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Economic Outlook Asia-Pacific Q4 2021: Growth Slows On COVID-19 And Rising China Uncertainty


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Economic Outlook Asia-Pacific Q4 2021: Growth Slows On COVID-19 And Rising China Uncertainty

New daily COVID-19 cases remain high in several parts of Asia-Pacific. This has prompted authorities in some jurisdictions to enforce new lockdowns. However, there is an increasing policy shift toward greater tolerance of COVID-19 outbreaks, especially in the emerging markets. This shift is partly driven by improving vaccination coverage.

Vaccination rates have picked up noticeably across the region since our last report. Indeed, some economies are catching up with the U.S. and Europe in terms of coverage (see chart 1). The advanced economies in Asia-Pacific are generally vaccinating their populations more quickly (excluding Taiwan) while the emerging economies of India and Southeast Asia (excluding Malaysia) generally continue to lag. The delta variant hit Southeast Asia particularly hard, and we lowered our GDP forecasts for four countries in August (see "Pandemic Is Disrupting 2021 Growth Outlooks In Southeast Asia," published Aug. 19, 2021).

Chart 1


Even as more economies consider living with COVID waves, pandemic response intensities have varied widely across Asia-Pacific over the recent months. Some economies have a high response intensity and will impose tight lockdowns for fresh outbreaks. Economies with a lighter response intensity are less willing to impose tight lockdowns in response to fresh outbreaks. A moderate group lies somewhere in between.

S&P Global Ratings' analysis (using standard clustering techniques) puts Taiwan, Vietnam, and New Zealand in the highest response intensities group while Korea, Japan, Indonesia, and Thailand have relatively lighter mobility reductions in response to outbreaks. The rest are in the middle (see chart 2). These preferences can change quickly and will likely evolve as vaccination coverage widens and the global pandemic situation improves. Overall, economies with high response intensity have a higher chance of intermittent lockdowns and may have a more gradual but also choppier path toward normalization.

Chart 2


Our bottom-line assessment is that, going forward, the fresh economic costs of pandemic escalations are likely to be lower across the region, but variation across geographies will persist.

Domestic Activity Slowing While External Demand Remains Robust

International trade continues to provide key support to Asia-Pacific growth. Robust goods demand globally has driven strong trade performance in the region. However, as the U.S. and European economies open up, their consumers are gradually spending more on services, which are largely non-traded. As a result, sequential export growth in Asia-Pacific has slowed and the impact will be felt more sharpy in the more open economies of the region. Importantly, trade activity is plateauing at high levels rather than declining. This means that trade will continue to provide some offset to weak domestic demand.

Despite some plateauing in trade, supply chains in key sectors such as computer chips, remain distressed. Supply bottlenecks crimp growth and raise upstream inflation pressures, potentially putting pressure on policy rates. The cause is mostly demand running well ahead of supply, reflecting key structural shifts on the demand side. In particular, more work from home has driven demand for computers and tech products higher; relocation from cities to suburbs has boosted demand for cars, which are big users of tech products; and the pandemic has led to companies moving away from just-in-time practices to holding higher levels of inventories. These demand pressures have been compounded by production disruptions due to localized outbreaks of COVID-19. S&P Global Ratings analysts believe the return to normal conditions could take 12-18 months as supply responsiveness in chip production is relatively low. In the interim, higher prices are benefiting firms in this sector despite the sluggish supply response.

China: A few different factors weighing on sentiment and economic activity

In China, private demand growth is still looking soft. Targeted lockdowns in July and August to contain delta-variant outbreaks have weighed on activity. Sequential growth is set to slow considerably in the third quarter. We do not expect large policy stimulus as policymakers are emphasizing "common prosperity," an effort to reduce inequality, over the quantum of growth. They remain wary of financial stability risks and are keen to cool property market excesses. There is also a background of limiting state support for various entities and reining in large private firms.

