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Asia's uncertain growth outlook

Head of Asia Research, Chief Economist SE Asia & India, and Senior Asia Rates Strategist, ANZ

Published July 14 2021

Recent virus resurgences in Asian economies have had less impact on growth than previous outbreaks.

Mobility indicators and services measures have not collapsed to the same extent as in the second quarter of 2020, while the construction and manufacturing sectors have remained open. At the same time, the evolution of the pandemic has undeniably tested anticipation of a linear and broad-based recovery in several Asian economies.

Fresh outbreaks or a prolonging of the current one could not only delay the recovery, but cause medium-term scarring.

Specifically, these outbreaks are delaying a recovery in the labour market. The labour force in the region’s lower-per-capita economies is experiencing weak wage growth or high unemployment, or both.

In the Philippines, around a quarter of the labour force is now un/under-employed, whereas in India and Thailand there has been sizeable forced migration of labour from the formal sector into lower paying jobs in the agricultural sectors.

Lower income growth has translated into a higher debt-to-GDP ratio, even with a milder pace of borrowing. Malaysia and Thailand stand out in this regard. This pattern of increase in household indebtedness implies that a larger share of incomes will go to servicing debt, the flipside being that household consumption could be constrained for a prolonged period.

Meanwhile, the scope to unwind forced savings is smaller now than in 2020. The intensity of pent-up demand could therefore turn out to be mild.


The scope and effectiveness of counter-cyclical policies is fading. On the monetary front, this is best seen in the continual weakness in bank lending, even with historically low real policy rates.

Bank lending has decelerated in most economies in the region and is even contracting in Indonesia and the Philippines.

This has come about despite unprecedented regulatory forbearance and a variety of subsidised lending facilities to support vulnerable sectors. Although weak demand has played a role, tighter lending standards are also a factor.

Fiscal policy continues to be effective, but its objective has changed. ANZ Research’s original thinking was that unlike in 2020 when the objective was to limit the fall in growth and mitigate deflationary risks, in 2021 fiscal policy will focus on fortifying the recovery.

This assumption is now being challenged at least mildly in some economies, and fiscal buffers for providing fresh stimulus are thinner now.

In both Malaysia and Thailand, public debt is now close to the already revised ceiling of 60 per cent of GDP. Similarly, in India, the current debt-to-GDP ratio of nearly 90 per cent has become a source of hesitancy for the government to augment spending.

External trade continues to be a reliable growth driver. Strengthening economic activity in advanced economies and the strong global semiconductor cycle assure the longevity of external demand even if growth in China is peaking. The Semiconductor Industry Association (SIA) recently upgraded its 2021 sales forecast to 12.8 per cent from 7.1 per cent.

The strength of the tech cycle is borne out in the superior export performance of South Korea and Taiwan. Exports are growing across all economies, but the scale of improvement among the major tech exporters (Singapore, South Korea and Taiwan) is formidable enough to feed through into the broader economy, including capex. A tech-driven capex cycle in both South Korea and Taiwan is now falling into place.


ANZ Research’s pan-Asia GDP forecast for 2021 has edged down to 7.8 per cent from 7.9 per cent. There is, however, considerable variation across economies.

ANZ Research has upgraded its GDP forecasts for Singapore, South Korea and Taiwan and lowered expectations for Indonesia, Malaysia, the Philippines and Thailand.

The forecast for India has been cut to 9.2 per cent from an already below-consensus 10 per cent. ANZ Research’s forecast for mainland China remains unchanged at 8.8 per cent, where both the evolving recovery and the policy response are turning out as expected.

From the standpoint of momentum, growth has cyclically peaked and a moderate trajectory is likely for the second half of calendar 2021. This view is validated by higher frequency data on credit, fixed asset investment and industrial production.

For 2022, ANZ Research forecasts GDP growth at 5.4 per cent for the region and at 5.5 per cent and 6.7 per cent for China and India, respectively. Expect 2023 forecasts when full normalcy has returned.


Turning to inflation, annual prints are starting to rise in some economies. However, as this is mainly due to an exceptionally low base, particularly in the ‘transportation costs’ category, the rise has generally been confined to headline inflation.

Core inflation has remained well-behaved and should continue to do so in the coming months. Moreover, even after incorporating low base effects, ANZ Research’s CPI forecast for the region is a benign 2 per cent in 2021. At an economy specific level, upside risks to inflation are most acute in China as market share consolidation may allow some producers to pass on price increases to consumers.

For inflation to become a serious consideration for monetary policy, the confluence of sustainably strong growth and core inflation is necessary. As discussed above, neither are on the cards in the near future.

Accordingly, most central banks in the region will stay committed to policy accommodation for a prolonged period. However, liquidity injections, rather than rate cuts, will be the preferred policy tool.

Growth dynamics in most economies do not support a change in policy settings for now. And the region’s solid external sector dynamics allow Asian central banks to run independent monetary policies.

Owing to weak domestic demand, current accounts are either in surplus or, at worst, in mild deficits. This is despite higher commodity prices, oil in particular, hurting the terms of trade. In fact, we are now a far cry from the external vulnerabilities that had existed during the 2013 taper tantrum.

The only exception is Thailand, where the absence of tourism income has meaningfully dented the current account. Even so, its FX reserves are solid. FX reserves are also at multi-year, if not historical, highs in most economies in the region.

ANZ Research believes as long as improving growth in the US underlies its policy normalisation, Asia’s growth and corporate performance will benefit.


The challenge for the region’s policymakers is to put domestic demand on a more sustainable footing. This underscores the urgency of vaccinations, which overall is lagging the US and Europe.

The pace of vaccination is the key metric to monitor. Based on the current pace of the vaccine rollouts, herd immunity in most economies will be attained only towards end-2021 or early 2022.

ANZ Research is, however, encouraged by governments attempting to accelerate vaccination drives by enhancing serum imports, stepping up domestic production where possible and improving logistics.

Khoon Goh is Head of Asia Research, Sanjay Mathur is Chief Economist SE Asia & India, and Jennifer Kusuma is a Senior Asia Rates Strategist at ANZ

This is an edited version of commentary which appeared in an ANZ Research report.  You can read the original report HERE.

Asia's uncertain growth outlook
Khoon Goh, Sanjay Mathur & Jennifer Kusuma
Head of Asia Research, Chief Economist SE Asia & India, and Senior Asia Rates Strategist, ANZ

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