Why the case for Asia to roar back to growth is stronger than ever

Compared to the US and Europe, Asia has lower inflation and interest rates, much improved financial systems, and solid domestic consumption and export demand

Chetan Ahya

Published: 3:45pm, 6 Apr 2023

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Coming into 2023, I believed Asia’s economy was poised to grow faster than most, arguing that the region will start to build up a meaningful growth differential over developed market economies.

With the recent banking sector stresses in the United States and Europe, investors may wonder if similar funding challenges could occur in Asia and, given this backdrop, whether the region’s growth can still outperform others?

If anything, recent developments have made the case for Asia’s growth outperformance even more compelling. For starters, the funding challenges in the developed world emerged because central banks – to combat inflation – raised interest rates aggressively.

Rates have risen by 4.75 percentage points in the US and 3.5 percentage points in Europe in this cycle. Both tightening cycles are the sharpest and fastest in recent times. In contrast, as Asia’s inflation is running at half the pace in developed markets, aggregate policy rates have risen by just 1 percentage point.

Another important distinguishing factor has to do with the set-up of the banking sector. In Asia, liquidity coverage ratios are well above 100 per cent, loans tend to be more floating rather than fixed, and deposit franchises are more diversified. The upshot of this is that while lending standards look set to tighten in developed markets and ultimately weigh on growth, it should be clear that Asia does not face similar challenges.

The relative health of the financial system is not the only reason I think Asia can still outperform. The large economies in Asia, namely China, Japan, India and Indonesia, all have economy-specific factors that are supportive of domestic demand and hence shelter them somewhat from the potential negative spillovers from weaker growth in developed markets.

People walk by construction cranes near office buildings at the central business district in Beijing on March 15. China’s reopening should allow it to achieve growth of over 5 per cent this year. Photo: AP

China’s reopening should allow it to achieve 5.7 per cent growth this year. This counter-trend recovery can play a key role in supporting Asia’s growth. Data from the first two months of the year suggests its economy is well on the recovery path and appears to be on track to achieve a growth recovery that will beat consensus expectations.

Moreover, China’s recovery is largely driven by a rebound in consumption, which in turn is tied largely to its reopening and the recovery in the labour market. The property market is also reflating, with sales continuing to pick up rapidly, and secondary sales are approaching 2021 levels. Policymakers have adopted a pro-growth, pro-business and employment-first approach.

As it is, China’s gross domestic product path has fallen below its pre-Covid trend (defined as the expected growth before Covid-19) over 2021-22, so if downside risks start to build, policymakers will be ready to take prompt action to address any downward pressures on growth. Against this backdrop, China’s defence of its growth trend will be key to providing an offset for the rest of the region.

For Japan, India and Indonesia, these economies should post strong rates of growth this year. Japan’s economy should be helped by a rebound in tourism, which in turn will be aided by China’s reopening. Moreover, the accommodative macroeconomic policies should keep private-sector demand supported and, in particular, lead to an uplift in private capital expenditure.

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For India, the balance sheets for the financial and non-financial private sector have been cleaned up over the years, leaving borrowers and lenders in good health. The private sector is thus primed with a healthy risk appetite for expansion.

India is also benefiting from another structural tailwind in the form of market share gains in global goods and services exports, which is catalysing employment and investment.

People shop at the crowded Ranganathan street in Chennai, India, on February 21. The Reserve Bank of India has projected India’s economic growth at 6.4 per cent for 2023-24. Photo: EPA-EFE

For Indonesia, macroeconomic stability risks have been well managed, meaning that interest rates have not had to rise as much as in other emerging market economies, even with retail fuel price increases. Domestic demand has therefore remained robust against this backdrop.

The risk for Asia is if the US economy goes into a hard landing. If the full-year US GDP contracts by 1 per cent or more, Asia is unlikely to escape the downdraft. But in this case, inflation should decelerate even faster as commodity prices are likely to decline, and this would provide room for policymakers in the region to ease both monetary and fiscal policies, which could bring about a quicker recovery.

Chetan Ahya is chief Asia economist at Morgan Stanley

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