Asia has weathered the Covid-19 pandemic better than the rest of the world in terms of infections and fatalities, though the economic impact has been no less substantial. Naturally, given its large population, Asia has experienced the most cases. But adjusted for population size in early November, cumulative infections amounted to about 18,000 per 1 million in Asia, compared to 74,000 in Europe and 134,000 in North America. The difference is equally stark for fatalities, which stood at 290 per million in Asia compared to 1,600 in Europe and 2,800 in North America.
Yet despite dramatically better performance handling the virus, the damage to Asia's economy was not materially different than for other regions. Looking ahead, the pandemic is not over yet, and a resurgence in cases in the Northern Hemisphere’s winter could push case rates upward again, pressuring governments to reinstate growth-depressing containment measures.
The biggest difference between the current recovery and the one following the global financial crisis (GFC) is the role of China. Then, China was the engine of the recovery, using massive credit-financed infrastructure programs to stimulate its economy – and in the process, through a surge in commodity and capital goods imports, fueling the rest of the world. In the current recovery, China rebounded early but quickly settled into a much more modest growth trend this year. While the annual GDP comparison with 2020 will look great (the International Monetary Fund forecasts an 8.1% rise), the average of the four quarterly growth rates in 2021, at an expected 4.1%, will be lower than the pace of recovery in Europe or the US. The IMF forecast is looking for a reacceleration in that quarterly pace in 2022. Yet energy supply issues, unresolved trade frictions with the US, and a stressed housing sector suggest downside risk to the 5.7% growth forecast for 2022.
India's recovery has been more volatile compared to most of its peers. After a strong initial recovery, the Indian economy suffered a serious setback in the spring of 2021 as the pandemic returned with a vengeance. The lockdowns that caused the setback were quickly lifted, and the economy likely rebounded strongly in the third quarter and, according to the latest purchasing managers’ indices (PMIs), carried that momentum into the fourth. India’s GDP growth is not likely to hit the IMF's forecast of 9.5% in 2021. However, the strong finish to the year means India should be on track to beat expectations for 2022, outperforming all other major economies.
Meanwhile, Japan's 2021 general elections brought some clarity about the next government, and we are likely to see more expansionary fiscal policy as a result, supporting the Bank of Japan's already ultra-accommodative monetary policy. Growth is expected to slow in 2022 but should remain above the economy's longer-term growth potential. The reemergence of policy rate differentials is likely to weigh on the Japanese yen, which could provide the economy with an additional growth engine in the form of stronger exports.
Inflation in Asia hasn't accelerated as much as it did in Europe or the US. Hence, Asian central banks are under less pressure to remove emergency policy accommodation. The Bank of Korea and the Reserve Bank of New Zealand are the only banks to have raised rates so far, and the rate hike cycle is expected to spread only gradually in Asia.
A theme looming over every economic outlook is the increasing impact of climate change, and Asia is very much at the epicenter. Asia emits more greenhouse gases than any other region and thus will have to make the biggest efforts to change production and consumption habits. It also faces the biggest funding needs to finance the necessary energy transformation and will likely suffer the greatest economic damage from climate change. Air quality has been a problem in cities like New Delhi and Beijing for years. And, according to a report from the OECD, nine of the 10 largest cities forecast to be seriously affected by rising sea levels in the future are in Asia, with Miami the only exception. Climate change represents a major investment opportunity for the region but at the same time is also a serious threat.
Covid is still on everyone’s radar screen going into 2022, even if Asia has been far less affected by the pandemic. China is not the economic engine that it was post-GFC. That role may in fact fall to India, which is expected to outperform all other major economies in 2022. Asian central banks are under much less pressure to remove policy accommodation, which, in a world of reemerging policy rate differentials, should lead to weaker Asian currencies and stronger terms of trade. We are not likely to see a return to the level of globalization we saw prior to the pandemic, which will weigh on the long-term growth prospects of the region. Yet despite these headwinds, the IMF’s 5.1% growth forecast for Asia is still the strongest for any region of the globe.
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