A spate of regulatory actions in China is weighing on both sentiment and economic activity. Over the past few months, policymakers have tightened regulations for:

  • Technology sector, where various anti-monopoly and data-security regulations have been enforced.
  • Gig economy, where companies such as Meituan (food delivery) and Didi (ride-hailing) have been asked to improve conditions for their operators, including minimum wages for delivery riders.
  • Internet gaming, where the authorities have restricted gaming time for everyone under 18, which is a significant blow to a large industry.
  • Private tutoring, where the authorities felt these companies were making child-raising too costly and effectively shut down the sector by making any profits non-attributable to shareholders.

Further uncertainty stems from property developer Evergrande, which is on the brink of defaulting, as of this writing. A default could have wide-reaching negative ramifications for other developers, suppliers and contractors, and the banks and financial institutions that lend to them. We do not expect the government to provide any direct support to Evergrande. We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy. Evergrande failing alone would unlikely result in such a scenario, given the property development sector is highly fragmented in China--Evergrande's market share is relatively low.

India: Indications of strong rebound after last COVID surge

In India, domestic macro indicators remain weak, though recovering. The April-June period saw a steep contraction in activity on the back of a severe COVID-19 wave, but high-frequency indicators suggest a strong rebound over July-September. Households and micro and small enterprises were most affected in the latest downturn and will slow the recovery while they repair their balance sheets.

Inflation remains relatively high, and public debt worries persist. Faster-than-expected tapering could cause capital flow risks as monetary policy in India remains highly accommodative with real interest rates in negative territory. Other fundamentals such as the reserve buffers and current account shortfalls are better than in 2013, when India was one of the "Fragile Five" economies caught in the crosswinds of Federal Reserve tapering.

Southeast Asia: COVID-19 waves lowered 2021 outlooks

Southeast Asia is facing persistent waves of infections from the delta variant of COVID-19. Their duration and severity have been more adverse than our previous baseline expectations. Although the new lockdowns this year have been less costly as economies adapted to reduced mobility, the longer durations have meant rising economic costs. As a result, we revised downward our 2021 growth expectations for key emerging Southeast Asian economies in August. Private consumption and services will be hit hardest by the pandemic while external demand will provide a buffer against further outlook deterioration.

High-income Asia: Outlooks stabilizing after pandemic escalation

The high-income countries in Asia-Pacific had managed earlier COVID-19 waves well but virus variants drove outbreaks in these economies and required lockdowns of varying intensity. These economies now have wide vaccination coverage, which will lower the impact of ongoing and subsequent pandemic waves. Trade and manufacturing continue to be key growth drivers. The region's electronics supply chain is a key beneficiary of the global microchip shortage. Private consumption started to recover in the first half of the year but the recovery stalled as authorities enforced lockdowns during the third quarter. Consumer activity should resume once lockdowns ease.

Asia-Pacific's Central Banks In The Vanguard

Inflation pressures are still muted in much of the region. However, core price inflation has picked up in some economies, including in China, Australia, New Zealand, and India. In the rest of Asia, core inflation remains low, given lockdowns and the resulting weakness in domestic demand. Given this backdrop of weak core inflation, real interest rates have only fallen moderately by 100 basis points despite aggressive policy easing (see chart 3).

Chart 3


Central banks of advanced Asia-Pacific countries are at the global vanguard and have begun the withdrawal of policy accommodation. These moves come ahead of the Federal Reserve and the European Central Bank. Moreover, some moves are not directly related to the expected achievement of inflation targets. Korea raised its policy rate by 25 basis points (to 0.75%) in August over concerns about elevated debt and financial stability. The Reserve Bank of New Zealand halted its asset purchases in July saying they were no longer necessary for monetary policy purposes, while keeping its policy rate at 0.25%. And the Reserve Bank of Australia decided in August to dial back asset purchases to A$4 billion per week, from A$5 billion, as the economy maintains strong momentum and the labor market recovers faster than expected.

Meanwhile, central banks in emerging markets remain on hold as inflation pressures are broadly controlled. Central banks in emerging Asia have some cause to ease policy, given that output gaps are negative. However, central banks are wary of tapering asset purchases and higher rates in the U.S., which could result in capital flow pressures in the region. This is a particular issue where inflation expectations are less well-anchored.

