Fragile, uneven recovery

Fragile, uneven recovery

Most economies in Asia are slowly reviving but too much still depends on whether Omicron will be the last significant Covid wave.

A man walks across an empty road in Tokyo in December last year. Photo: ISSEI KATO/REUTERS
A man walks across an empty road in Tokyo in December last year. Photo: ISSEI KATO/REUTERS

The world has entered 2022 facing numerous uncertainties. After two years of fighting the coronavirus pandemic, the emergence of the Omicron variant now poses challenges to economies even in countries where vaccination rates are high.

Future mutations of the virus seem inevitable, and could bring more setbacks if they have higher transmissibility. A return to what we consider normal seems unlikely in the foreseeable future.

After a sharp rebound in 2021, albeit from a rock-bottom base in 2020, global economic growth is expected to moderate in 2022. Strong headwinds include supply-side constraints that will start to bite and high inflation that will squeeze real incomes, forecasters say.

In Asia Pacific, the expected slowdown in China's growth could have a significant impact as supply chain disruption persists. Tourism-reliant economies are facing particular threats as international travel is projected to remain below pre-pandemic levels -- especially if China continues to keep its citizens at home.

Both the World Bank and Asian Development Bank (ADB) have trimmed their forecasts for 2022 accordingly. In its Global Economic Prospects report released on Jan 11, the World Bank projects growth in East Asia and the Pacific to decelerate to 5.1% this year, from an estimated 7.1% in 2021, reflecting a slowdown in China where growth could slow from 8% to 5.1%.

The overall economy in the region excluding China also recovered in 2021, but by a modest 2.5%, which is 1.5 percentage points lower than projected in June last year, and about half the trend growth rate.

"This weaker-than-expected growth performance reflects a series of significant disruptions from the pandemic in the course of 2021 in several large economies, including Indonesia, Malaysia, the Philippines, Thailand and Vietnam," the bank said in an email response to Asia Focus.

The recovery in the region excluding China gained momentum from stronger domestic activity. But growth in goods exports softened as global trade peaked amid persistent supply disruptions. Services trade has remained subdued on recurrent travel restrictions.

"Despite a steady, albeit uneven rise in vaccination rates, pandemic resurgence presents a significant risk to the regional outlook given great uncertainty related to the highly transmittable Omicron variant," the World Bank pointed out.

The pandemic resurgence could also weigh on exports due to weaker global demand, supply disruptions, labour shortages and further increases in shipping costs, it added.

The ADB has also downgraded its forecasts for developing Asia to 7.0% in 2021 and 5.3% in 2022. New pandemic waves could reverse the current reopening trend in many economies owing to still-insufficient vaccination coverage, the Manila-based bank noted in its Asian Development Outlook update released in late December.

"Although the region was expected to sustain a strong rebound and keep inflation at manageable levels, the emergence of Omicron brought additional uncertainty to economic growth," noted Chitchanok Annonjarn, associate economics officer with the ADB in Thailand.

Impacts in 2022, she said, would depend on how quickly the government of each country responds to the spread of the virus. If it can be contained within a few months without the imposition of strict mobility restrictions, such as business closures, interprovincial lockdowns and nighttime curfews, the impacts would not be significant.

In Thailand, businesses and workers in the tourism sector have struggled to recover from the crisis because of the suspension of quarantine-free entry to international visitors, just a few weeks after it was introduced, Ms Chitchanok told Asia Focus.

However, authorities last Thursday said the Test & Go programme would be reintroduced starting on Feb 1, reviving hopes in the tourism industry. In line with a strategy to treat the virus as endemic, with high emphasis on vaccination and rapid testing, officials are also starting to relax other controls.

Looking at the broader region, the economic recovery "remains uncertain and uneven", said Anouj Mehta, country director of the ADB for Thailand. The possibility of a weaker external environment arising from premature reduction of central bank stimulus, notably in the US, and tightening of global interest rates are among potential downside risks to the regional recovery.

Nonetheless, exports of goods could be the main engine of growth in the short term. Domestic consumption and investment are expected to gradually recover if Covid cases "remain manageable", he said.

