The global outlook for Asia-Pacific hinges on weaker growth in China due to stringent COVID restrictions and the higher projected U.S. interest rates, S&P Global Rating said
It said that considering the slower-than-expected easing of COVID restrictions and shallow recovery of domestic demand in China, it has further lowered our baseline 2022 growth forecast for the country to 3.3%.
A report entitled “Economic Outlook Asia-Pacific Q3 2022: Overcoming Obstacles, said that expect solid economic growth in 2022-2023, especially in economies relatively led by domestic demand such as India, Indonesia, and the Philippines.
However, S&P said that rising inflation has been a key factor behind the start of the monetary policy normalization in many economies: all but four central banks have started raising their policy rates.
The other key motivation S&P said is staving off external pressure amid rising global interest rates. Capital outflows and currency depreciation against the U.S. dollar have so far been contained. But we expect most central banks to continue to raise their policy rates to anchor inflation expectations and guard against external vulnerability.
On China, it said that lockdowns in Shanghai and elsewhere have hindered the economy since end-March. Consumption and the service sector have particularly suffered, and more so than investment and industrial production. Nonetheless, because of the intricate supply chains in and around Shanghai industrial production has been substantially disrupted.
It said that since May, restrictions and their economic impact have started to ease, but the recovery is shallow. Conditions in industry and exports improved significantly in May.
And, as has been the case throughout the COVID period, the effects of China’s restrictions on global supply chains should remain manageable.
However, S&P said that consumption and service sector activity remained weak and the recovery is slower than in 2020.
This is it said because the easing of restrictions on movement has been gradual, new restrictions have been imposed in other areas, and overall sentiment remains poor. In all, the economy is on track for a very weak second quarter, with little or no year-on-year growth.
On the monetary side, it said that concerns about capital outflows amid rising U.S. interest rates prevent the People’s Bank of China (PBOC) from slashing interest rates. But the PBOC is using quantitative levers to support credit growth.
On the fiscal side, China is advancing its infrastructure development and has implemented some tax cuts, while a cut in the mortgage rate provides some support to the property market.
S&P said that given China’s weak second quarter and with its COVID stance unlikely to change soon, we expect the country’s growth to fall well short of the “around 5.5%” target. In our new baseline, we project full-year GDP at 3.3%.
This it sad is based on the impact of lockdowns and restrictions easing in the second half and some stimulus kicking in. The lack of visibility on the COVID situation has started to affect medium-term prospects, as investment decisions change and some foreign companies look at moving production to other economies. As a result, S&P have tempered our expectations as to how much the economy can recover in 2023 following the current weakness
It said that the key downside risk in China is new COVID lockdowns in one or more large, relatively developed cities with economic heft and connectivity. GDP growth in 2022 would be lower still, with the relative strain on consumption, investment, industrial production, and service sector activity to resemble that of the recent episode
China’s lockdown weakness has lowered demand for other countries exports. The fact that consumer spending is hit harder by the lockdowns than investment and industrial production mitigates the stress on other economies, as China’s consumption is less import-reliant.
Nonetheless, China’s imports have weakened severely, in part because of the impact of the property downturn on commodity imports.
