Asia Key themes 2023 – Cyclical slowdown, but resilient structure

Asian economies have bounced back smartly from the pandemic-related dislocations. But pressures remain, though they are changing. Cyclically, Asia will struggle given its exposure to the global economy and limited policy space. Structurally, though, the region is more resilient given the relatively strong balance-sheets of households, firms, and governments. Overall, we think Asia’s recovery is likely to be flatter than history would suggest.

Asia Key Themes 2023:

• China, China, China – so important, we called it three times. The biggest impact from China on the region could come from the uncertainty about its Covid policy and the consequent impact on the regional risk premium. But even without Covid, the housing bubble is slowly deflating, and political tensions are rising. Recovery will be slow, and the region will feel the pain.
  
• Changing pressures from oil prices to global growth. In 2022, policy rates went up in nearly all Asian economies, largely due to higher energy prices and supply side bottlenecks. As these pressures ease, how are central banks likely to react? It’s possible that monetary easing will happen sooner than most expect.
  
• A harder hit, but a stronger chin. The blow to Asian economies from Covid-related lockdowns, higher oil prices, and China’s growth slowdown, is unprecedented. Yet, the structure – the balance sheets of households, firms, and the government – is also stronger. The growth recovery may be slow but it will on a solid foundation.
  
• India to slow but still shine, at least relatively. With China slowing, India is the favoured regional growth story, especially given its performance in the aftermath of the pandemic. While there is plenty to cheer about, a slowdown is looming in the near term – and that carries risks.
  
• The Hong Kong dollar peg to the US dollar is here to stay for now. Simply put, it’s not in either Hong Kong or China’s interest to abandon it.