While it pointed out that the recovery in East and South Asia remains moderately robust, the United Nations said a slow recovery of labour markets will weigh on consumption and export growth of East Asian economies.

Subdued inflation and still low public debt levels, however, offer room for policymakers to continue accommodative monetary and fiscal policies, according to the UN's World Economic Situation and Prospects 2022 report.

It estimates headline GDP growth in East Asia at 6.7% in 2021 and 4.9% this year. Global output, after expanding 5.5% in 2021, is projected to grow by only 4% this year and 3.5% in 2023.

"Without a coordinated and sustained global approach to contain Covid-19 that includes universal access to vaccines, the pandemic will continue to pose the greatest risk to an inclusive and sustainable recovery of the world economy," noted Liu Zhenmin, Under-Secretary-General of the UN Department of Economic and Social Affairs.

"The pandemic has exposed several economic and social vulnerabilities," says Anouj Mehta, country director of the Asian Development Bank in Thailand. Supplied/ADB

CHINESE FACTORS

China's 2022 forecast has been downgraded as policy support is assumed to offset the impact of regulatory tightening and deleveraging of the real estate sector.

"Rapid recovery in the first half of 2021, driven by strong exports due to the reopening of developed countries and robust investment, has lost momentum," the UN report noted.

"The reintroduction of restrictive measures under the 'zero-Covid' policy has taken a toll on services and consumption while policy-induced property market cooling and temporary power rationing to phase out fossil fuels have weighed on investment."

At the same time, the default of a large real estate company has shaken financial markets and confidence in the sector, it added.

The report, which was released on Jan 14, foresees China's economic growth moderating to 5.2% this year, from an estimated 7.8% in 2021.

The Chinese government, nonetheless, still has multiple policy tools to stimulate economic activity as low inflation offers room for monetary easing, it said.

A swift recovery from the pandemic has boosted government revenues for more targeted fiscal spending. Going forward, China's transition toward development driven by consumption and higher-end manufacturing will lead to more sustainable but slower growth, with significant international spillover effects, the UN report pointed out.

The World Bank shared the same view, saying that China's growth moderated appreciably in the second half of last year, reflecting recurring mobility restrictions and regulatory tightening. However, export growth remains solid and domestic demand has stabilised in response to government policy easing measures, the bank noted.

Standard Chartered, the London-based financial group, also expressed market concerns about the risk of a sharper downturn in China as growth has slowed significantly in recent months.

"Sequential growth almost stalled in the third quarter of 2021, owing to policy headwinds including China's stringent Covid approach, regulatory tightening, power shortages and macro policy normalisation," it noted. The bank, however, forecasts China's GDP will expand by 5.3% this year, outpacing the market consensus.

"We see signs of abating headwinds heading into 2022. The authorities have moved to address power outages by increasing coal supply, and the pace and intensity of regulatory tightening are likely to be adjusted to prevent systemic risks," Standard Chartered said in its Global Economic Outlook 2022 released on Jan 14.

Since September, financial regulators have encouraged banks to accelerate mortgage approvals and increase loans to financially sound developers, indicating that housing credit conditions may gradually improve.

"While we do not expect major changes to China's Covid measures by mid-2022, easing is more likely than tightening in the second half, when over 80% of the population is expected to be fully vaccinated," said the report.

More importantly, the bank expects Beijing to move to curb downside risks, so as not to spoil the mood in the run-up to the once-every-five years Chinese Communist Party (CCP) congress later this year. The government will likely set a growth target of 5% or above for 2022, supported by slightly more expansionary fiscal policy and credit expansion.

Standard Chartered also pointed out persistent geopolitical risks as Chinese relations with the US remain the key vector in the global balance of power. Starting from a trade war in the Donald Trump era, the US-China relationship is evolving into one of multi-faceted disputes.

Tensions have consolidated around technological competition and repatriation initiatives for production of strategic goods such as electric batteries, semiconductors and 5G technology and recently an emerging arms race.

But the Joe Biden White House has provided a degree of predictability relative to the Trump administration. The relationship has become more "institutionalised", playing out via the traditional channels of bureaucratic exchanges and negotiations, eliminating the volatility of Mr Trump's highly personalised approach.

