2021 Midyear Asia Economic Outlook: Divergent Recoveries

  • Economic growth has shown to be less sensitive to new Covid-19 surges in Asia, thanks to the effects of fiscal and monetary stimulus, better medical knowledge, and vaccines.
  • We expect growth to be uneven across the region, with China leading the recovery.
  • Not only has China recovered from its post-Covid decline, but it has exceeded its pre-Covid growth trend.
  • We also expect monetary policies to stay accommodative and inflation to remain relatively benign for the most part.
2021 Midyear Asia Economic Outlook: Divergent Recoveries

More than a year after the initial outbreak, Covid-19 continues to hang over Asian growth. The rise in cases in India dominated global headlines for weeks during the first half of the year and led to a fresh set of lockdowns in the country. Even outside of India, countries that seemed to do well in containing the virus in 2020 have come under pressure, including Malaysia, Thailand, and Philippines, where cases are reaching new highs in 2021. North Asian economies like Taiwan and Japan also suffered harsher outbreaks in 2021. In Japan’s case, the situation has called into question the viability of the Tokyo Summer Olympics, which had already been delayed one year.

That said, growth seems to be much less sensitive to lockdowns compared to 2020. First, global growth is running at a much stronger pace, with much of the world still benefiting from the powerful, unprecedented combination of  fiscal and monetary stimulus packages. Second, the uncertainty factor from Covid has fallen dramatically as medical professionals and policymakers now know what to expect, and the relief of having several vaccines available has buoyed both business and consumer confidence. Empirically, India is an example of relative growth resilience. Despite the surge of cases in India, and the significant human toll of the virus, targeted lockdowns and relatively less stringent measures have had a more muted impact on economic indicators like industrial production this year than last.

However, much more progress needs to be made. The vaccination rollouts, a sterling achievement in the UK and the US, where a majority of adults have been vaccinated, have lagged in Asia. The UK and the US have both given out more than 90 doses per 100 people, while China, in contrast, has delivered 44, Japan around 19, India just 18, and Taiwan a measly 3.6. Vaccinations are seen as key to the revival of intra-regional travel, with countries easing entry restrictions for the vaccinated, and greater mobility would help small businesses that have relied on foot traffic. 

While Covid-19 Cases Surge, Vaccinations Lag in Asia

Asia Daily Covid Growth

Doses per 100 People

Source: Macrobond, PineBridge Investments calculations as of 21 June 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Buoyant economies

Nevertheless, growth in the region continues to be buoyant, if divergent. Despite growth revisions to the downside, we still expect Asia to be the fastest-growing geographic region globally, led by China. The region’s largest economy has not only recovered from its post-Covid decline but has exceeded its pre-Covid growth trend, thanks to its mixture of prudent credit growth, surgical targeting of its lockdowns, and global demand for the country’s exports. As a result, China’s share of global exports has risen to an all-time high, which has also supported the year-to-date appreciation of the Chinese yuan.

Growth is not all uniform, however. Measures of China’s consumption sector continue to lag the industrial side of the economy, despite growing evidence of a labor market recovery and healthy household balance sheets that look to be in much better shape now than in the beginning of many past recessions. In some ways, China’s economy is a microcosm of the region at large. The more export-driven economies, like Taiwan and Korea, have seen their manufacturing sectors boom of late and exports surge as global demand for semiconductors and other electronics led to decade-high manufacturing purchasing managers’ index (PMI) readings and increased the odds of a wave of capital expenditures – long overdue thanks to many of years of sluggish investment combined with the uncertainty of the US-China trade war.

China’s Industrial Production Is Surging, But Consumption Remains Sluggish

China Industrial Production and Retail Sales

Source: Macrobond, PineBridge Investments calculations as of 21 June 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

Rates will rise, but not yet

We expect monetary policy to remain accommodative. While news of accelerated inflation rates is gripping the headlines in parts of the Western world, inflation in Asia, for the most part, remains relatively benign and mostly concentrated on the producer side due to increased supplier delivery times and accelerating commodity prices. Gains in consumer prices relevant to central bank mandates still trend mostly below target, pushing back fears of premature rate hikes around the region.

Moreover, continued statements by the US Federal Reserve that an initial rate hike shouldn’t occur before 2023 could mean many central banks in Asia could raise rates before their US counterpart. We expect the Reserve Bank of India to raise rates before the end of the year to support its currency, while Malaysia, Taiwan, and Indonesia may raise rates in the first half of 2022. In China, where policy accommodation throughout 2020 had been more modest compared to its peers, we expect policy rates to remain unchanged – in line with Premier Li Keqiang’s promise of “no need for sudden shifts” in policy1 and for credit growth to remain in the high single-digits for the rest of the year.

Inflation Remains Below Target in Most Asian Economies

Source: Macrobond, PineBridge Investments calculations as of 21 June 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.

More upside risks than downside risks? 

We wrote last year that we thought US-China relations would play out in a much more predictable manner under a Biden presidency than a Trump second term. So far, that has been the case. The path hasn’t been entirely smooth – human rights and national security issues remain sticking points between the two nations – but the constraints of the Phase One trade agreement, a remnant of the Trump era, have been all but forgotten. Recent high-level talks between Secretary of Treasury Janet Yellen and Vice Premier Liu He appeared constructive, with both sides promising more economic cooperation going forward.

Meanwhile, election calendars and their accompanying uncertainty are also relatively light in the region. Japan is set to hold a general election of the House of Representatives, which will most likely result in a reaffirmation of the Suga administration, while Hong Kong’s Legislative Council elections have been scheduled for later this year. In short, we expect very little scope for significant electoral surprises throughout the rest of the year.

For more insights into trends moving economies and markets, visit our 2021 Midyear Investment Outlook page.


1 Please see “Premier Li Keqiang Meets the Press: Full Transcript of Questions and Answers,” Ministry of Foreign Affairs of the People’s Republic of China, 12 March 2021: https://www.fmprc.gov.cn/mfa_eng/zxxx_662805/t1860396.shtml


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