GDP Forecasts Mostly Lower For 2021, Unchanged In The Out Years

Growth outlooks for the remainder of 2021 have weakened moderately in Asia-Pacific due to persistent COVID-19 waves. These waves of infections are disrupting activity even in places where the pandemic was previously under control. Medium-term economic costs are set to be higher, given the additional strain on balance sheets for households and micro, small, and midsize enterprises. This important group will cut back on spending during the forecast horizon.

Our updated GDP forecasts appear in table 1. Since our previous forecast round, we have marked down 2021 growth for many Asia-Pacific economies. Southeast Asia has the largest reduction for this year's growth forecast, ranging 1 to 2 percentage points, with only a partial offset in 2022. New Zealand and Singapore are the only economies we expect to have faster growth in 2021 than our previous forecast. Our forecasts for the two largest economies in the region fell 30 basis points for China and unchanged for India. For Asia-Pacific as a whole, we now project growth at 6.7% this year, down from 7.1% previously. For 2022-2024, we see much slower growth of 4.5% to 5.2% in the region, led by a sharp reduction in China's growth.

Table 1

Real GDP Forecast
Change from June 2021 forecast (percentage point)
(% year over year) 2020 2021 2022 2023 2024 2021 2022 2023
Australia -2.4 4.2 3.3 2.8 2.5 -0.7 0.0 0.2
China 2.3 8.0 5.1 5.0 4.8 -0.3 0.0 0.0
Hong Kong -6.1 6.5 2.5 2.0 1.9 0.0 0.0 0.0
India -7.3 9.5 7.8 5.7 6.5 0.0 0.0 0.0
Indonesia -2.1 3.4 5.6 4.8 4.8 -1.0 0.4 -0.5
Japan -4.7 2.3 2.2 1.2 1.1 -0.2 0.1 0.2
Malaysia -5.6 3.2 6.0 5.2 4.6 -0.9 -0.3 0.2
New Zealand -1.2 5.4 2.7 2.8 2.7 0.8 -0.1 -0.1
Philippines -9.6 4.3 7.7 7.4 7.3 -1.7 0.2 0.1
Singapore -5.4 6.6 4.0 3.1 2.8 0.4 0.2 0.3
South Korea -0.9 4.0 2.8 2.5 2.4 0.0 0.0 0.0
Taiwan 3.1 5.5 2.9 2.6 2.5 -0.1 0.2 0.1
Thailand -6.1 1.1 3.6 4.2 2.9 -1.7 -1.3 -0.4
Vietnam 2.9 4.2 7.1 7.0 6.7 -3.1 -0.4 -0.1
Asia Pacific -1.5 6.7 5.2 4.6 4.5 -0.4 0.0 0.0
Note: For India, 2019 means fiscal 2019/2020 (year ending March 31, 2020); 2020 means fiscal 2020/2021 (year ending March 31, 2021); and so forth.

Risks Remain On The Downside

As we have argued throughout this pandemic, the health outcomes-to-economy risks remain on the downside until we reach a critical mass of vaccinations. Until then, highly contagious and potent variants, such as the delta variant, can spread quickly, capping mobility and slowing growth, in addition to the human costs. While some countries have made progress in vaccination, the risk of future outbreaks remains on the table. An exit from crisis necessarily involves mass vaccinations.

The other downside and rising risk relates to a changing growth path in China. New regulations and policies are aimed at common prosperity and greater self-reliance through dual circulation, which mark a shift in China's growth strategy. We have increasingly factored in lower emphasis on the quantity of growth in favor of factors such as deleveraging and lowering inequality so our baseline includes some of these dynamics. However, the shift in strategy runs the risk of dampening confidence, spending, and domestically generated growth.

Perhaps the larger risk involves China's medium-term growth outlook. As we argued in earlier research (see "China Credit Spotlight: The Great Game And An Inescapable Slowdown," published Aug. 29, 2019), China has benefited massively from integrating with the rest of the world in previous decades, including through the transfer of technology and best practices, which have boosted productivity and per capita growth. A model of excessive self-reliance runs the risk of materially slowing trend growth. The effects will not only be domestic. Given China's established position in propelling global growth, the impact of any material slowdown will be felt by a wide swathe of other economies as well.


