Chart source: Haver, ASI Research Institute, June 2021

Vaccine roll-outs support global growth

Vaccine rollouts are proceeding at pace in the US and UK, and have ramped up meaningfully for earlier laggards such as Europe and China. This is allowing a progressive dismantling of remaining lockdown restrictions and a strong rebound in economic activity. However, while some economies move into ‘post pandemic’ territory, Covid-19 – and the risk posed by new variants – remains a major threat for many.

The Delta variant tragically led to a sudden second wave and the re-imposition of restrictions in India, for example. Still, we expect the economic damage to India to be less pronounced than last year’s shock, perhaps to -6.5% in quarter-on-quarter GDP growth – reflecting continued manufacturing and construction activity and a more decentralised approach to lockdowns.

India’s viral caseload has eased substantially over the past five weeks, from 520,000 infections per day to almost 90,000 at the time of writing. Already eager politicians have announced some easing of restrictions. But given the Delta variant’s higher transmissibility and the modest progress that India has made in its vaccination roll-out, the risk of easing too quickly remains significant.

Elsewhere in Asia, cracks are emerging as case numbers have climbed, notably in Malaysia. It underscores the risk of a relatively slow vaccine roll-out across emerging Asia (outside of China), which will contribute to a slower recovery. Hopefully, increasing vaccine supplies from China and developed markets should lead to a fuller normalisation of emerging economies in Asia next year.

Our aggregate global economic growth forecasts are 5.7% in 2021, 4.8% in 2022 and 3.4% in 2023 – well above trend and somewhat above consensus for 2022. Divergences between early and late vaccinators, developed and emerging economies and the manufacturing and services sectors remain key themes.

Indeed, as the composition of developed market growth swings towards services, the Asia-Pacific region is unlikely to receive its customary boost from accelerated trade with advanced economies.

Policies to remain supportive

In a number of emerging markets, we harbour concerns that the combination of higher bond yields, near-term inflationary pressures and fear of downgrades to sovereign credit ratings will lead to economically damaging austerity budgets. However, this risk is fairly modest in Asia Pacific.

Asian policymakers’ fiscal stances (cyclically adjusted) look set to remain fairly neutral, in part reflecting the region’s better record at managing Covid. Relative to the stage of recovery, fiscal policy in Asia is unlikely to weigh much on growth and there’s little sign of politicians pushing for austerity.

Sustained rise in inflation hard to see

Strong energy prices, expiring subsidies and re-opening price pressures are pushing headline inflation rates higher around the world. But these are temporary base effects and should peak within months.

However, other drivers of the recent rise in inflation may prove more persistent. As demand rebound brushes up against supply constraints, we expect bottlenecks to put upward pressure on producer and core consumer goods prices. This trend will likely broaden into service-sector prices, depending on the pace of reopening. Nevertheless, ultimately our base case is that these effects will prove temporary.

We don’t think conditions for a sustained shift in global inflation are in place – namely prolonged above-target inflation expectations and central bank tolerance for persistently above-target inflation. This risk seems lower in Asia Pacific than the US, for example. For now, core inflation in Asia (ex- India) remains in line or below target-consistent rates, while there is no sign of a dramatic shift in fiscal policies.

Tight monetary policy some way off

Central banks will start to reduce the extent of their accommodation over the next few years. The US Federal Reserve has started to ‘talk about talking about’ tapering stimulus measures, and we think it will reduce asset purchases from early 2022 and hike interest rates in 2023.

Higher US yields and the roadmap for Fed policy has forced some emerging market central banks to draw easing cycles to an end (e.g. Mexico, South Africa), and others to raise rates (e.g. Brazil, Russia, Ukraine). However, central banks in Asia – with the exception of the Bank of Korea – have remained dovish. Most have signalled that they will not look to tighten this year.

The tailwind from accommodative Chinese policy is unlikely to provide much support to the rest of Asia – a reflection the China’s economy being ‘first in, first out’ of the pandemic. ASI’s Chinese Financial Conditions Index has moved closer to neutral territory and will likely fall as the credit impulse moderates. But authorities seem attentive to the risks of a slowdown, which should keep policy fairly neutral, while their vaccination campaign is running at speed – opening the door to a return of international tourism.

Fewer headline political risks, but rifts remain

The foreign policy shift under US President Joe Biden’s administration has shored up traditional Western alliances, but also amplified rivalries. The US-China geostrategic conflict will likely create rifts in Asia. But while Taiwan may continue to be a political focal point, the risk of military conflict appears very low.