There are reasons to worry that Asia’s recovery might suffer as a result of the Russian invasion of Ukraine. However, considering all the various factors shaping the region’s economic trajectory, we believe the damage to Asian growth prospects is likely to be contained.
The main threat to economic prospects comes from the sharply higher costs of energy and some key food items. Oil prices have surged about 50% since the beginning of the year while prices of food items such as wheat and edible oils have also risen. As the cost of living rises, consumers will tend to cut back on spending while businesses may curtail operations and defer expansion plans.
Central banks, fearing that higher inflation could become entrenched, may have to raise interest rates faster than planned, which would also cool demand in the economy. Moreover, the ructions in the financial markets will raise the cost of capital while depressing business confidence. The sanctions that have been imposed on Russia add to uncertainty.
These factors will certainly exert a drag on the world economy. Nevertheless, there are several reasons why the Asian region can still sustain recovery, albeit at a modestly slower pace.
Central banks, fearing that higher inflation could become entrenched, may have to raise interest rates faster than planned
More upside than down
But, first, let’s set out our assumptions. Our best guess is that the kind of military conflict that disrupts supplies of energy and food will last for several weeks rather than many months. If so, then prices of these commodities will fall eventually and most of the damage to global economic growth will be confined to roughly one quarter rather than the whole year.
Against this definite hit to growth, we also need to consider the potential upside to growth from the easing of the pandemic. We believe that rising vaccination rates combined with better medicines will reduce the public health dangers and encourage the authorities to ease the current restrictions, allowing more consumer and business activities to resume.
Countries such as Thailand, Singapore, Malaysia, Indonesia and the Philippines, have persisted in carefully rolling back rules on gatherings and the need for extensive testing and quarantines. As these easing measures are expanded, consumers and businesses are likely to regain confidence, and pent-up demand will be released, including for crossborder travel. Companies will also start dusting off long-delayed plans to expand capacity, triggering a revival of investment.
Fresh impetus
This will give fresh impetus to global demand for Asian commodities and manufactured goods. Moreover, we suspect that there is a strong yearning on consumers’ part to travel and expect tourism to return quite forcefully in the second half of the year. For Thailand, where tourism contributed, directly and indirectly, roughly 18–20% of the economy before the crisis, this will be a particularly potent driver of economic revival. But other countries such as Malaysia and Indonesia will also benefit significantly.
Additional momentum for emerging Asian economies is set to come from an improvement in consumption and investment in China. The Chinese economy has been slowing for several months and the authorities have stepped up their efforts to stimulate the economy through monetary and fiscal measures. More credit has flowed to local governments, helping to revive infrastructure spending while taxes and fees have been cut for companies.
The purchasing manager survey for February has consequently picked up the beginnings of a rebound in demand. The pipeline for new business in manufacturing, for example, is at a seven-month high. With small enterprises still under pressure, policymakers are likely to unveil further measures to help this important sector, which employs the bulk of the workforce.
Barring an unforeseen event, such as an overly aggressive monetary tightening by the US central bank, economic growth prospects in emerging Asian economies remain reasonably good in 2022.
