Asia's resilience and promising growth prospects outshine other markets

| 17 Dec 2020

Asia has performed well compared to other regions, with economic activity forecast to contract by only 1.3% this year despite negative shocks of the pandemic and the ongoing US-China trade war, according to trade credit firm Atradius' 2021 Regional Economic Outlook for Asia.

The report revealed the region is well-positioned to bounce back given its successful containment measures, as well as firm fiscal and monetary policies, with GDP expected to rebound by about 6.5% in 2021.

Bert Burger, Senior Economist at Atradius, said, “Asia's resilience will drive promising growth prospects that outshine other markets in 2021.

“The Chinese economy, which experienced its first quarter-on-quarter GDP contraction in decades, is gradually recovering, as did many Asian countries. A gradual decoupling of the Chinese economy from the US and other Western countries will have varying implications for Asia’s growth prospects. As companies adjust to the post-pandemic world, the diversification and relocation of supply chains out of China will inevitably benefit several countries in the region.”

‘Multi-speed’ recovery has begun

Asia has begun a ‘multi-speed’ recovery, as the coronavirus itself will no longer be an obstacle with effective vaccines on the horizon. The pace of growth will be dependent on infection rates, containment measures, and divergent policy responses by governments and central banks.

The region’s large output gap and low inflationary pressure provides leeway for additional rate cuts (Malaysia), measures to strengthen liquidity (Indonesia, Thailand), or maintain current accommodative monetary policy (China, South Korea, the Philippines).

On the fiscal side, Thailand and Malaysia will continue to ramp up fiscal spending in 2021 to support recovery, while China will restrain from more spending to avoid a further increase of macro leverage.

Gradual trade and technology decoupling expedited by new policies

Besides the Covid-19 pandemic and fiscal and monetary measures, economic policies in China and the strained relationship between Washington DC and Beijing will also have an impact on the economic and trade outlook for Asia.

The extent of the gradual decoupling will be expedited by China’s new Five-Year Plan and the policy intentions of the incoming Biden administration.

China’s 14th Five-Year Plan has outlined ‘dual circulation’, technological self-reliance, and building a sustainable and resilient economy as its key priorities. It makes clear China’s intention to reduce dependence on other countries, and its continuous pursuit to shift gradually from export-oriented to consumption-based economic growth.

The pandemic has already contributed to the shift towards domestic-led growth, as China successfully restarted its economy amidst weak external demand.

The incoming Biden administration is expected to adopt a less confrontational US-China policy, and a measured multilateral approach to achieve a level playing field in international trade and business. Through practicing closer cooperation with its allies, Biden is likely to be more successful than Trump in persuading China to change its policies on trade, competition, and other issues.

The benefits of such approach and the end of trade wars will be favourable for international and Asian trade in the short term, but will unlikely alter the gradual trade and technology decoupling of the US and Chinese economies.

Diversification within supply chains inevitable?

While Covid-19 is a temporary phenomenon, its implications on supply chains will be long lasting and compounded by the trend of gradual decoupling. Recent protectionist tendencies in global trade and stringent containment measures in China at the beginning of the outbreak exposed the vulnerability of corporations’ concentrated supply chains. This awareness will likely accelerate the change of supply chains globally, especially in East and Southeast Asia.

However, the scale of such change will be dependent on factors such as capacity restraints, infrastructure, labour supply, and the Chinese consumer market.

Diversification within supply chains will be inevitable. The supply chain changes that do occur will be beneficial for Vietnam, Malaysia, and Singapore. Vietnam in particular is favoured by companies seeking to relocate part of their supply chain out of China, given its low wage cost and membership in several free trade agreements (CPTPP, RCEP).

Bart Poublon, Head of Risk, Asia Pacific, said, “While Asia’s rebound in economic activity and positive outlook for 2021 will improve the business environment and operating conditions, the risk environment remains uncertain as the pandemic is not yet completely behind us.

“Credit risk in several trade sectors, including travel, entertainment and retail, which have suffered a huge blow from the pandemic, is high compared to other sectors.

“We expect the situation to improve at a slower pace as exemplifed by China’s recovery that we are seeing now, and it will vary from country to country.”

The 2021 Atradius Regional Outlook Asia report covers Asia, with a focus on China, India, South Korea, Indonesia, Thailand, Philippines, Malaysia, and Vietnam. It excludes Central Asia, the Middle East, and Japan.

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