IMA Analysis

Tuesday March 29, 2022

Asia Brief - July 2021

The outlook for the next six months is dominated by the contest between COVID-19 variants and vaccination levels. The outcome will vary by country. Wealthy countries with capable bureaucracies and good vaccine supplies are better placed. This group accounts for 60% of global demand, and as they move to herd immunity by the second half of 2021, their growth should lift. Pent-up savings and left-over stimulus should deliver a strong 2022 for them.

For instance, in the US, the full vaccination rate stands at 47% in early July, putting it on track for herd immunity by the last quarter of 2021. Last month, the Federal Reserve Bank raised its GDP forecast to 7% for this year (prior 6.5%) and 3.3% in 2022 (unchanged). We expect QE to taper from late 2021 with a Fed rate hike in 2022, which will lift the US dollar. In the EU, the full vaccination rate was 38% in early July, putting it on track for herd immunity by Q4 of this year. The EU Commission lifted its GDP forecast to 4.8% this year (prior 4.3%) and 4.5% next year (prior 4.4%).

By contrast, many emerging markets are struggling with the Delta variant, with their growth rates being cut. Weaker growth for some of these markets could continue for many years due to a fall in savings and a loss of attractiveness (whether for tourists, export factories, or global capital). An additional challenge, a perennial one, is political instability (Haiti being this month’s case in point), which often increases in times of crisis. But it is noteworthy that Asia’s three big markets - China, India and Indonesia, which contain 40% of the world’s population - have not seen such instability or any loss of authority for their governments.

In China, President Xi Jinping is lining up a third 5-year term in late 2022 and continues to drive campaigns to reform and deleverage the economy. In India, Mr Modi has carried out a major cabinet reshuffle, which is aimed as much at revitalising reform as winning a third 5-year term in 2024. In Indonesia, poor policies leave President Widodo facing a pandemic crisis but there is no challenge to his authority, and a stable leadership change is expected in the 2024 election.

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