Since early 2022, inflation has been rising, albeit moderately, for the first time since 2014, while growth contracted in Q1. The yen has depreciated sharply due to the Bank of Japan’s very accommodating monetary policy, which is out of step with the other major central banks, who have already begun to tighten their monetary policy. In June 2022, BoJ Governor Haruhiko Kuroda still thought it was “necessary” to maintain a yield curve control policy to boost core inflation to a “stable and sustainable” level. Yet currency depreciation aggravates imported inflation and further erodes household purchasing power. A few weeks before the legislative elections of 25 July, the government is likely to reinforce measures to support household purchasing power.
The Covid-19 pandemic weakened Indonesia’s economy. Two years after the crisis, real GDP has returned to 2019 levels, but the labour market is still weak, the poverty rate is higher than before the crisis and investment remains subdued. According to the World Bank, the pandemic’s lasting impact on education and the labour market will cost the country 0.1 points of its long-term growth potential. Today, Indonesia must deal with a new unfavourable economic environment as commodity prices have dramatically increased due to the conflict in Ukraine and sanctions against Russia. Although growth is bound to be squeezed by the Ukrainian conflict, Indonesia’s external accounts should remain healthy and inflationary pressures should remain moderate
The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
In 2021, sales by foreign subsidiaries of Japanese industrial companies accounted for nearly a quarter of total sales. China is the main anchor country, particularly for the automotive industry. Despite this, Japan has retained a larger industrial base than most other OECD countries. The sector accounted for more than 20% of total national value added in 2021. The share of goods exports in GDP has also increased, reaching 16.4% in Q1 2022. This production structure for Japanese companies, based on the complementarity between domestic facilities and foreign subsidiaries, has helped support profits, which climbed to a record as a share of GDP in Q1 2022
China’s economic growth started to slow down in March, then activity contracted in April (industrial production: -2.9% year-on-year, services production: -6.1% y/y). This rapid deterioration has principally resulted from mobility restrictions implemented in various provinces of the country in response to the epidemic wave. Most importantly, stringent lockdowns have been imposed in some major industrial and port regions (notably Shanghai), which has dampened activity in manufacturing factories, disturbed transport of goods and leading to supply chain disruptions in many sectors. Overall, the health situation and the level of mobility restrictions in China are improving in May. Local economic activity may therefore be able to recover at least slightly.
After an extremely solid performance in 2020 and 2021, export growth will slow steeply in 2022. Export growth rates have already been normalising in recent months, and the slowdown is expected to deepen in Q2 2022. This is the consequence of supply-side constraints due to disruptions in factories, supply-chain difficulties in the manufacturing sector and problems with goods transport following lockdowns in several main industrial and port regions (notably Shanghai). Exports to other Asian countries (47% of China’s total exports) were the first to be hit by China’s logistics problems and slowed markedly in March. On the demand side, the outlook has been worsening since the beginning of the war in Ukraine
China’s economic growth reached 4.8% year-on-year (y/y) in Q1 2022. It improved slightly over the first two months of the year, both in industry and in services, but this recovery was cut short in March. Economic conditions have worsened rapidly, as our barometer shows (narrowing of the blue area relative to the dotted area). This deterioration has resulted primarily from the resurgence of Covid-19 and mobility restrictions imposed in a number of regions in the country. In addition, short-term growth prospects are also looking bleaker due to deterioration in the international climate triggered by the war in Ukraine.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. Therefore, China’s official economic growth target, which has been set at 5.5% for 2022, seems highly ambitious. The Chinese authorities are accelerating the pace of fiscal and monetary easing.
The international economic and financial environment is not helpful for the Indian economy. Although India produces and exports wheat, it will suffer from surging commodity prices. Slowing growth is likely to hamper the government’s announced fiscal consolidation. The government will be forced to increase fertiliser subsidies sharply if it wants to contain the increase in domestic food prices, which make up almost 46% of consumer spending. India will not be able to avoid a significant deterioration in its current account deficit driven by higher oil prices and downward pressure on the rupee, especially if recent portfolio investment outflows continue. The results of the recent regional elections should ensure a degree of political stability at least until the 2024 general election.
The economic growth recovery has been unbalanced since the health shock in early 2020 and has rapidly lost steam. It was then interrupted in the first quarter of 2022, due to a very sharp rise in the number of Covid-19 infections and deaths linked to the Omicron variant. The epidemic wave is starting to recede, but Hong Kong will now have to face the effects of a slowing global trade, rising commodity prices and the tightening of US monetary policy. Despite these unfavourable conditions, sovereign solvency remains very robust and the government keeps a strong capacity to continue an expansionary fiscal policy.
After a modest growth in 2021, Malaysia’s economy is set to recover more strongly in 2022. It will be supported by firm domestic demand, an expansionary fiscal policy and the reopening of Malaysia’s borders to tourists. The country is an exporter of commodities – mainly oil and palm oil – and should benefit from higher international prices, without being directly affected by the conflict in Ukraine. Thanks to the additional revenue from higher oil prices, the government should be able to take on most of the burden of higher inflation to prevent problems for households whose finances have already been weakened by the 2020 crisis. Another key uncertainty regarding economic growth is how long and how severe Chinese lockdowns will be, since they could drag down Malaysian exports.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. The Chinese authorities are bound to accelerate the easing of economic policy.
While the US Federal Reserve has begun raising its policy rate, the Bank of Japan continues to pursue a very accommodating monetary policy. The sharp depreciation of the yen leaves the BoJ less manoeuvring room to pursue its yield curve control policy. Some adjustments in its policy are expected. Economic support – both monetary and fiscal – will be maintained in 2022 in an environment that is especially tough for Japanese industrial companies, hard hit by global supply chain disruptions and the economic slowdown in China.
