There are four reasons why 2021 should usher in a robust Asian recovery. First, the Covid-19 pandemic is coming under control. Second, monetary policy will remain highly supportive of growth. Third, China’s economy is poised to soar. And finally, the inexorable rise of technology will keep driving Asian exports. There are, of course, many risks that need to be watched but these can be managed.
The vaccines against Covid-19 are being rolled out speedily. A sufficient number of people in major economies should be immunised by the third quarter of the year, allowing confidence to return as restrictions on economic activity are removed. For Asia’s trading nations, the revival of capital spending by businesses in developed economies will be key, as there is a high correlation between expenditure and their exports of manufactured goods.
The central banks of the major developed economies have clearly signalled they will be in no hurry to step back from their ultra-easy monetary policy stance; low interest rates and central bank buying of bonds will help ease the flow of credit to consumers and companies. While China’s central bank has indicated that it will recalibrate monetary support and encourage businesses to reduce leverage, it will do so carefully so as to not risk the economic rebound.
Fiscal policies, however, will be generally less expansionary than in 2020 given the recovery. So long as fiscal deficits are cut in a calibrated manner, this should not hinder the recovery.
China revs up
Mainland China’s economy has already regained momentum, as seen in recent data on industrial production, retail sales and fixed asset investment. Consumer confidence is likely to grow as consumers are optimistic about the future. Investment will be the principal engine of growth.
The coming year is the first year of mainland China’s latest five-year plan, when, typically, many new projects are launched. We are likely to see manufacturing investment rising relative to infrastructure and real estate investment, making for a healthier pattern of capital spending. Since mainland China is now 18% of the world economy and accounts for more than 10% of world imports, its recovery will help its trading partners.
The Chinese yuan is also likely to appreciate modestly, which should also help support Asian currencies. That will give Asian central banks more leeway to keep interest rates low and thus contain any potential risks to the economic recovery.
Economies in East and South-East Asia are major exporters of electronic components. For them, the tech cycle is a vital determinant of exports. While there might be short-term inventory adjustments which could slow demand in the very near term, there are good reasons to expect overall demand for tech-related equipment to be strong in 2021. The rollout of 5G services is one reason, as is the faster pace of digital adoption generated by the pandemic crisis.
Reforms in some major economies in Asia are also likely to help raise investment rates and so boost economic growth. In Indonesia, for example, the government has secured parliamentary approval for game-changing reforms to improve the labour market and reduce the damage caused by inconsistent regulations issued without coordination by central and local governments. India, too, has deregulated its labour market and is proposing to reform agriculture. Both countries stand to gain more foreign investment as a result.
After a year of unexpected setbacks, it is fair to ask where the downsides might come from in 2021. Certainly, trade tensions between the major economic powers remain a concern, but a new president in the US is likely to help cool tensions.
Financial stresses do pop up every now and then, but central banks have been alert enough to contain such risks.
A final concern is inflation. An unexpected spike could trouble financial markets by sparking an abrupt rise in long-term interest rates. However, given the large amount of unused capacity in most economies and weak pricing power, this does not appear to be a major risk.
In short, there is every reason to be optimistic about the coming year.