"China's relations with the US and its allies are set to remain tense," the bank wrote. "The long-term competition between the two powers could lead to a bifurcated world in which some countries follow the US lead and others follow China's, particularly in areas such as high-tech and 5G."

Ongoing US-China tensions are also likely to play out in areas including the South China Sea, Australia or Taiwan. This trend is unlikely to change in the foreseeable future. But with their differences more predictable and clearly defined, both sides will likely seek to manage them rather than escalating the conflict, the bank stated.

"The emergence of Omicron has brought additional uncertainty to economic growth," says Chitchanok Annonjarn, associate economics officer with the ADB in Thailand. Supplied/ADB

RISKS & RECOMMENDATIONS

The lingering pandemic, economists say, entails other risks, notably prolonged supply-chain disruptions.

"Supply-chain bottlenecks will remain a challenge in 2022, with many of the factors that have disrupted global trade in the past two years likely to linger," the Standard Chartered report explained, adding that labour shortages and port/warehouse congestion should be gradually resolved.

As well, a lack of capital expenditure planning due to pandemic-related uncertainty, particularly in the semiconductor industry -- may continue to weigh on global trade and growth in 2022.

"There is no quick fix for the global semiconductor shortage," the bank's report said. "So far, the global shortage of customised semiconductors has resulted in production bottlenecks in the automotive and consumer electronics sectors."

According to Bloomberg, the total hit to global automakers due to a lack of semiconductor supply likely reached US$210 billion in 2021 with the shortage resulting in 7.7 million fewer cars being built. Given automakers' "just-in-time" supply chains, they are ill prepared for a non-typical boom-bust cycle caused by an event such as the pandemic.

In response to the semiconductor shortage, the US, Japan and the EU have announced ambitious policies to promote investment in their chip sectors. These longer-term policies, however, are unlikely to improve the current global shortage, Standard Chartered noted.

"This is especially true for the auto sector, where production capacity is expected to fall short of the level required to meet 2022 demand following capital expenditure reductions during the pandemic."

Emerging economies in Asia, meanwhile, are likely to face a longer road to reopening, particularly those still pursuing strict or zero-Covid policies. That has resulted in extended lockdowns and restrictions, causing some global producers, including apparel and footwear as well as consumer electronics makers, to scale back production in manufacturing hubs in emerging markets, notably Vietnam, Indonesia and Malaysia. This is further exacerbated by shipping bottlenecks, causing multiple chokepoints and unpredictable delays.

"Prolonged global supply-chain disruptions are negative for global trade and growth. It is not just businesses that suffer due to an inability to meet demand; higher factor input prices are also more likely to be passed on to end consumers," the bank pointed out.

Supply-chain bottlenecks amid rising demand have already resulted in a surge in global freight rates to unsustainable levels. To ease logistics and warehousing bottlenecks, government efforts are required globally to achieve faster cargo turnaround at terminals, frequent testing of, and medical support for, workers at ports and warehouses to avoid disruptions due to outbreaks, as well as a review of quarantine measures for shipping crews, which have contributed to shipment delays.

"Achieving higher vaccination rates globally is also key to easing disruptions -- only when herd immunity is reached can global economic activity fully resume. This will require efforts by public institutions and governments to address vaccine inequality," the bank said.

Mari Pangestu, the World Bank's managing director for Development Policy and Partnerships, agreed, saying that the immediate priority for countries should be to ensure that vaccines are deployed more widely and equitably so the pandemic can be brought under control.

But tackling reversals in development progress such as rising inequality will require sustained support. In a time of high debt, global cooperation will be essential to help expand the financial resources of developing economies so they can achieve green, resilient and inclusive development," she said.

The ADB's Mr Mehta said that policies such as increasing investments in the health sector could bring the region's healthcare system closer to the world's best standards and could have a significant impact on economic growth.

"The pandemic has exposed several economic and social vulnerabilities. What governments could do is improving social assistance programmes, supporting small enterprises, building competitiveness, and choosing a greener path to economic recovery," he told Asia Focus.

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