Asian economies have been hit by the pandemic but differences among countries are striking. Beyond the extent of lockdowns and the size of the policy response, whether fiscal or monetary, the underlying characteristics of Asian economies also explain differences in growth trends.

Countries with the largest current account deficits have suffered, as risk-off episodes have complicated their necessary external funding, constraining their fiscal support. This is the case of India, Indonesia, and the Philippines. In turn, the Chinese mainland, but also other economies such as Vietnam and Taiwan and, to a lesser extent, South Korea and Japan have been less impacted both because of more effective containment policies and, in many cases, larger fiscal and monetary response. In addition, many of these economies' sectoral specializations have helped increase exports during COVID-19, whether tech, electronic or medical supplies. This is clearly the case of the Chinese mainland but also South Korea and Taiwan.

Policy responses

Regarding policy response, the region has shown much more courage as opposed to previous crises even in emerging Asia. This is more the case on the monetary front than on the fiscal front – with the clear exception of Japan and Singapore. The introduction of full-fledged quantitative easing in some more geographies, such as Australia, and even in some emerging countries such as Indonesia, India, and the Philippines are welcome. 

Looking forward, most countries in the region would do well to improve on the efficiency of fiscal policy for countercyclical purposes. The good news is that aggressive easing in developed markets has driven rates and the U.S. dollar lower, helping with risk appetite. In addition, the recent rollout of new vaccines cannot but make 2021 a good growth year, which the markets have already priced in. This also means that some temporary reversals cannot be discounted but, overall, 2021 will come with much better, but most of it will be cyclical, and 2022 will be a much harder year. 

Asian countries outlook

As far as the sectoral composition of the 2021 recovery is concerned, the rotation away from COVID-19 sectors into the real economy will help old sectors, especially transportation and energy, as well as countries most dependent on them. In addition, some countries have managed to carry out reforms during the pandemic, out of necessity, especially in India, Indonesia, and the Philippines.

Among major Asian economies, the Chinese mainland has clearly been the first in and the first out with a rather robust recovery. We expect the recovery to continue to be supported by the rollout of new vaccines. Against such background and supported by base effects and the impact of the 2020 fiscal policy stimulus, growth in 2021 will be much faster even if cyclical.

Challenges of COVID-19 have also facilitated the progress of a number of reforms in India, Indonesia, and the Philippines, to which investors will pay even more attention as the clouds of the coronavirus pandemic continue to be lifted. Japan, instead, will have a harder time in terms of lifting the economy beyond a statistical rebound and notwithstanding a much bigger fiscal and monetary stimulus. The minimal structural reform during the Abenomics years will continue to push down potential growth.

Overall, with growth staging a comeback and companies resuming investment after a massive drop in 2020, our outlook remains positive but not without acknowledging the hangover of the pandemic. In fact, faster debt accumulation is an important negative consequence of the coronavirus and the policy response, not only in Asia but globally. 

The second negative consequence is an acceleration of demographic problems due to the fall in the fertility rate across the globe. In Asia, this hits aging economies much more brutal than those with a still positive demographic dividend. On the positive side, there is a silver-lining to COVID-19, namely a potential boost to regional trade integration thanks to the signing of the Regional Comprehensive Economic Partnership Agreement.

Risks facing 2021

Finally, a number of risks remain in our positive scenario for 2021. The first and most obvious one relates to vaccine-related delays which could come from production or distribution bottlenecks but also renewed lockdowns. 

At the other end of the spectrum, an inflationary shock could appear due to supply constraints on the back of pent-up demand from a smooth vaccine rollout and widespread optimism. Supply constraints would obviously hit economies with current account deficits more severely. 

The third one comes from growing tensions between the U.S. and China, especially as they move further from economics to security issues. Taiwan and the South China Sea are clearly the most important flashpoints. 

Finally, such a complicated geopolitical outlook, coupled with the lessons learned from COVID-19 regarding supply disruptions could push the reshuffling of value chains further, with important consequences for Asia. The risk of decoupling, or even deglobalization if more generalized, could actually extend beyond trade towards technology or even finance, with obvious negative consequences for growth in Asia and globally.

(Edited by Ye Ke)