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Asia outlook: Recovery 2021

After a wild ride in 2020, Renee Chen, Senior Investment Strategist, shares her 2021 outlook on the economic recovery in Asia.
09 December 2020
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    Key takeaways:

    • After a wild ride in 2020, we expect economic activities across Asia to continue the transition to a post-Covid new normal in 2021
    • The recovery, led by mainland China / North Asia in 2020 should further broaden to the rest of the region in 2021, with a larger scope of catchup growth for India and ASEAN to narrow the growth divergence
    • The prospect of wider availability of effective vaccines raises hopes of a faster return to normalcy, but distribution and deployment face logistical challenges. We do not expect a full normalisation of mobility or cross-border travel in 2021
    • Despite the vaccine optimism, Covid-19 will likely still leave some lasting economic scars. A greater concern is the pandemic’s impact on the region’s medium-term growth potential
    • Macro policies will likely stay accommodative to sustain the recovery and lessen the economic scarring. But incremental policy impulse will fade and policy support will become more targeted and data dependent as economic recovery gains traction, and amidst reduced policy space and debt/financial stability concerns
    • We expect a greater focus on structural reforms to boost longer-term growth potential (which also helps mitigate debt sustainability risks). Asia’ growth outlook will depend on effective healthcare and macro policies and reform implementation

    From growth divergence to growth convergence; India and ASEAN catching up

    The Covid-19 pandemic has delivered severe shocks to Asian economies via the economic impact of the health crisis and containment measures as well as the spillover from the global recession. After a wild ride in 2020, we expect 2021 to be a year during which activities – particularly in the laggard economies and sectors – transition to a post-Covid new normal. Recent data shows an ongoing recovery across Asia, albeit still uneven, from a trough in Q2, driven by gradual relaxation of mobility restrictions, significant policy stimulus in 2020, and resilient external trade – thanks to Asia’s relative success in managing the first wave of infections and earlier production normalisation, a product mix benefiting from ‘stay-at-home’ (tech) and medical demand, and robust shipments to mainland China and the US.

    Mainland China / North Asia showed relative growth outperformance in 2020. In 2021, the recovery should further broaden to the rest of the region, with a larger scope of catchup growth for India and ASEAN to narrow the growth divergence. We see near-term risks due to a resurgence of infections globally and locally, but we do not expect a significant derailing or reversal of the recovery. Factors that would help mitigate some of the negative impact include a higher level of healthcare policy and institutional preparedness, a more targeted and less stringent containment approach, and increased adaptability of consumers and companies to the new normal. The availability of an effective vaccine, even as it starts with small numbers of doses relative to the population size, should help buoy household and business confidence and should be a positive for a rebound in activity.

    Vaccine availability lifts hopes of a faster return to normalcy; deployment faces challenges

    The vaccine rollout could disproportionately benefit economies with large exposure to international travel/ tourism-related services (e.g. ASEAN and Hong Kong), as well as economies which have trailed in Covid-19 containment (e.g. India and select ASEAN economies). That said, while we see the potential for mass vaccination to begin in H2 2021 / before the end of 2021 for most parts of Asia, rolling out the logistics and supply chain for the distribution will be challenging. These challenges could be expected despite mainland China’s late stage trials for several vaccines and its intention to give priority to ASEAN; some Asian economies will also ramp up manufacturing capacities and partner with drug-makers to produce and distribute vaccines in the region – India is one of the largest vaccine manufacturers globally. Effective vaccine deployment is key. We see mass vaccination occurring only gradually and we do not expect a full normalisation of mobility or cross-border travel flows in 2021. Even assuming a phased reopening of borders, the rush to travel may not occur until the pandemic eases more significantly. International travel-related and in-person / consumer-facing services may only improve gradually through 2021. Overall, the growth outlook would depend on effective healthcare and macroeconomic policies.

    Asia’s relatively better pandemic control does not prevent some lasting economic scars

    The prospect of wide availability of an effective vaccine has reduced the threat of the virus and brightened the cyclical growth outlook, but the pandemic will likely leave a lasting legacy of economic imbalance and slack. The pace of recovery could be restrained by some lasting economic scars and a number of factors including a slow labor market recovery with the risk of some permanent job losses, the hit to household incomes and private-sector balance sheets, credit default and bank asset quality risks, and debt sustainability concerns. Mainland China is likely to be the only major economy to record positive growth in 2020, while we expect the nation’s growth to accelerate to ~8% in 2021. We see a likely return to pre-Covid-19 “levels” of output/GDP (taken as the prevailing level in Q4 2019) for most Asian economies in H2 2021, although the Philippines (due to more prolonged lockdown) and Thailand (due to the heavy exposure to tourism) could lag. However, returning to the pre-pandemic “trend growth path” will take longer and a greater concern involves the possible decline in the region’s medium-term growth potential as Covid-19 weighs on investment, productivity and labor force participation.

