Asia’s Growth Consolidates in 2022, But with Major Risks

By Alicia García Herrero

Outlook for Asia’s Growth in 2022

 After a fast technical rebound in the first half 2021, Asia GDP growth quickly sagged in the second half of the year, as COVID-19-related suppression measures were tightened and supply chain constrains continued to bite. The power crunch in China, several real estate developer defaults, and forced deleveraging also pushed down growth in China, with reverberations for the Asian region. Still, external demand helped both China and the region keep a moderately high growth rate during the year.

This might be much harder in 2022, however, as global growth is expected to decelerate even more in light of the Omicron COVID-19 variant, which is rapidly spreading across the world. All in all, weighted average GDP growth for Asia should end at around 6.1% in 2021, up from -0.8% in 2020, and land at 4.7% in 2022.

Growth consolidation in 2022 hinges on a number of assumptions, namely: a steady exit from “zero-Covid” policies in Asia; easing supply shocks; and supportive fiscal policy, especially in China and Japan.

The outlook is clouded by slower external demand, impacting export-driven economies such as South Korea. New cross-border restrictions could also create additional hurdles for the global value chain.

As if this were not enough, global financial conditions are bound to tighten, led by the United States, which will put pressure on central banks. As the Fed’s tapering gets into full wind in 2022, it will leave the door open to interest rate hikes thereafter. The market is already discounting two hikes of 25 basis points by the end of 2022, which is bound to push Asian central banks to follow. For some countries, including South Korea and Australia, the process has already started.

Central Banks’ Responses to Global Financial Conditions

China, however, is on an easing path in order to cushion its cyclical deceleration. In fact, the People’s Bank of China has already started to ease by cutting the reserve requirement ratio, and more cuts are expected in the coming year.

The Bank of Japan is not expected to make any change to its current monetary strategy, as inflation remains muted. More generally, inflation is expected to rise in the region in 2022, up from the rather moderate levels in 2021, especially when compared to the U.S. and Europe, but not to the point of breaking the boat and forcing Asian central banks to overreact.

All in all, central banks’ responses are expected to be gradual, keeping monetary conditions accommodative, even if tighter, except in the cases of China and Japan. For China, monetary easing will not be enough to avert a rapid deceleration of the economy. Therefore, a fiscal stimulus will be needed through the fastest and most effective means that China has long followed for such an endeavor: infrastructure investment. We are already starting to see a turnaround in the amount of local government debt issued to finance infrastructure.

Risks to Asian Growth

This baseline scenario is not without risks. The first, which has already been mentioned, is that Asia backtracks on its opening progress in response to a new COVID-19 threat. Omicron is clearly the first of these threats and perhaps relevant enough on its own, though it is too early to tell what its full impacts will be.

The second risk is renewed supply chain disruption, which could stem from border closures in Asia or domestic lockdowns in the region or elsewhere. This would be an issue for growth, as it would make manufacturing production more difficult, and also for inflation, as has become increasingly clear this year.

In addition, Asia’s awakening to the need to push for energy transition in light of their climate commitments, though positive in its own right, could have unintended consequences on both growth and inflation. Bold commitments to reduce emissions are bound to prolong the energy crunch experienced by several Asian countries, notably China, into 2022 and beyond.

The next risk relates to spillovers from China’s deleveraging drive, especially in the real-estate sector. This bloated sector, which accounts for a third of China’s growth, will need to shrink, with an obvious negative impact on fixed asset investment. In addition, plummeting housing transactions and land sales are going to put some real-estate developers, and also some local governments, in trouble—requiring a masterful monitoring by Chinese policy makers.

Finally, U.S.-China strategic competition remains a key risk. The renewal of high-level meetings should only be read as a de-risking device, while the U.S. economic containment on China continues, and China continues its push to gain global influence. With such high stakes, growing disagreement and selective decoupling remain major risks to Asian growth going forward.

About Alicia García Herrero

Alicia García Herrero is the chief economist for Asia Pacific at Natixis. She also serves as senior fellow at the Brussels-based European think-tank BRUEGEL, and as a non-resident senior follow at the East Asian Institute of the National University Singapore. In addition, Alicia is an adjunct professor at the Hong Kong University of Science and Technology and a member of the Advisory Group for the Emerging Markets Institute at the Samuel Curtis Johnson Graduate School of Management