The evidence is accumulating for a strong global recovery. Yes, there are still some risks to that forecast, but as more data comes in, an optimistic scenario is looking ever more likely. This is good news for the exporting economies of East and South-East Asia.
First, the lead indicators that have traditionally offered a reliable view on future growth prospects are turning markedly positive. The OECD’s latest composite lead indicators are one example. These show a broad-based rise across all the large economies of the world.
Surveys of purchasing managers in January and February are also noteworthy for the generalised improvement in business confidence about economic recovery, despite the increase in Covid infections in many regions in late 2020. The pipeline of new business is also improving for manufacturers in almost all the economies covered by these surveys. A lead indicator we have developed for the outlook for Asian exports is also signalling a rebound.
Second, there are several dimensions of this recovery that are particularly beneficial to Asian economies. The key to stronger than expected growth in demand for exports of manufactured goods is capital spending in the developed economies, especially in the US. In recent months, US core capital goods orders (which are usually reflected in Asian exports three to six months later) have been rising consistently.
In 2020, US businesses were holding back on capital spending because of the dislocations caused by the pandemic, but their spirits had already been checked by the great uncertainty created by President Trump’s trade and other policies. With these uncertainties now easing, pent-up demand is likely to be released, with investment taking advantage of the many new technologies that have reached take off, whether in the digital, renewable energy or bio-medical fields. Our analysis shows China and Singapore as best positioned to increase exports as a result, with Indonesia, Korea, Vietnam and Malaysia more modest winners.
Third, the improving prospects for a global recovery have boosted prices of the region’s export commodities, such as coal, crude palm oil, rice, copper and nickel. Indonesia, in particular, should benefit from this.
The improving prospects for a global recovery have boosted prices of the region’s export commodities
These developments have unfolded against a background of growing confidence that the world has gotten over the worst of the pandemic. The vaccine roll-out, though disappointing in some regions, is gathering momentum, and improved clinical management and better drugs are reducing the health risks associated with the pandemic. Governments are also learning to manage spikes in infections in a more calibrated manner, which has reduced the economic damage that public health countermeasures cause.
Covid-19 remains a mystery in some regards for even the best medical experts. We keep learning new things about the virus, and there is much that we simply do not yet know. The truth is that the virus could well mutate and cause even more damage. The comfort we can draw is that, so far, the results of the vaccination drive have been remarkably good. Even with new variants emerging, infections and deaths have diminished significantly among the vaccinated population.
Our suspicion is that if there is a risk that we should worry about it is that the coming rebound will be too strong. After all, a rapid return to normal levels of capacity utilisation and unemployment may spur inflation fears and produce a spike in interest rates that could hurt financial markets and the economic recovery. Some of this is already happening, as seen in the recent spike in bond yields.
The key issue here is whether inflation will indeed rise higher and faster than expected. There are several reasons to doubt that. So long as unemployment rates are slow to return to normal, it is unlikely that wages – crucial for inflation overall to take off – will rise abruptly.
Moreover, in most economies that are open to trade, higher demand is more likely to lead to a surge in imports than a spike in domestic prices. Also, given the intense shock caused by the pandemic, it is unlikely that companies will have enough confidence in their pricing power to raise prices aggressively any time soon. And, finally, with technological progress really accelerating and boosting productivity, unit costs of production are likely to fall.
The bottom line seems to us that the second half of this year should see a robust recovery. Economic growth this year could far outperform the already upbeat forecasts made by the World Bank and the International Monetary Fund. The resulting uptick in global demand will give a strong uplift to Asian economies.