Table 2

Inflation (Year Average)
(%) 2020 2021 2022 2023 2024
Australia 0.9 2.5 2.6 2.2 2.2
China 2.5 0.9 1.8 2.2 2.2
Hong Kong 0.3 2.0 2.0 1.8 1.7
India 6.2 5.8 5.0 4.5 4.5
Indonesia 2.0 1.7 2.9 2.8 2.8
Japan 0.0 -0.3 0.8 0.6 0.7
Malaysia -1.1 2.7 2.2 2.3 2.2
New Zealand 1.7 2.9 2.5 2.2 2.1
Philippines 2.6 4.5 2.2 2.5 2.5
Singapore -0.2 1.9 1.8 1.7 1.7
South Korea 0.5 2.0 1.3 1.3 1.3
Taiwan -0.2 1.6 1.1 1.0 0.9
Thailand -0.8 0.9 1.0 1.1 1.0
Vietnam 3.2 2.5 3.5 4.0 4.5
Note: For India, 2019 means fiscal 2019/2020 (year ending March 31, 2020); 2020 means fiscal 2020/2021 (year ending March 31, 2021); and so forth.

Table 3

Policy Rate (Year End)
% 2020 2021 2022 2023 2024
Australia 0.10 0.1 0.1 0.5 0.75
India 4.00 4.25 4.75 5.25 5.25
Indonesia 3.75 3.50 4.00 4.50 4.50
Japan -0.10 -0.10 -0.10 -0.10 -0.10
Malaysia 1.75 1.75 2.00 2.50 2.50
New Zealand 0.25 0.50 1.00 1.25 1.25
Philippines 2.00 2.00 2.00 2.75 3.00
South Korea 0.50 1.00 1.50 1.50 1.50
Taiwan 1.13 1.13 1.38 1.38 1.38
Thailand 0.50 0.50 0.50 0.50 0.50
Note: For India, 2019 means fiscal 2019/2020 (year ending March 31, 2020); 2020 means fiscal 2020/2021 (year ending March 31, 2021); and so forth.

Table 4

Exchange Rate (Year End)
2020 2021 2022 2023 2024
Australia 0.77 0.73 0.74 0.74 0.75
China 6.52 6.45 6.40 6.35 6.30
Hong Kong 7.75 7.8 7.8 7.8 7.8
India 72.9 75.0 76.0 77.0 78.0
Indonesia 14,050 14,500 14,650 14,800 14,950
Japan 103.5 110.0 110.5 111.0 111.5
Malaysia 4.01 4.180 4.220 4.250 4.270
New Zealand 0.72 0.71 0.73 0.74 0.75
Philippines 48.04 50.35 51.16 51.16 51.09
Singapore 1.32 1.35 1.34 1.34 1.33
South Korea 1088 1172 1180 1173 1165
Taiwan 28.5 27.9 28.0 28.1 28.2
Thailand 30.04 32.80 33.00 32.80 32.50
Note: For India, 2019 means fiscal 2019/2020 (year ending March 31, 2020); 2020 means fiscal 2020/2021 (year ending March 31, 2021); and so forth.

Table 5

Year average (%) 2020 2021 2022 2023 2024
Australia 6.5 5.3 4.7 4.6 4.5
China 5.7 5.1 5.0 4.9 4.8
Hong Kong 5.8 5.6 4.6 4.1 3.8
Indonesia 6.2 6.4 5.8 5.5 5.2
Japan 2.8 2.8 2.5 2.4 2.3
Malaysia 4.5 4.8 4.4 4.0 3.7
New Zealand 4.6 4.2 4.1 3.9 3.8
Philippines 10.4 7.9 6.8 5.6 4.5
Singapore 3.0 2.7 2.4 2.3 2.3
South Korea 4.0 3.7 3.1 3.0 3.0
Taiwan 3.8 3.7 3.6 3.5 3.5
Thailand 1.7 2.2 2.0 1.7 1.4

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The views expressed in this report are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

Global Chief Economist:Paul F Gruenwald, New York + 1 (212) 437 1710;
Asia-Pacific Economist:Vishrut Rana, Singapore + 65 6216 1008;

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