In the past three months, economic fortunes across Asia have diverged on growth, but joined up on inflation, say Barclays economists Rahul Bajoria and Chang Jian.
Calling inflation an “immediate headache”, Bajoria and Chang say the region’s high exposure to energy prices has fuelled sharp rises in inflation over the past few months.
“In the very near term, headwinds to growth are being overshadowed by rising inflation, as the region battles surging costs for food, fertilisers, fuel and increasingly labour, creating a vortex of inflationary headwinds.”
The notable exceptions are Malaysia — which is capping consumer prices through subsidies — and China, where demand remains soft, say the economists in a June 22 outlook.
While Brent oil prices have risen by some 58% year-to-date, the impact across the region has varied. They add: “Higher energy costs have generally been allowed to pass through to consumers, though countries like India, Thailand and Indonesia have used fiscal measures in varying degrees to limit the spillover.”
A bigger challenge for the region will be the upward pressure on electricity tariffs, which tend to rise with a lag, say the economists.
For example, Singapore recently announced a power tariff hike of 8.1% for the coming three months, even though oil prices have softened. With the increase in coal and gas prices, power bills are likely to have a much bigger impact on household and corporate costs going ahead.
China’s recent Covid-19 outbreaks and subsequent lockdowns have put brakes on its once red-hot economy.
The good news: There is limited spillover on the rest of the region, say Bajoria and Chang.
“This has meant that domestic demand and high contact services have recovered strongly across most economies, despite the emergent headwinds of rising inflation and energy prices,” add the analysts.
Barclays says Asia is benefiting from its relatively well-functioning manufacturing supply chains, which have not been disrupted materially by the Chinese authorities’ hard lockdowns.
“Looking ahead, we expect Asia’s export sector to experience a soft landing, with demand from within the region helping to mitigate the negative effects of weakening demand from Europe and the US, rendering the overall impact on exports manageable, even as consumption patterns shift from goods to services,” say Bajoria and Chang.
They add that a key challenge facing Asia will be digesting the surge in input costs — especially energy prices — into goods and services production, which will likely compress margins further and weigh on household consumption demand.
Barclays has trimmed its 2022 GDP growth forecast for China by 1 percentage point (pp) to 3.3% on “rolling Covid-19 lockdowns and continued housing drag”.
They have also cut growth forecasts for India by 0.5pp to 7.0% for FY2022 and 2023. “While we maintain our GDP forecasts for the other economies, our overall 2022 EM Asia growth forecast is down by 0.8pp for 2022, dragged lower by our changes for China and India,” say Bajoria and Chang.
Asia outlook by country
Although Indonesia is a net importer of oil, it is overall a net exporter of commodities and is thus poised to enjoy an economic boost from higher global prices, write analysts from Barclays Bank Singapore. “Our base case is for the government to hold the line on price controls and subsidies to limit inflation pressures, which are rising. While Bank Indonesia has continued to resist adjusting its policy rate, we expect rate hikes to commence in 3Q2022.”
Barclays’ base case is for one 25 basis point (bp) policy rate hike in 3Q2022 followed by another two in 4Q2022 and another three 25 bp rate hikes in 2023. “We forecast GDP growth rising to 5.7% in 2022, from 3.7% in 2021.”
Meanwhile, South Korea should “get ready for the summer heat”, as inflation will likely pressure the Bank of Korea to raise its policy rate by 25 bp in all of its four remaining meetings this year, taking the policy rate to 2.75% by November, say the analysts, adding that they forecast South Korea’s GDP growth will moderate to a “still solid” 2.8% in 2022, from 4.1% last year.
Malaysia is “showing resilience”, appearing to be the sole beneficiary of the rise in energy and food prices in the region, says Barclays. This reflects its position as a major commodity exporter, add the analysts.
“We expect Bank Negara Malaysia to raise policy rates by 25 bp in July, after which we expect the bank to pause and observe the impact of these hikes on domestic demand,” say analysts.
“We forecast a further 50 bp of rate hikes in 2023, taking the Overnight Policy Rate to 2.75%, which we believe will be close to the terminal rate in the current cycle.”
They forecast Malaysia’s GDP growth will accelerate to 7.0% in 2022, up from 3.1% in 2021, “significantly above” the central bank’s 5.5% to 6.5% forecast range.
The Philippines could see three more rate hikes this year, followed by one more in 2023, says Barclays. “We expect the economy to grow 7.5% y-o-y in 2022, driven by stronger private demand as reopening benefits gain traction, amid increasing external headwinds… For 2023, we see GDP growth moderating to 5.0% y-o-y.”
Elsewhere, Taiwan’s resolve to keep the economy open despite a surge in Covid-19 infections will likely help to support GDP growth, say analysts.
“This will likely continue to fuel demand-pull inflation pressures and keep the Central Bank of China (CBC) on a tightening path. Our base case is for another two 12.5 bp of policy rate hikes in September and December — the remaining meetings of this year.”
Barclays forecasts Taiwan’s GDP growth will ease to 3.9% in 2022 from 6.6% in 2021.
Singapore leading the pack
Finally, Singapore is leading the way in Southeast Asia in terms of relaxing social distancing measures and restrictions on international travel, thereby providing a noticeable lift to services activity.
However, this is exacerbating labour shortages and fuelling inflation pressures, write Barclays analysts. They expect core inflation to rise to 3.5% in 2022 — at the top-end of the Monetary Authority of Singapore’s (MAS) 2.5% to 3.5% forecast range — from 0.9% last year.
As for headline inflation, they see a jump from 2.3% in 2021 to 5.7% this year — slightly above MAS’s 4.5% to 5.5% forecast range. “Our estimates suggest labour market conditions remain tight and labour shortages have yet to be significantly ameliorated despite the relaxation of international travel restrictions and the reopening of the land border with Malaysia.”
Barclays believes Singapore’s GDP growth will slow to 4.9% in 2022 from 7.6% in 2021, which enjoyed a low-base effect from the contraction of 2020. “We now expect the government to run a fiscal surplus equivalent to 0.5% of GDP in FY2022, in contrast to its projection of a 0.9% deficit — consistent with its penchant for fiscal out performance.”
