Searching for a sustainable rebound in Asia amid rising risks

PineBridge Investments asks what kind of market rebound in Asia is likely at a time of economic and geopolitical risk.


 


The following commentary on the Asian economic and financial landscape comes from PineBridge Investments and its chief economist, Markus Schomer. As readers can imagine, the editorial team of this news service regularly feasts on wealth managers’ views on what they think will happen in the markets, and we like to pick the viewpoints that are unusually detailed, or contrarian, or have a specific angle. . Schomer’s article adds to the debate and we hope readers will find it useful.


As with all guest contributions, the editors of this news service do not necessarily share the opinions of outside commentators. Join the debate and make your point of view heard! E-mail [email protected]

Our outlook for Asia in 2022 has been distorted by another exogenous shock in the form of the Russian invasion of neighboring Ukraine. We expected the global economy to outgrow the Covid pandemic and settle into the new economic cycle this year. Instead, we now face a sharp build-up in inflationary pressures that are depressing economic sentiment and have raised expectations of more aggressive monetary policy tightening, particularly in major developed economies. That, in turn, is fueling growing recession fears that are hanging over global financial markets.

However, global monetary policy is far from synchronized. Many emerging market central banks have been raising rates for more than a year now, while the People’s Bank of China is cutting them. The reason China is on a very different political trajectory is its “dynamic zero-Covid” policy, which has resulted in continued lockdowns in its economy. Recently, some restrictions have eased, allowing greater mobility but with frequent testing. Purchasing managers’ indices point to a sharp slowdown and possibly a contraction in Chinese GDP growth in the second quarter, posing a serious threat to the country’s growth target. In his April 2022 World Economic Outlookthe International Monetary Fund (IMF) cut its forecast for China by more than one percentage point to 5.1% from its previous October 2021 forecast, acknowledging this development (1).


Growth is slowing in China, but government stimulus is underway

Industrial production recorded its second largest decline since 2020




Annual growth in investment in fixed assets remained positive, underlining efforts to stabilize growth


Source: Macrobond, Bloomberg, PineBridge Investments Calculations as of May 16, 2022

The Chinese government has decided to implement more stimulus measures. Yet it is not just zero-Covid that is weighing on the economy, but also problems in the real estate sector, which complicate attempts to use traditional stimulus tools such as increasing the supply of credit. or falling interest rates. China’s outlook is the most deteriorated among major Asian economies since our initial release of the outlook for 2022.

Japan is another global exception in terms of monetary policy, where the central bank is keeping the yield on 10-year government bonds close to zero. Japan started the year with another contraction in GDP. The poor first-quarter performance was the result of a new round of Covid-related restrictions, underscoring how far the country lags behind the United States and Europe, which have largely scrapped most Covid measures. But the economy is expected to rebound in the spring, and continued monetary and fiscal policy support, along with stronger exports boosted by a weaker yen, should extend this recovery into next year. In fact, the IMF forecasts roughly the same GDP growth rate for the United States, the Eurozone and Japan in 2023 (1). It would be remarkable if this were achieved with three radically different monetary policy regimes.

India’s economy slowed sharply in the first three months as Covid restrictions kept growth at an annualized rate of just 1.2%. Still, purchasing managers’ indices suggest growth should pick up in the second quarter as restrictions lift. The main risk to India’s outlook is soaring oil prices. The country imports 85% of the oil it consumes, meaning oil costs will put increased pressure on India’s current account, potentially necessitating higher interest rates or a weaker currency. However, the latter is not desirable, because it would further fuel inflation. Therefore, tighter monetary policy is in the cards, which means downside risks to growth are on the rise. In June, the Reserve Bank of India raised the repo rate by 50 basis points to 4.90% and announced a gradual withdrawal of the accommodative measures implemented during the pandemic with the aim of keeping inflation within the limits of the goal.

The economic outlook for Asia looks a little weaker compared to the end of 2021, when we wrote our initial outlook. The Russian invasion of Ukraine has pushed up inflation even further, increasing the risk that central banks will go too far in their attempts to counter soaring prices. China has been under more Covid containment measures since the start of the pandemic. On the other hand, a weaker growth outlook also means fewer rate hikes and less restrictive monetary policy. We would need a more sustained market rebound and a turnaround in inflation to (quickly) lead to a pause in the rate hike cycle and the disappearance of recession risks.

Footnote,

1, International Monetary Fund, April 2022, https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022