The key domestic risk remains another COVID wave although authorities have shown their ability to quickly contain outbreaks.
|Real GDP Forecast|
|Change from June 2020 forecast (ppt)|
|(% year over year)||2019||2020||2021||2022||2023||2020||2021|
|Note: For India, the year runs April to following March, e.g., 2019--fiscal 2019/2020, ending March 31, 2020. ppt--percentage point.|
|Inflation (Year Average)|
|Note: For India, the year runs April to following March, e.g., 2019--fiscal 2019/2020, ending March 31, 2020.|
|Policy Rate (Year End)|
|Note: For India, the year runs April to following March, e.g., 2019--fiscal 2019/2020, ending March 31, 2020.|
|Exchange Rate (Year End)|
|Unemployment (Year Average)|
A Note On Our Coronavirus Assumption
S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
This report does not constitute a rating action.
|Asia-Pacific Chief Economist:||Shaun Roache, Singapore (65) 6597-6137;|
|Asia-Pacific Economist:||Vishrut Rana, Singapore (65) 6216-1008;|
|Research Contributors:||Lavanya Kaushal, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Nishant Nadkarni, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Additional Contact:||Vincent R Conti, Singapore + 65 6216 1188;|
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