After an unprecedented year, some green shoots are evident a few months into 2021, while some uncertainties remain. Broadly, three themes emerge. One, a combination of powerful stimulus policies, improving vaccine rollouts, and enhanced economic resilience point to a better-than-expected recovery from the pandemic-induced recession. Two, downside risks remain—in the form of new spikes of COVID-19 infections and the emergence of new strains of the virus, as well as likely financial market turbulence. Three, as the world settles into the postpandemic era, the focus of businesses and markets will likely be on how to “build back better.”
Trends in the exports of countries such as China and Korea suggest that the rebound is stronger than expected. For instance, China’s exports are up 21% in March 2021 from March 2019. Further signs, such as across-the-board improvement in the OECD’s composite lead indicators and an expansion in the pipeline of new orders, indicate this strengthening of global demand is likely to be sustained. Emerging from the pandemic, it’s becoming evident that as the economic recovery in Asia/Pacific (AP) countries spurs imports, the recovery in one country is likely to spill over into others.
But exactly how durable is this recovery, especially given the devastating second wave of infections in some countries and questions about the side-effects of the vaccines? While these headwinds present challenges, they have to be viewed through the lens of other corresponding developments:
• Countries seem better equipped to handle new waves of the infection, or rather, policymakers, businesses, and citizens seem to have adapted to pandemic-induced restrictions in ways that reduce the infection’s impact on the economy.
• Monetary and fiscal policies continue to support their economies. For instance, central banks in large developed nations around the world remain committed to prolonged periods of near-zero interest rates and high levels of quantitative easing.
• Vaccinations are gaining traction in both developed and developing countries. As the proportion of the vaccinated population grows, economic activity and consumer spending will increase.
• Several technological advances, such as the proliferation of 5G and the shift to work from home, are likely to benefit several AP economies (Japan, South Korea, Taiwan, and Singapore, among others).
Amid the slow but steady recovery, risks persist. The biggest concern is the COVID-19 virus itself and the emerging mutations of the virus that are bringing about huge spikes in infections, India being a case in point. However, we believe policy actions could go a long way in mitigating this risk:
• Monetary and fiscal policies currently in place to support funding should not be prematurely withdrawn. These can help alleviate damage to jobs and incomes in case of new waves of the virus.
• The speed and scope of the vaccinations have to be increased to ensure that the maximum number of people are vaccinated against the virus.
• Government support to expand research and development into vaccinations and medicines to treat the virus must continue so that countries have a wide range of medical options to battle the crisis.
Another challenge is the likely turbulence in financial markets. Inflationary pressure could increase or the current ultra-easy monetary policies in place might be withdrawn sooner than expected, causing some market imbalance. While our research suggests that inflation is likely to increase, it is not expected to rise to the level where it could cause undue dislocation. Even with a strong rebound, there’s likely to be enough slack in the global economy to limit pricing power. Also, sharp spikes in inflation usually occur when wage pressures become formidable, but at current rates of recovery, employment rates are not likely to return to prepandemic levels until 2023.
However, it is likely that inflation could gather momentum in developed economies (but remain below rates), which could prompt an abrupt tightening of monetary policy. Further, with the US economy recovering, the US current account deficit could surprise on the upside, which could lead to more demands for protectionism in the United States, which, in turn, could impact exports from Asian economies. How these risks play out will depend on how central banks manage market expectations so that asset price movements are not disorderly.
Several changes, which may have seemed nebulous before the COVID-19 crisis, have cemented into definite trends now:
• The focus on technological solutions, such as remote working, e-commerce, and online payments, has strengthened. The implications of this trend are far-reaching and will likely shape the future of work.
• Policy frameworks have undergone a fundamental shift toward an increased willingness to experiment with policies in pursuit of economic development and social goals.
• An increased focus on supply chain resilience, combined with rising costs in China and trade conflicts, means a redrawing of supply chains, with other developing countries moving up the value chain.
• Recent natural disasters—and, even to some extent, the COVID-19 pandemic—underscore the need to focus on human interaction with nature and climate change. We examine the implications of climate change in a special topic article in this edition.
Several major changes are afoot, and for countries in the AP, a lot will depend on how governments intervene to ensure economic flexibility and how the corporate sector responds to these cues.
To read more on our analysis of AP economies, download the full report, Voice of Asia: Edition 9.
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