We know the coming year will be a consequential one but the trouble is we do not know exactly how. There are big unknowns to deal with: potentially ground-breaking elections in the US, India and Indonesia; the lagged impact of this year’s sharp monetary tightening; and the effects of technological changes such as artificial intelligence expanding into uncharted territories. How will all these affect Asia’s economic prospects?
The International Monetary Fund and World Bank tell us that global economic growth in 2024 is likely to remain positive; even if some of the major economies decelerate, most countries in Asia will do somewhat better than the global average and improve on this year.
Our view is that the Asia-Pacific economies outside mainland China and Japan will indeed hold up – and probably better than expected. Overall, economic growth is probably going to gather more momentum from the pace in 2023, with currencies strengthening a little against the US dollar and inflation rates edging down. Of course, we will have to watch carefully how the downside risks play out; the resilience that these economies have demonstrated in recent years gives some room for optimism.
Cautiously confident
On balance, the forces that determine the region’s economic growth are likely to be relatively supportive.
Asia will benefit from rising Chinese demand for commodities
First, the export-oriented economies in the region will be helped by the upturn in the electronics cycle, which is solidifying as inventory corrections are completed and the demand for components for artificial intelligence grows, boosting their manufacturing sectors.
Second, as policy support in China stabilises its faltering property sector and domestic demand recovers, Asia will benefit from rising Chinese demand for commodities and intermediate goods as well as a stronger revival in Chinese tourist arrivals. A steadier Chinese yuan will also relieve pressure on Asian currencies.
Third, data on foreign investment approvals and company announcements point to more production relocation from China to South-East Asia and India as the reconfiguration of supply chains accelerates.
The sharp monetary tightening of the past year will hurt over-leveraged sectors
Fourth, within the region, infrastructure spending will be boosted as governments revive plans that were deferred during the pandemic. Companies are also likely to resuscitate expansion plans now that the uncertainty created by the pandemic, geo-political risks and rising interest rates is ebbing.
Potential pitfalls
There are indeed many potential pitfalls. None of these should be under-estimated but the most likely scenarios suggest that the worst case can be avoided for some of the main risks we see.
China’s economy could turn out to be worse than expected if policy measures being implemented are not effective, perhaps because the interaction between the deflating property market and the financial sector ends up being far more toxic than anyone imagined. So far, though, the authorities are shifting towards a stronger policy response that should help avoid this risk – by channelling funds to property developers, raising spending on urban renewal and infrastructure, and by providing more support for the small business sector.
The Silicon Valley Bank crisis did also highlight the resilience in global finance
It is reasonable to expect that the sharp monetary tightening of the past year and the resulting tighter financial conditions will hurt over-leveraged sectors and expose areas where investors made grievous misjudgements or engaged in excesses. In fact, we would not be surprised if there were to be episodes similar to the implosion of Silicon Valley Bank (SVB) earlier this year. The SVB crisis, however, did also highlight the resilience in global finance; regulators responded swiftly and there were sufficient buffers in the balance sheets of systemically important financial institutions to allow the global financial system to absorb a repetition of such stresses.
We see South-East Asia in particular as a relatively stable region in a global economy beset with turbulence. There may be headwinds but there are also enough buffers in the region and sufficient positive drivers to allow the region to maintain a decent pace of growth.
