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
The crisis in the real estate sector, the “zero Covid” strategy in the midst of a resurgent pandemic, and the persistent fragility of household consumption are some of the main risk factors straining China’s economic growth. In the short term, the authorities are expected to cautiously step up monetary and fiscal policy support while maintaining their focus on rebalancing the property market, reducing financial risks and tightening the regulatory environment.
The victory of the Liberal Democratic Party in the October general election allows prime minister Kishida to implement his policies. In November, he presented an unprecedented fiscal package amounting to some JPY55.7trn or 10% of GDP. In 2022, GDP growth could rise to 2.6% after 1.7% in 2021, largely driven by private consumption.
Our monthly Pulse highlights the cyclical deterioration of the Chinese economy in August-October 2021 compared to the previous 3-month period. While the situation in the industrial sector improved in October after a sharp slowdown in September, the correction in the real estate sector has continued. Industrial production growth picked up slightly in October (+3.5% y/y in real terms, compared to 3.1% in September and 5.3% in August). In fact, the measures introduced by the authorities rapidly eased energy constraints last month.
Chinese real GDP growth slowed to 4.9% year-on-year (y/y) in Q3 2021 from 7.9% in Q2 2021. In the services sector, growth slowed sharply in August (+4.8% y/y), due notably to the reintroduction of lockdown measures to counter a new surge in Covid-19 cases. Although services growth rebounded in September (+5.2%), it is still sluggish. Tighter regulations in a number of segments, including online services, tutoring and video gaming, have constrained activity. The services sector has also been hit by the downturn in the real estate market due to a severe tightening of prudential regulations and credit conditions in the sector. In Q3 2021, house sales contracted while property developers have encountered increasing financing and cash-flow problems
In the past few months, activity was hampered by the state of emergency in large parts of the country, which affected in particular the services sector. In addition, the manufacturing sector was confronted with supply disruptions, specifically in the car industry. Finally, the substantial base effects related to the pandemic make it difficult to interpret the year-on-year data.
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
India’s economic and financial situation has consolidated slightly since the summer. After contracting sharply in Q2 following the spread of the Covid-19 pandemic, economic activity rebounded strongly in Q3. Even so, at end-September, only 20% of the population was fully vaccinated, which means the country is not sheltered from a third wave of the pandemic. Growth prospects are still looking good for the rest of the year. Household consumption will benefit from falling inflation and higher government spending. Business leaders are still confident, even though they are taking a cautious approach to investment plans. Borrowing rates are low, and the banking sector, though still fragile, is doing better than it was three years ago
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
The third wave of the Covid-19 pandemic is unlikely to jeopardise the dynamic momentum of South Korea’s economic recovery. Solid fundamentals, diversified exports and massive fiscal and monetary support should help limit the impact of the crisis on the country’s medium and long term growth prospects. In contrast, an ageing population continues to erode the country’s growth potential and public finances, even though the government has implemented a series of structural reforms. Household debt has picked up rapidly over the past 18 months. The associated credit risks are limited, however, thanks to the implementation of macroprudential measures and the comfortable level of household financial assets.