Given the obstacles piling up for the global economy, there was concern that the consensus forecast of a significantly weaker Tankan survey would end up being too optimistic. Upon its release, it turned out not to be the case, with some series below consensus and other slightly better. The overall conclusion is clear however: the report was indeed less positive than in the previous quarter.
Economic growth picked up in the first two months of 2022, but this improvement will probably halt in March.In the services sector, growth was 4.2% year-on-year (y/y) in January-February, which is low, yet this figure is higher than the 3.3% reported in Q4 2021. The same observation can be made for retail sales volumes, which rose 4.9% y/y in January-February, up from less than 2% in Q4 2021.
At first glance, Indonesia consolidated its external accounts in 2021. Foreign exchange reserves amounted to USD 131 bn, the equivalent of 8.3 months of imports of goods and services, while the external debt came to only 35% of GDP, which is less than the pre-Covid level. Moreover, the current account showed a slight surplus (0.3% of GDP) for the first time since 2011. The strong performance of the current account reflects the steep increase in the trade surplus, which swelled to 4.1% of GDP, from an average of 1.3% over the past five years. Although imports increased by nearly 6 points of GDP compared to 2020, Indonesia reported a sharp rise in exports, driven up by higher commodity prices for coal, iron ore and palm oil
In Japan, possibly more than anywhere else, it is important to distinguish the dynamics between headline and core inflation. Headline inflation – at 0.5% in January – is bound to rise further, led by higher energy prices. By contrast, core inflation is still deeply in deflationary territory, and this trend is amplifying. Excluding perishable food products and energy, the consumer price index (CPI) declined by 1.2% year-on-year in January, the biggest decline since March 2011. The services sector even has reported the strongest deflation since 1970 (-2,8%), mainly due to the sharp drop in mobile phone charges, down more than 50% since March 2021. Medical services were also down (-0.8% y/y), as was durable household goods (-3,0% y/y), and leisure goods (-1.1% y/y)
Economic indicators for the fourth quarter of 2021 confirm that China’s economic growth has been heavily constrained by the crisis in the real estate and construction sectors, the authorities’ zero-Covid strategy and the persisting weakness of household consumption. Export activity remains buoyant. However, it could start flagging in the very short term due to weaker momentum in global demand and the Omicron wave’s repercussions on factory production and the transportation of goods. The Chinese authorities are gradually easing their monetary and fiscal policies to support economic activity. At the same time, they are expected to continue cleaning up the property market, reducing financial risk and tightening regulation.
Economic growth is still vulnerable to another epidemic wave as less than 50% of the population was fully vaccinated at the end of December 2021. Activity has already been losing momentum since December, and it could be curbed even further by the new epidemic wave that swept the country in January at a time when labour market conditions are still deteriorated. Inflation is another risk factor looming over the recovery. Not only does it reduce household purchasing power, but it could also convince the monetary authorities to raise policy rates
Vietnam weathered the 2020 health crisis without any major waves of infection, without a contraction in GDP and without a notable deterioration in its macroeconomic fundamentals. In 2021, the situation was much more complicated. In Q3, an upsurge in the number of Covid-19 cases and strict lockdown measures brought the economy to a standstill. The epidemic curve deteriorated further in Q4, but the economy picked up again thanks to the increase in vaccinations and the adjustment of the “zero Covid” strategy. In the manufacturing sector, production and exports rebounded, and growth prospects are still solid. In contrast, private consumption and activity in the services sector remain weak. The government still has some manoeuvring room to boost its fiscal support.
Thailand’s economic growth prospects over the short and medium term are limited. Private consumption and the tourist sector, the main engines of growth, will remain weak for some time. In tourism in particular, it is highly unlikely that the activity levels of 2019 will return before 2024. Moreover, the structural weaknesses of the economy (lack of investment and infrastructure) have been worsened by the pandemic and will hold back the recovery, particularly in exports. This said, although the country’s external vulnerability has increased over the last two years, it remains moderate for the time being.
Chinese economic growth slowed to 4% year-on-year in Q4 2021 from 4.9% in Q3. In the industrial sector, the situation improved slightly in Q4 after a summer that was badly disrupted by power cuts and supply-chain problems. Industrial growth accelerated from 3.1% y/y in September to 4.3% in December, driven by the still strong performance of exports (up 22.9% y/y in Q4). In the immediate future, however, manufacturing output and exports are likely to suffer from repercussions arising from the latest wave of the pandemic.
Economic figures for November once again show the dynamic momentum of Chinese exports (+21.4% year-on-year in current dollars), which continues to drive production and investment in the manufacturing sector. Our barometer highlights a deteriorated industrial performance in September-November 2021 compared to the previous 3-month period. Yet the industrial situation has been picking up slowly since October, after major disruptions in September due to power outages and supply chain disruptions. Industrial production rose 3.8% y/y, compared to 3.5% in October.
The Japanese economy revived in the fourth quarter after the state of emergency related to the Covid-19 infections was lifted in all prefectures in October. In particular, sentiment in the services sector has clearly improved. The quarterly Tankan survey showed that actual business conditions in the non-manufacturing sector gained 7 points in December compared with three months earlier. Moreover, consumer confidence improved in October and November to levels seen before the outbreak of the pandemic, although remaining low relative to its long-term average. By contrast, the gains in the manufacturing sector were minimal, as activity continues to be affected by supply disruptions and rising production costs that are reducing profit margins
