Will the post-pandemic era in Asia herald an economic recovery reminiscent of the “ Roaring Twenties
” decade that followed the Spanish flu a century ago, or is the region facing stagflation and continued economic pain? Asian CEOs are divided on that question, and the uncertainty could weigh on the growth prospects of the region.
A recent survey of Asia Business Council members, who head businesses headquartered or with significant operations in Asia, found that 38 per cent expected business conditions to worsen in the coming year. Meanwhile, 37 per cent expected conditions to remain about the same or were uncertain and 25 per cent expected conditions to improve.
Two-thirds of respondents expected inflation to be the biggest economic challenge over the next year. The conflict in Ukraine is expected to drive a rise in food and fuel prices and other input costs while disruptions to global supply chains
While the results are not meant to be statistically significant conclusions, they shed light on the economic outlook as seen by the leaders of some of the region’s largest companies. Key question marks for that outlook are the duration of China’s “zero-Covid” policy
and the ramifications of Russia’s invasion of Ukraine. Businesses in the region increasingly worry that profits are subject to the whims of domestic and international politics.
That uncertainty makes it difficult to plan for the future, which explains the increasing cautiousness of some respondents. Only around half of those surveyed plan to increase capital spending in the next year, and fewer than half expect to hire additional employees. A greater share of respondents had expansion plans in both aspects at this time last year, when the pandemic-induced downturn appeared to have turned the corner.
The survey results illustrate how business leaders are grappling with three new economic and geopolitical realities. First, business and politics used to be seen as separate, but no longer
. Asian businesses now have to be well versed in politics as well as finance and even hire additional teams tasked with compiling data on and analysing developments in geopolitics.
Beijing, for example, had long measured the performance of government officials on the basis of GDP growth. That goal now appears to have been replaced by targets relating to the government’s pandemic-related goals
. Zero-Covid targets offer little predictability for foreign investors seeking to make capital investments or expand operations.
In some countries in Asia, as well as in the United States
and Europe, the new imperative of economic security means higher barriers to foreign investment. There is pressure by governments for companies in certain strategic sectors to set up shop in their home economy or in certain politically aligned nations.
Those businesses will have to straddle a complex set of domestic political, geopolitical and business pressures. For companies that do business with both the US and China, not choosing sides is likely to become more difficult.
That could give businesses pause when it comes to making investments in the two superpowers. The US and China remained the top two investment destinations
for respondents, but a smaller share of respondents were planning new or increased investments in the two countries.
Second, the outcome of all this could be decoupling
– even if governments don’t want to call it that – and a more economically fragmented world. In the West, an economic coalition
is developing on the basis of values alignment in the wake of Russia’s invasion of Ukraine.
The risk is that emerging economies in Asia and elsewhere could be shut out
from that system. Such a scenario would not only increase operating costs for businesses but also slow the trade-driven growth that has underpinned Asia’s economic rise.
Third, resource competition could become a reality for businesses in Asia, driving an increased focus on energy efficiency and alternative energy sources. In this year’s survey, Asian business leaders cited energy as the top issue for businesses in Asia for the first time since 2014 following that year’s global oil price crash
Gas prices are likely to increase this winter as European buyers increase their purchases of liquefied natural gas to replace Russian supply
. With minimal spare capacity on hand in the LNG market, the future revival of Chinese demand could result in a perfect storm of shortages and even higher commodity prices.
In response, Asian businesses are working to become more energy-efficient. Asian countries will have to implement more flexible energy possibilities, starting with the consideration of sources they might have previously overlooked.
and South Korea
are moving towards nuclear energy, and other countries could follow suit. There are signs this has benefited the green energy transition, but the impact on pocketbooks and finances in lower-income countries remains a concern.
All these factors are playing out on a micro scale in Hong Kong, although the city has been relatively less affected by energy price inflation because it makes up a small share of the city’s consumer price index. But for companies in Hong Kong and abroad, the upshot is the same: businesses need to hope for the best and prepare for the worst.
Colleen K. Howe is a programme associate at the Asia Business Council