    Growth convergence expected for 2021

    Growth convergence expected for 2021

    Debt sustainability/financial stability concerns

    Debt sustainability/financial stability concerns

    Source: CEIC, Bloomberg, HSBC Global Asset Management, as of December 2020. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management Limited accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    Macro policies will likely stay accommodative to sustain the recovery and lessen the economic scarring. Benign inflation and the lack of major external imbalances in Asia, coupled with the Fed’s average inflation targeting framework, would allow Asian central banks to keep policy rates low for longer. A negative output gap caps demand-pull inflationary pressures. Core inflation outside of India (where core inflation is sticky – a near-term policy constraint) is expected to see a slow pick-up. Headline inflation outside of mainland China and India should rise in 2021 (but remain benign), off of 2020’s low base and given a gradual recovery in services consumption and higher global oil prices; in mainland China and India, headline inflation is likely to moderate as food inflation is expected to soften due to easing supply-side factors and logistics disruption. Meanwhile, the Covid-19 induced improvement in the current account balance, via a combination of sharp import falls and relative export resilience, is set to reverse in 2021 as imports are expected to rebound, but such normalisation will likely be a gradual process.

    More targeted policy support with incremental impulse to fade; an abrupt shift unlikely

    We expect largely stable monetary policy in most parts of Asia in 2021, although several economies that suffered significant economic damage from the pandemic and that face greater fiscal constraints and/or have relatively high real interest rates may ease modestly further (e.g. Indonesia). We see more limited room for policy maneuver, following 2020’s aggressive easing via policy rate cuts, liquidity infusion, and unconventional measures such as bond purchases. The recovery is expected to gather pace, and many central banks consider multiple objectives implied/embedded in broader mandates beyond inflation-targeting, which could include growth and employment as well as asset/ housing prices amid financial stability concerns (e.g. in mainland China and Korea). Mainland China’s central bank is already normalising interest rates and credit growth will likely decelerate into 2021. That said, we expect targeted easing measures and liquidity support to continue, particularly as default risks warrant close watch as policies deferring small and medium-sized enterprises’ loan repayments are due to expire next March. Despite the relatively hawkish policy tone in mainland China and the potential for talks to emerge about policy normalisation in select economies in H2 2021, an abrupt exit of policy support is unlikely.

    We expect fiscal-monetary policy coordination to continue, including efforts to mitigate solvency risks and the risks to the financial system (once government forbearance or other short-term debt relief measures expire). Central banks may support government financing in the form of maintaining a benign interest rate environment and/or bond purchases, especially in Indonesia and the Philippines, albeit in a more measured and conditional form (e.g. serving as a standby buyer at government debt auctions). Nonetheless, the use of QE-like programmes or debt monetisation is likely to be more constrained in emerging markets due to concerns over medium-term macro stability on inflation, capital flows and FX.

    The significant fiscal expansion in 2020 with widespread policy response to the pandemic caused a sharp deterioration in the fiscal balance and a marked increase in public debt ratios. Debt sustainability is expected to come to the fore despite largely manageable public debt ratios and track records of fiscal prudence for most major Asian economies. There is likely to be a shift to fiscal consolidation in 2021, though fiscal deficits are only expected to narrow slightly (partly due to a rise in nominal GDP) and stay large by historical standards. With the recovery gaining traction, this may also reduce government incentive to ramp up additional stimulus, though some relief measures, such as aids for most pandemic-vulnerable sectors and wage subsidy programmes, may get extended in a more targeted form and some effects of previously announced measures will likely continue to support the economy. Overall, we expect less expansionary but still supportive fiscal policy stance in 2021.

    Strong monetary easing reduces policy space

    Strong monetary easing reduces policy space

    Source: CEIC, Bloomberg, HSBC Global Asset Management, as of December 2020. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management Limited accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    Focus on structural reforms and digitalisation/innovation to boost productivity

    With the worst of the pandemic behind us, there is greater policy focus on structural reforms to boost longer-term growth potential (which also helps mitigate fiscal/debt risks). In mainland China, the 14th Five-Year Plan focuses on promoting indigenous technology and innovation capacity, expanding domestic (consumer) demand, and pursuing higher quality and more balanced and sustainable growth. The “dual circulation” development strategy focuses on strengthening self-sufficiency and competitiveness while deepening opening up. Many economies in the region also continue to press ahead with structural reforms and deregulation to improve ease of doing business and to shore up economic resilience in the face of slowing globalisation and geopolitical uncertainties; these reforms are aimed at creating employment, attracting foreign direct investment (FDI), capitalising from supply-chain realignments (e.g. the “China+1” strategy and/or regionalisation) and raising the long-term productivity/potential growth. The recent signing of the Regional Comprehensive Economic Partnership (RCEP) should facilitate regional economic integration and provide a modest boost to GDP over the longer term. A set of common rules of origin with harmonised rates and standards should provide a greater incentive for companies in RCEP economies to build their supply chains and production hubs in the bloc. Meanwhile, the pandemic has accelerated the digital transformation and will boost Asia’s internet economy over the medium term, while many economies have also made green and sustainable development among the priorities of their political and policy agendas. Overall, effective reform implementation is key to the region’s medium-term, post-pandemic growth outlook.

    Reform push to attract FDI

    Reform push to attract FDI

    Source: CEIC, Bloomberg, HSBC Global Asset Management, as of December 2020.

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