Economic recovery in 2021 for Asia-Pacific nations was largely supported by export demand from the US and Europe and easy monetary policies, however, economists expect conditions to be less supportive going into 2022.
“When you think of what 2021 should have been about? Major recovery because of Covid in 2020. We didn’t see that major recovery,” said Alicia García Herrero, chief economist (Asia Pacific) at investment firm Natixis.
“The underwhelming scenario was supported massively by external demand and very lax monetary conditions globally. It won’t be as nice next year,” she added.
Natixis at its Asia Outlook 2022 conference said that in the absence of external supportive conditions, “2022 needs stronger domestic demand for growth to be decently high.”
Prolonged high inflation, faster-than-expected rate hike, spillover from China’s deleveraging drive, power crunch, Sino-US relationships and potential political transitions in South Korea and the Philippines are seen as key risks for the region going into the new year.
Investment bank UBS said if inflation proves to be more ’sticky’ than expected the risks from such a scenario are multifold.
Inflation and rate hikes could damage domestic growth
“First, a sustained rise in consumer prices could start to weigh on consumer demand. Second, central bank officials may misjudge signals in the data and raise interest rates too soon, too quickly, or too far,” UBS said in its Year Ahead 2022 report.
“Third, a series of “transitory” shocks combined with central bank inaction may de-anchor consumer and business inflation expectations, leading to self-fulfilling inflation and requiring central banks to hike rates aggressively to regain credibility.”
Households in South Korea and Australia would be most vulnerable to rate hikes due to their higher debt burden, added García-Herrero of Natixis.
Commodities-exporting nations like Australia and Indonesia will face headwinds coming from China’s deleveraging drive as the nation’s cash-hungry real estate sector slows down.
“A real stress test arrives with £2.1B due in March, and $1.5B due in April. Evergrande is not safe yet, and nor are its peers,” said Craig Botham, chief China+ economist for Pantheon Macroeconomics.
Furthermore, Asia’s goals towards clean energy transition and bold commitments towards it were a potential risk, Natixis added, having seen China suffer from an acute power crunch in 2021.
Slower growth in 2022
UBS anticipates slower gross domestic product (GDP) growth for Asia in 2022 at 5.8% compared to 7% in 2021.
“As pandemic-related drivers of economic growth begin to subside, we embark on a journey of discovery to see whether we are entering a new longer-term economic regime,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
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