S&P: Asia Pacific Economic Outlook Q4

Standard & Poor's headquarters in the financial district of New York on August 6, 2011. The United States' credit rating was cut for the first time ever August 5 when Standard and Poor's lowered it from triple-A to AA+, citing the country's looming deficit burden and weak policy-making process. AFP PHOTO/Stan HONDA

Asia Pacific ex-China saw its growth largely remain robust in the second quarter. Weighted average year-on-year growth was 4.0%, unchanged from the first quarter. A pronounced slowdown in China was offset by a strong rebound in India as consumption–especially of services–continued to recover and investment grew robustly. Japan’s economy also grew strongly.

The widely expected slowdown in global demand is a big test for Asia-Pacific. Real export growth and manufacturing purchasing managers’ index surveys have already deteriorated in Northeast Asia, especially in the global trade bellwether economies of South Korea and Taiwan. The recovery of domestic demand from the effects of COVID-19 should support growth. Outside of China, governments and people have largely moved to a “living with COVID-19” stance, although in
In some economies (such as Japan) new COVID-19 waves are affecting mobility and spending.

Following a mostly solid 2022, expect the slowdown in 2023 to vary across the region, depending on several factors. More domestic demand-oriented economies are less exposed to the global slowdown. Expect a larger slowdown in 2023 in South Korea and Taiwan than in India, Indonesia, and the Philippines. India growth outlook has been retained at 7.3% for the fiscal year 2022-2023 and 6.5% for the next fiscal year, although S&P sees the risks tilted to the downside.

In some countries, the domestic demand recovery from COVID-19 has further to go. This should support growth next year in India, Malaysia, the Philippines, and Thailand. The latter three should also further benefit from improving tourism.

In some economies, the impact of higher interests on growth will be pronounced, either because policy interest rates climb strongly or the effect of the increases is profound. Policy interest rate increases hit harder in case of high debt or heavy borrowing on variable terms. Notably, higher interest rates will weigh on growth where mortgage financing has expanded strongly.

The recent fall in energy and food prices has eased the pressure on inflation. However, as previously argued, what happens to core inflation–underlying inflation excluding energy and food–is key to understanding the trajectory.

Core inflation has shot up in some Asia-Pacific economies, less so in others. It has soared in Australia, South Korea, and New Zealand and has remained high in India. On the other hand, it has stayed low in China and Japan and modest in Hong Kong, Indonesia, Malaysia, Taiwan, and Thailand (see chart 5). On a sequential (month-on-month) basis, core inflation seems to have plateaued in some Asia-Pacific economies and declined in India. But in some economies it is too early to conclude
that a downward trend has started. For instance, in India headline, Consumer Price Inflation (CPI) is likely to remain outside the Reserve Bank of India’s upper tolerance limit of 6% until the end of 2022.

  1. That’s amid substantial weather-induced wheat and rice price increases as well as sticky core inflation. And food inflation may rise again.
  2. By Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings.
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