Asia: immune to the shift

Apart from possible near-term weakness in cross-border flows, the Asian region outside mainland China will be largely immune to the current shifting conditions in developed markets.

ANZ Research expects gross domestic product in the region to grow 4 per cent, reflecting the net balance of resilient domestic demand and prolonged weakness in exports.

The region is well positioned to manage any financial market stress emanating from developed economies. Banking systems are well capitalised and asset price valuations including equities and property prices are generally not stretched.

Credit, though improving is far from excessive. Better current account positions and generally stable vulnerable external liabilities further add to resilience. In all likelihood, any oncoming slowdown should be of a ‘garden variety’ as opposed to a protracted one.

Firm

Household consumption, though slowing, has held up better than anticipated. Labour markets, encompassing both employment and wages, remain firm, whereas monetary policy tightening has not made any meaningful dent in select ASEAN economies or India. The latter largely reflects the incomplete transmission of higher policy rates to lending and deposit rates.

The structure of bank deposits is still skewed towards lower interest-bearing demand and savings deposits, credit demand has not materially strengthened and liquidity remains generous by historical standards. Banks in several economies have not yet felt compelled to pass on higher policy rates to lending rates.

Only in Malaysia have lending rates risen in lockstep with policy rates. In India, Indonesia and the Philippines, lending rates have risen by less than half that of the policy rate.

Cumulatively, labour market strength and incomplete policy transmission portend stronger than previously anticipated resilience in household consumption in some economies in the near term.

This combination is particularly evident in Malaysia and the Philippines. Though policy transmission has been complete in the former, the rise in the policy rate has been mild amounting to 100 basis points.

ANZ Research, accordingly, lifted its 2023 GDP growth forecast for these two economies to 5.8 per cent and 4.2 per cent from 5 per cent and 4 per cent previously.

Malaysia’s growth should also benefit from a step-up in public development spending. For India, ANZ Research has maintained a 2024 GDP growth forecast of 6 per cent despite a cumulative 250 basis point increase in the policy rate.

Still, incomplete policy transmission offers only near-term upside to growth. As growth becomes more leveraged and excess liquidity normalises, lending rates will rise more aggressively.

Developments in South Korea provide useful forward guidance. That region’s business and credit cycles advanced earlier than those in ASEAN and India, with lending and deposit rates recalibrating accordingly.

Even so, it helps to offset weak exports, for which the global backdrop is less than encouraging for three reasons: one, the services-oriented bias of economic activity in developed economies; two, ongoing pressure on the global tech cycle; and three, the focus of mainland China’s policymakers on internal demand to drive growth.

Validating the third point was the nearly 21 per cent annual fall in mainland China’s imports from Asia in the first two months of calendar 2023. This suggests the main benefit of China’s reopening will be regional tourism as opposed to goods exports. It also underscores ANZ Research’s relative optimism in Thailand’s growth.

On the weakness in the global tech cycle, exports from Singapore, South Korea and Taiwan have fared less well, and the new export orders sub-components of their manufacturing PMIs remain well below neutral.

Furthermore, South Korea’s and Taiwan’s inventory-shipment ratio for this sector is running at a multi-year high, the unwinding of which is likely to be time consuming. As such, the world is still midway through a downturn of the global tech cycle, which typically lasts 13 to 16 months.

Abating

Weaker exports notwithstanding, ANZ Research foresees better current account positions for most economies in the region. Headwinds that had adversely impacted current account positions in 2022 are abating. Food and energy prices, supply chain disruptions and tourism flows are turning more supportive.

ANZ Research anticipates the largest improvement in Thailand, where the current account should swing back into surplus, despite weak outturns in January 2023.

Price stability will likely remain the key near-term anchor for monetary policy, especially with the US Federal Reserve close to completing its own tightening cycle. On this premise, central banks in Malaysia, South Korea and Taiwan have concluded their tightening cycles. ANZ Research anticipate further hikes of 25 basis points each in India, the Philippines and Thailand.

The inflation outlook is quite varied across economies. Overall, as food and energy prices − as opposed to domestic demand − have been the main sources of price pressure, their retreat should be unambiguously favourable for inflation in the region.

However, for idiosyncratic reasons, the path is proving to be non-linear in India and the Philippines. Market inefficiencies in the Philippines are preventing a decline in food prices whereas in India, inflation expectations now appear to be feeding through to core inflation.

It is unlikely inflation can gravitate back into the official target range of 2 per cent to 4 per cent before the fourth quarter of calendar 2023 in the Philippines. It is also likely to stay above the mid-point of the official range in India for a prolonged period.

The path of inflation is also unclear in Malaysia where the new administration has reiterated its intention of moving to targeted fuel subsidies. As the contours of this shift have yet to be tabled, we have retained our earlier inflation forecast of 3.1 per cent for 2023. Singapore’s inflation is also set to remain elevated owing to the 1 per cent hike in the GST in 2023.

Sanjay Mathur is Chief Economist, Southeast Asia & India at ANZ

This is an edited version of a note which appeared in the latest ANZ Research Quarterly, published March 30, 2023